NEW YORK--(BUSINESS WIRE)--The recent sharp decline in auto sales in Brazil will contribute to further shrinkage of auto loan portfolios within the country's banks, adding to the headwinds of those banks dependent on auto lending, says Fitch Ratings. We believe it is unlikely that the auto loan growth will recover over the near term given our forecast for a 1% contraction in GDP in 2015. With the prospect that the end of Brazil's asset quality recovery for auto loans is nearing and the expected increase in unemployment, Fitch forecasts a rise in non-performing loans (NPLs) by year-end 2015.
Between April 2015 and April 2014, vehicle sales fell 19.2% on a year-over-year basis, compared with a December 2014 drop of 7.1%. The magnitude of the new drop suggests that captive auto lenders and commercial banks with relatively higher exposure to auto loans (for both new and second-hand vehicles), such as Banco Pan and Banco Votorantim, and smaller institutions like Banco Rodobens e Omni, could become increasingly affected by the slowdown. Auto loans make up a relatively low share (6.6%) of the Brazilian banking systems' total loans exposures, thus limiting the scope of the impact to lenders with large market shares in auto loans.
The drivers of weak first-quarter 2015 auto sales were not only macroeconomic conditions and rising unemployment, but also the recently implemented tax increase for industrialized products (IPI) implemented in January 2015. The tax increase raised average vehicle prices in the country by 4.5%. Existing household debt, which peaked at 46.5% of annual household income at the end of March, is also dampening consumers' appetite for more debt.
The chart, https://www.fitchratings.com/web_content/images/fw/fw-chart-20150601c.htm, provides a four-year review of annualized, monthly changes in the aggregate auto loan portfolios of Brazil's banks, as well as auto loan NPLs. The top chart shows that after the 2010 and 2011 period of growth boosted by IPI tax relief, Brazilian banks lowered their risk appetites in 2012 and began a period of tighter underwriting with shorter loan terms and lower loan-to-values. Since 2012, auto loan portfolios have been shrinking, with the declines now likely to accelerate given the further drop off in auto sales seen thus far in 2015. Auto NPLs peaked at 7.1% in July 2012, then began a period of improvement that has persisted to the point of returning asset quality to pre-2011 levels. Existing loans have essentially run off faster than new loans have been added due to tighter lending and stagnant economic conditions.
Despite measures by the central bank (through circulars No. 3711 and No. 3714) to ease banks' capital requirements on auto loans, auto loan growth has failed to materialize. In particular, the risk weights of loans with a maturity longer than 60 months were reduced to 75% from 150% in 2014. The central bank also permitted greater use of retail deposits to finance select acquisitions, such as vehicles under circular 3715. These changes do not appear to have had any material effect on spurring loan portfolios as the macroeconomic conditions and other factors facing consumers are more dominant factors.
Captive auto lenders have been affected differently by the slowdown. They have actually increased their loan exposures as their parent manufacturers are relying more heavily on incentive pricing during the current period of lower demand. The top five captive auto lenders loans rose, on average, 2.5% in 2014.
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.