NEW YORK--(BUSINESS WIRE)--Brazil's private midsized banks have reported steady first half results that Fitch Ratings says reflects their cautious appetite for credit risk amid the country's weak macroeconomic conditions.
Fitch believes lending conservatism among the rated, midsized private banks positions them well within their rating categories. These banks include Banco ABC Brasil, ('BBB-', Rating Outlook: Stable), Banco Daycoval, ('BBB-', Rating Outlook: Stable) and Banco Pine, 'BB+', Rating Outlook: Stable).
These banks' lack of credit appetite due to concerns over the impact of weak economic activity has been a contributor to slower lending growth during the first half of 2014. Loan balances rose just 0.9% among the eight midsized private banks listed on the San Paulo's BM&F Bovespa over the first six months of 2014 and just 1.1% across all Brazilian private banks. The small increases signal a further slowdown in lending from the 7.5% growth rate (year-over-year) seen across all private banks since 30 June 2013. Fitch anticipates loan growth at private banks will remain tepid for the remainder of 2014, in spite of recent central bank measures to free bank liquidity and jump-start loan growth.
Recent results indicate that loan impairment charges and delinquency rates are under control and should remain so through the rest of the year, in Fitch's view. Good asset-liability management and improvements in midsized banks' overall funding quality, without stretching for loan growth, has allowed these banks to maintain acceptable profitability during a challenging first half. Liquidity levels at the banks are adequate and our expectations are that they will remain healthy throughout the remainder of 2014.
Brazilian banks are also diversifying funding sources and locking in some longer term funding, such as issuances of Letras Financeiras by Pine (BRL 250 million, rated 'AA-(bra)') and Daycoval (BRL 400 million, rated 'AA(bra)') earlier this year. Alternative sources of bank funding, such as Letras Financeiras, LCAs (agricultural credit bills), and LCIs (real estate credit bills) now represent roughly 20% of these banks' total funding base as of the end of 1H14, in contrast with less than 3% at the end of 2010.
For Banco Daycoval, changes to its loan mix have increased the bank's payroll deductible loan portfolio, which has exhibited good asset quality through credit cycles, while ABC Brasil and Banco Pine are expanding sources of fee income. Smaller banks such as Indusval and Parana have also emphasized diversifying toward less non-interest sensitive income streams.
Fitch also notes moves toward lending to larger clients in the upper middle market, as opposed to remaining focused on smaller clients. Daycoval remains an exception to this trend, focusing instead on achieving adequate loan pricing and collateral coverage from its core base of smaller clients. Larger loans to higher quality customers increasingly require secured terms with stronger collateral coverage.
Brazil's macroeconomic challenges have not shown signs of abating. The country's target lending rate has climbed to 11%, but is presently holding steady and may ultimately reduce inflation pressures. We believe that recent central bank measures to ease the risk weightings for certain types of loans to free more capital and drive greater lending growth are likely not enough to overcome the cautious stance of most private banks to keep loan growth in check in the current macro climate.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.