Nov 04, 2013
Sao Paulo, Ocotber 29th 2013 - The outlook is stable for the Brazilian banking system, reflecting the expectation that Brazilian banks will maintain sound financial profiles in the face of modest economic growth and asset quality pressures, says Moody's Investors Service in its latest "Banking System Outlook: Brazil."
Historically high consumer indebtedness and rising interest rates will dampen domestic private consumption, and although Brazil's government has announced investment initiatives any economic rebalancing will take time to show results, says Moody's.
"We expect that Brazilian banks will be pressured on asset quality, despite recent improvements in early delinquency indicators reported by private banks," said Moody's Senior Credit Officer Ceres Lisboa. "While private banks have tightened underwriting standards, public banks will experience growing delinquency rates following years of rapid loan growth, as modest economic growth and rising interest rates maintain credit costs at elevated levels," added Lisboa.
In addition, rising funding costs will weigh on bank profitability over the next 12 to 18 months, says Moody's. Brazilian banks' growing reliance on market funds has weakened their financial profile, as systemic liquidity is expected to tighten. Moody's notes that so far, market funding has been relatively stable, with only smaller institutions vulnerable to confidence risk.
Still, Brazilian banks maintain solid capital and reserve levels to absorb an unexpected deterioration in asset quality with regulatory capital levels also remaining strong and stable, says the rating agency.
In cases of stress Brazilian authorities would support only the large and systemically important financial institutions, says Moody's. However, the rating agency believes that the capacity of the Brazilian government to provide systemic support has deteriorated in recent years. This assessment reflects the weakened fiscal position of the government and the rapid expansion of public sector banks, which increases the size of contingent liabilities stemming from the banking sector for the government.
Re-disseminated by The Asian Banker