Brazil’s central bank finally cut its base rate – by a surprisingly large 50 basis points – at its meeting in early August. Bank chief executives have wasted no time in reporting increased credit demand and calling a peak to rising delinquencies.
If asset-quality deterioration is now in the rear-view mirror – and that is a big if – the outlook for a strong banking performance in the second half of this year looks good.
The CEOs certainly think so, with conference calls being dominated by expectations of a much better operating environment – lower rates, lower inflation, better credit demand (loans, debt issuance and other capital market deals) – as well as improving credit metrics.
In April, I took a deep dive into Brazil’s battle with worsening credit risk. At the time, analysts told me that they been watching steep increases in non-performing loans across corporate and individual segments, and asking how these very un-Brazilian spikes in unsecured lending had been allowed to happen.
If asset-quality deterioration is now in the rear-view mirror – and that is a big if – the outlook for a strong banking performance in the second half of this year looks good
The big question was whether or not there was further deterioration to come. The latest set of earnings suggests not.
Itaú – the country’s biggest private bank – provided comfort that credit losses were being stemmed. The bank’s individual portfolio in Brazil remained stable at 4.9% in the second quarter of 2023; the highlight was credit cards, which improved sequentially despite a reduction in the portfolio’s size.
Itaú’s chief executive, Milton Maluhy, says he believes the bank’s de-risking strategy implemented in previous quarters has improved NPLs in the individuals’ portfolio by about 180bp. Coupled with growth in net interest income, the bank’s net income grew by a very solid 14% year on year, with return on equity of 20.9%.
Profits party
Meanwhile, the biggest public bank is also powering ahead: Banco do Brasil reported profit of R$8.79 billion ($1.76 billion) in the second quarter of the year, an increase of 11.7% in 12 months.
The gain was slightly above analysts’ projections of R$8.66 billion and, once again, the state-controlled bank surpassed all private competitors in terms of gain and profitability, benefiting from the expansion of its financial margin. Importantly – with one corporate default aside (Lojas Americanas) – NPLs remained virtually flat.
BTG Pactual joined the profits party, too.
The bank’s model – it is far less exposed to retail credit – makes direct comparisons of credit quality difficult, but in terms of expansion it is in line with its peers. Net income was R$2.575 billion in the period from April to June, an 18% year-on-year increase, and the bank’s loan portfolio closed the quarter at R$153.8 billion, an annual increase of 31%, driven mainly by large companies.
RoE hit 22.7%, higher than the first quarter (20.9%) and the second quarter of last year (21.6%). It was highest level since 2015.
BTG’s chief executive, Roberto Sallouti, said that the forecast given at the beginning of the year for the indicator in 2023 may have been conservative. And the bank’s CFO, Renato Cohn, added to the growing bullish sentiment when he said: “With the beginning of the cycle of falling interest rates, conditions should continue to improve.”
Bottom of the cycle
But it is not a universally rosy picture. The CEOs of Bradesco and Banco Santander Brasil tried to chime in with their peers by painting a picture of improvement in the second half. They may be right from a macroeconomic perspective, but there isn’t any proof that these two banks will similarly rebound from their latest results. Both reported a drop in earnings for the quarter.
Bradesco’s chief executive, Octavio de Lazari, expressed belief that Q2 will be the bottom of the cycle of asset quality: it is to be hoped that it is, but it is far from a given.
Data from the central bank shows how much more Bradesco’s bank is exposed to the lower credit quality population segments – 10.8% of Bradesco’s total loan portfolio is with the E to H categories, compared with just 5.7% for Banco do Brasil and 5.5% for Itaú.
Santander Brasil’s loan portfolio is 7.9% exposed to the E-H segments. And despite falling unemployment, these clients are struggling with high levels of debt and still-high debt servicing costs.
At least Santander is on a trajectory of improvement. Its chief executive, Mario Leão, said that the institution is already beginning to feel the positive effects of the greater selectivity in credit adopted at the end of 2021, while the cost of credit continues to improve with the quality of new customer acquisitions. He also said he was confident the bank had now seen peak defaults.
We will have to wait until the third quarter to see how these statements from Bradesco and Santander Brasil play out.
Both banks need a rapid turnaround in asset quality, or the gap in financial performance that has emerged between them and the other large Brazilian banks in past couple of years of tight monetary policy could become embedded through this coming cycle.
