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Low interest rates by Brazil's central bank (photo) have helped bank lending surge. (Photo: Brazil central bank)
Wednesday, January 27, 2021

Brazil Bank Lending Jumps

Pandemic needs, low rates help boost bank lending most since 2013.

Inter-American Dialogue

Brazil’s level of bank lending grew more than 15 percent for the 12-month period through November, banking industry association Febraban said in December. The figure marks the sharpest increase in bank lending since September 2013, the organization said. What factors are driving bank lending in Brazil? Will the trend continue this year? How are President Jair Bolsonaro’s policies affecting Brazil’s banking sector?

Candido Botelho Bracher, president and chief executive officer of Itaú Unibanco Holding: Bank lending in Brazil was boosted in 2020 by low interest rates and pandemic-related liquidity needs. Total outstanding loans in November were around 16 percent higher (in nominal terms) from one year before. This increase was mainly driven by lending to corporates, which grew 22 percent after four years of negative or sluggish performance, while credit to households grew 11 percent, a similar pace to that of 2018-19. According to the Brazilian central bank’s forecasts, total credit in 2021 is set to grow about 8 percent, a smaller, but still robust, result. However, the composition tends to change, with loans to corporations increasing 4 percent as companies digest the excess leverage of 2020 (partially caused by foreign-exchange depreciation) and capital markets resume, while credit to households expands around 11 percent again, led by lines that are more sensitive to low interest rates, such as vehicle loans and mortgages. As a matter of fact, in an environment of sustainably low rates, mortgages have a long way to go, as this kind of lending is still relatively small in Brazil (about 10 percent of GDP in 2019, as compared to 75 percent in the United States). Regarding government policies for the sector, we highlight the agenda of innovation and competition that the central bank has pursued in recent years, which fosters more efficiency—the new ‘Pix’ payment system is a good example of that.

Looking specifically at pandemic-related measures, lower taxes on credit operations, the reduction of reserve requirements and the government’s emergency credit lines for companies have successfully supported the banking system in acting as a buffer during this crisis.

Steven Sandretto, partner at Holland & Knight: The significant expansion of bank lending in Brazil in 2020 was largely a result of the coronavirus pandemic as many companies were forced to seek financing in order to preserve liquidity. This increase was made possible as a result of regulatory changes put into effect in Brazil in early 2020 due to Covid-19. The Brazilian central bank approved a package of measures aimed at expanding banks’ lending capacity in order to restore liquidity, allowing banks to offer increased loans and more flexible terms. These measures added more than 1.4 trillion reais of liquidity to the national financial system. The pandemic also sped up digital banking in Brazil, which further expedited bank lending. Brazil also experienced historically low interest rates in 2020, further increasing borrowing by both large and small businesses seeking to maintain liquidity. Brazil has historically been plagued by sky-high lending rates, but in 2020, the domestic (Selic) interest rate reached a record low, prompting a shift to bank borrowings by many companies. However, the expiration of the central bank’s loan forbearance programs will likely lead to an increase in impaired loans and credit losses and, therefore, less lending going forward into 2021. In addition, many large companies have returned to other sources of funding, such as equity offerings. Furthermore, the central bank may be unable to keep interest rates at historically low levels in light of rising inflation expectations. As a result, traditional bank lending may return to more normal levels in 2021.

Cynthia Cohen Freue, senior director and sector lead for financial institutions ratings at S&P Global Ratings: Lending growth in Brazil was quite strong in 2020, mainly driven by the higher credit demand from corporates, which boosted their liquidity to prepare for the difficult times, and the incentives that the central bank provided to boost lending through liquidity support, guarantees on loans as well as capital and provisioning relief. In addition, the devaluation of the currency also played a role through the exposures abroad of the largest private bank. However, we expect lending growth to be lower during 2021 (about half of last year’s growth rate) given the absence of the extraordinary measures from the government and due to banks’ lower appetite to take on additional risk given the uncertain scenario driven by the second wave of infection. With regard to government policies, we believe the central bank has taken a timely and comprehensive set of measures to mitigate the impact of Covid-19 on banks’ asset quality. In addition, the government has introduced extraordinary support to mitigate the economic and social impacts of the pandemic. The full fiscal support package is 12 percent of GDP, one of the largest among emerging markets. We expect major Brazilian banks’ credit losses to remain manageable thanks to banks’ conservative growth strategies in the past two years and the regulatory measures that help cushion the impact.

Claudio Gallina, senior director and head for South America and the Caribbean in the financial institutions group at Fitch Ratings: The main factors that, combined, contributed to boost credit in Brazil—which increased by 9.9 percent from June 2019 to June 2020 and more than 13 percent from December 2019 to November 2020—were: 1.) large companies looking for liquidity at the beginning of the pandemic, 2.) a reduction in repayments from borrowers due to debt rollovers and 3.) the government’s guarantee programs, which expanded credit especially for small and medium-sized companies. Total credit in Brazil reached 4 trillion reais—around 55 percent to retail, 25 percent to large corporates and 20 percent to SMEs.

In general, we believe that economic agents are expected to better gauge their needs as compared to the time of the pandemic. This may limit another round of large increases in loans in Brazil. Another important aspect is the increase in deposits. Savings, for example, increased by almost 190 billion reais in one year, strongly influenced by a lower level of consumption. However, we saw increases in payroll and residential/mortgage loans, credits with more robust guarantees. We expect this trend to continue, although at a slower pace. We are revising our projections in terms of credit growth, but we are definitely not expecting double-digit growth again for 2021. Brazilian regulators have had an important role in taking several actions to face the pandemic.


Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor


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