Brazil’s banks adapt to lower NIMs
Sharp reduction in Selic boosted 2017 profitability but is a challenge in 2018; ‘soft’ recovery in credit demand might not offset lower margins.
The Brazilian central bank’s decision to cut the country’s Selic rate for a 10th consecutive time takes the benchmark to an historic low of 6.75% and creates notable challenges for Brazil’s banks to maintain profitability, according to analysts.
Most economists think the central bank will hold at the 6.75%, but the fall in the policy rate has been steep and will hit banks’ margins.
The Selic rate was 14.25% in October 2016 and Brazil’s banks enjoyed a boost to earnings in 2017 from the fact that funding costs are predominantly floating rate and therefore fall faster than the fixed interest rates charged to their borrowers.
However, a prolonged period of historically low interest rates will lower net interest margins (NIMs) and, as a result, will pressure profitability.