Fitch: Brazil's Deposit Decline Further Constrains Mortgages

NEW YORK--()--Brazil's first-quarter 2015 net outflow of savings deposits signals growing pressure on local banks to seek funding alternatives to support the expansion of residential mortgage portfolios, says Fitch Ratings. A continued outflow of savings, or even a slow return to inflows, is likely to exert significant pressure on Brazilian banks' high mortgage loan growth. Lower risk appetites by banks and lower mortgage demand have helped to decelerate Brazil's mortgage loan growth recently; however, annualized growth was still 27% in March 2015, down from 31% at year-end 2014. Mortgage loan growth in Brazil averaged 42% between 2013 and 2009.

Under Brazilian banking regulations, a minimum of 65% of savings deposits need to be directed to mortgage lending or other real-estate related loans. While Brazil's benchmark SELIC rate has risen, recently reaching 13.25% after a 50 bps increase in April, the offering rates on savings accounts have lagged, leading to substantial withdrawals of savers seeking higher returns elsewhere. Generally, higher interest rates result in lower saving deposit rates relative to other banking products. The differential has widened significantly as a result of the monetary tightening cycle of the last two years. Fitch expects the pressure on savings deposits will continue as long as interest rates remain high, despite bigger marketing efforts on the part of banks to attract depositors.

The declines may also suggest that households are using more of their savings to sustain consumption and or debt payments in an environment of higher inflation, higher household indebtedness and expectations of higher unemployment.

Annual net flows into savings accounts show the volatility of this funding source. In 2014, the net inflows dropped sharply to BRL24billion, from BRL71 billion in 2013 and BRL45 billion in 2012. However, in the first three months of 2015 alone there was a net outflow of about BRL23 billion. In the same period in 2014, there was a net inflow of about BRL5.4 billion.

Among the large retail banks, Caixa, a government-sponsored bank is the most affected. Caixa is Brazil's largest mortgage lender with a 68% market share in all mortgages and is also the largest savings deposits taker, with nearly 36% of market share. Last week, the savings deposit volatility led the bank to cap its mortgage lending on existing homes sales at 40% to 50% of the home's total value, down from a prior level of 70% to 80%. These loan-to-value rates depend on the type of funding and the amortization method of the loan.

Since 2013, financial bills linked to real-estate related assets (letras de credito imobiliario, LCIs), have become a growing source of funding for mortgage lenders. They are deposit-like funding products that offer tax advantages to investors. However, Fitch does not expect them to grow fast enough to address a significantly higher proportion of mortgage funding than savings deposits in the medium term, as they are more expensive than savings deposits. Going forward, alternative sources of funds, such as residential mortgage-backed securities (RMBS) and covered bonds (letras imobiliarias garantidas, LIGs) may fill any void and become more significant sources of funds for mortgages. The basic legislative framework for LIGs was enacted in January 2015 and is awaiting more detailed regulation. As for RMBS, the market is still very small. Overall, it is most likely that mortgage lending growth in Brazil will simply decline across the board over the near term.

As of December 2014, the savings deposits and mortgage loans across the system totaled BRL668 billion and BRL498 billion, respectively. Savings deposits make up about 10% of total sector funding, but they are concentrated in large retail banks and regional public banks. Mortgage loans make up about 17% of total sector loans.

As for the other large Brazilian banks, savings deposits accounted for about 13% of total funding, on average, across Banco do Brasil, Bradesco and Itau. Therefore, these banks would be expected to manage a sharp slowdown in savings deposits relatively more easily.

Fitch believes that aggressive mortgage loan growth has limited increases in loan impairment ratios. Therefore, mortgage lenders are likely to face a slight increase in relative impairment expenses due to a combination of the seasoning of the loan books and the lower than expected loan growth. Impairment ratios are unlikely to rise to the average level of other Latin American mortgage portfolios in the short term. In the medium term, such seasoning may look similar to markets with more established mortgage portfolios, such as Chile.

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.

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Contacts

Fitch Ratings
Esin Celasun, +55 21 4503 2626
Director
Latin American Financial Institutions
Praca XV de Novembro, 20, Sala 401-B
Rio de Janeiro, Brazil
or
Eduardo Ribas, + 55 11 4504 2213
Director
Latin American Financial Institutions
Sao Paulo, Brazil
or
Jayme Bartling, +55 11-4504-2602
Senior Director
Latin American Structured Finance
Sao Paulo, Brazil
or
Matthew Noll, CFA, +1 212 908-0652
Senior Director
Financial Institutions Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Esin Celasun, +55 21 4503 2626
Director
Latin American Financial Institutions
Praca XV de Novembro, 20, Sala 401-B
Rio de Janeiro, Brazil
or
Eduardo Ribas, + 55 11 4504 2213
Director
Latin American Financial Institutions
Sao Paulo, Brazil
or
Jayme Bartling, +55 11-4504-2602
Senior Director
Latin American Structured Finance
Sao Paulo, Brazil
or
Matthew Noll, CFA, +1 212 908-0652
Senior Director
Financial Institutions Fitch Wire
33 Whitehall Street
New York, NY
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com