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Brazilian banks could be entering a new credit cycle

Macro-economic recovery and falling Selic paint positive outlook; credit growth frustrating the rosy outlook.

There are signs the banks are moving into a new and positive credit cycle as Brazil approaches the end of its monetary-easing cycle and expectations for the country’s GDP growth in 2018 improve.


Philip Finch, UBS

“After four years of downturn, Brazilian banks are approaching a new lending cycle,” says Philip Finch, financial analyst at UBS.

The Selic interest rate is expected to fall to between 6.5% and 7.0% in early 2017 and, crucially, is expected to remain around that level for at least a year.

The reduction of the country’s base interest rate by more than half in the past couple of years should add to the trend to improving asset quality and lower provisions.

Meanwhile, GDP growth is forecast to hit around 3% next years – sparking expectations of renewed credit growth and banks’ re-risking lending portfolios.

Finch recently visited Brazil and has subsequently upgraded the country’s banks to overweight as a result of those meetings.

“With GDP growth expectations rising, we believe the banking sector is about to move into a new lending cycle with a re-risking of loan book expected to help offset NIM pressure,” he says.

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