Economy

Brazil Bank Crisis Likely In Three Years

Brazilian banks escaped the credit crisis of 2008. They might find themselves in one of their own in 2017.

Forbes
01/07/2014 18:29
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The Bank for International Settlements (BIS) says Brazil’s newfound love for all things credit-related –from corporate debt to consumer auto loans and mortgages — has put the country at risk of hitting a brick wall within three years. A credit crisis, the BIS says, is plausible.

 

In their annual report released over the weekend, the BIS — known as the Central Bank of Central Banks — warned that there was “grave tensions materializing” in Brazilian banking.

 

Long considered some of the safest banks in the world thanks to years of battling hyper-inflation, conservative lenders at places like state-owned Banco do Brasil and Itau Unibanco have become more levered up than they were a decade ago.

 

This month, Moody’s Investors Services said that a rising non-performing loans at Brazil’s state-run banks is likely to intensify in coming quarters.

 

The Moody’s report stated that rising bad loans were a result of rapid credit growth at state banks –namely home lender Caixa Economica Federal and big retail and corporate lender Banco do Brasil. Both have expanded their loan portfolios at a compound annual rate of 24% over the last decade, in part to help out small and mid-sized businesses, and due to government policies like the My Home My Life housing program. To make matters worse, a slower economy is making it harder for indebted Brazilians to take on more debt. Or pay what is already coming due.

 

Short-term defaults rose in April as retail and corporate borrowers are left to deal with lower profits and higher borrowing costs.

 

None of this bodes well for the publicly traded Brazilian banks, namely Itau, Bradesco and Banco Santander Brasil. All three have outperformed the Bovespa and the MSCI Emerging Markets Index this year. It is unclear whether or not investors are looking that far ahead.

 

For the BIS, Brazil faces two major credit risks. The first is the credit ratio compared to GDP growth. It’s currently 13.7 percentage points above the historic average. The second warning sign comes from credit costs. Brazil is home to some of the highest interest rates in the world, with consumer credit well into the double digits.

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