SAO PAULO & NEW YORK--(
“Albeit its good fundamentals, credit deterioration and pressure on margins - along with a weaker macro scenario - create a more challenging environment for Brazilian banks”
Amidst a weaker macro scenario, Fitch Ratings deems that Brazilian banks are overall adequately prepared to face increased volatility.
While the Outlook for the Brazilian bank industry remains Stable, the banks face a host of challenges. In addition, the deceleration of the Brazilian economy and the alignment on the national rating of subsidiaries of foreign banks with the Rating Outlook of their parents have resulted in a marginal increase in Negative Outlooks, according to Fitch.
"Albeit its good fundamentals, credit deterioration and pressure on margins - along with a weaker macro scenario - create a more challenging environment for Brazilian banks," says Eduardo Ribas, Associate Director in Fitch's Financial Institutions Group.
Large Brazilian banks remain financially solid, showing adequate capitalization, good liquidity and access to funding, as well as higher profitability than local and international competitors.
Medium-sized and small bank's ratings are adjusted based on the challenges related to their size and their higher vulnerability to prolonged periods of greater uncertainty. Fitch notes that most of these banks have prepared themselves to endure an environment of higher volatility.
The significant credit expansion across the industry in 2010 and 2011 has increased credit costs to higher levels than the emerging markets and Latin American average and is the main factor pressuring margins in the medium term, especially in an environment of lower interest rates.
Credit quality deterioration has been intense and reflects the deceleration of the economy, which has been greater than initially projected. Greater rigor in credit concession in the recent vintages will slow delinquency growth over the medium term. At the same time, the greater level of individual indebtedness highlights the need to monitor credit expansion, especially considering that the unemployment rate remains at historically low levels.
The intensity in reducing spreads has varied between private and government banks. Initially, its effect has been marginal, but it is expected to accentuate over time in an environment of sustainable lower local interest rates. Similar to world banking sector trends, it is unlikely that Brazilian bank returns will revert to the high levels of the recent past.
For more information, see the special report titled 'Review and Outlook: Brazilian Banks Good Fundamentals, Credit Deterioration, Pressure on Margins - Old and New Challenges' is available on the Fitch Ratings web site at www.fitchratings.com, or by clicking on the link.
Additional information is available at 'www.fitchratings.com'.