NEW YORK--(BUSINESS WIRE)--Today's move by the Brazilian central bank to fuel greater lending by local banks may not prove enough to overcome many banks' concerns over borrower credit quality in the face of country's macroeconomic slowdown, says Fitch Ratings.
Brazil's move marks the second time in the past month that the central bank has freed liquidity in the banking system to spur economic growth. The first move was on July 25, when the central bank injected BRL45 billion (USD20 billion) into the system by lowering reserve requirements and making changes to risk weightings for capital allocation on banks' payroll and auto loans. Today's moves eased the requirements for banks making payments on non-cash deposits, adding another BRL10 billion into the banking system, according to the central bank.
Brazil's macroeconomic challenges have not shown signs of abating. Inflation, currently at 6.5%, has been running above central bank targets since at least August 2010. Fitch's sovereign team projects average growth to remain around 2% during 2014-2016 as Brazil's economic underperformance continues.
Brazil's public (government sponsored) banks have seen very high, but weakening loan growth in 2014 (over 17% year over year, ending June 30, 2014). The central bank's measures will help support the loan growth agendas of the public banks, not necessarily due to the liquidity effect, but likely as part of the overall economic policy agenda. Public lenders remain the largest contributors to the banking system's overall loan growth and may remain so in the short term.
Fitch believes that high loan growth that is not supported by similar growth trends on economic activity (i.e. GDP growth) may result in asset quality pressures for those lenders, especially if economic activity remains weak.
With private banks, Fitch believes that the central bank is pushing against weak lending appetite within the country's private banks. An unwillingness to ease on borrower credit quality in the current economic conditions has led to weak loan growth for private banks (over 7.5% year over year, ending June 30, 2014).
In one sign of growing lender conservatism, many banks are shifting their loan mix by increasingly expanding their secured lending portfolio. Fitch believes the trend may continue as banks seek further protections, as weak macroeconomic performance is expected to continue over the next two years.
Additionally, Brazil's largest private banks have made moves to target better rated companies and shorter loan tenors. Several of these large banks have been able to free up several billions of reserves in response to their efforts to focus on clients with a less risky profile, and to obtain better guarantees and structures on their loans.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.