Download Brazilian banking sector – a view from 30000 feet

Research Briefing
Emerging markets
As a result, Brazil experienced a sustained increase in lending to the private
sector. Bank lending to the private sector almost doubled between 2003 and
today, rising from 24% of GDP to 47%. Although many emerging economies
experienced rapid credit growth, Brazil is among only a handful of major
emerging economies that saw bank lending double (as a share of GDP).
Total bank credit does not appear to be unsustainably high. Other emerging
markets have far higher levels of bank lending. This suggests that credit has
room to continue to grow. It is worth mentioning, however, that sooner or later
sustained growth will require a larger contribution from mortgage-related
lending. Consumer lending is already relatively high in Brazil.
Solid growth
DX
Tangible increase ... from a low base
Bank credit, % of GDP
Bank credit*, % of GDP
60
160
DX
120
50
80
40
40
30
0
01 02 03 04 05 06 07 08 09 10 11 12
Credit to private sector
Source: BCB
Credit to public sector
As of 2003
Change 2003-2011
*Figures differ slightly from BCB statistics. Includes 'other
financial corporations' in addition to 'deposit money banks'.
Source: Fitch
Turkey
S. Africa
10
Russia
0
20
Mexico
DB Research Management
Ralf Hoffmann | Bernhard Speyer
Korea
www.dbresearch.com
Rising domestic consumption was supported by – amongst other things –
increasing government transfers, rising incomes, rising employment and
expanding domestic credit. Consumption growth was particularly pronounced
among the poorer classes. Increasing domestic credit, especially bank lending
to the private sector, was itself a function of reform (e.g. bankruptcy code,
crédito consignado or payroll-deducted loans) and the improvement in overall
economic conditions (e.g. booming labour market, increasing formalization of
the labour market, lower domestic interest rates).
Indonesia
Deutsche Bank AG
DB Research
Frankfurt am Main
Germany
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India
Editor
Maria Laura Lanzeni
The Brazilian economy experienced an acceleration of economic growth over
the course of the past decade. Economic growth was underpinned by improving
terms of trade, rising exports, broadly supportive macro-policies, solid credit
growth and a supportive fiscal policy.
China
Author
Markus Jaeger
+1 212 250-6971
[email protected]
Brazil
June 15, 2012
Brazilian banking sector –
a view from 30,000 feet
Brazilian banking sector - a view from 30,000 feet
Consumer credit has grown the fastest
1
Credit to private sector, % of GDP
18
16
14
12
10
8
6
4
2
0
02 03 04 05 06 07 08 09 10 11 12
Industry
Housing
Rural
Commercial
Individuals
Other
Source: BCB
Public-sector banks dominate
domestic lending ...
2
Credit operations, % of GDP
25
20
15
5
0
03
05
07
09
As regards the origin of bank credit, both the public and the national private
sector banks have roughly doubled their lending as a share of GDP. By
contrast, foreign-owned banks not only had a smaller market share initially, their
market share has also grown more modestly. It is noteworthy that banks wholly
or partially owned by the state (BNDES, Caixa, Banco do Brasil) originate more
bank credit than the national private sector banks. This, however, is not unusual
in emerging economies.
Brazil has quite a segmented loan market. Loans can be divided into so-called
‘earmarked’ and ‘non-earmarked’ credit. Earmarked credit refers to credit
operations with compulsory allocation and/or government resources.
Specifically, there exist directed-lending requirements specifying that a fixed
share of deposit liabilities needs to be lent to the agricultural and housing sector
at below-market interest rates. In addition, BNDES, the state-owned
development bank, directly (and indirectly, so-called on-lending) offers credit at
below-market interest rates. Non-earmarked credit, by contrast and by definition,
is not subject to directed-lending requirements.
Lending rates remain extremely high. Historically, the cost of default (or loss
given default) has been the most important contributor to loan spreads (that is,
1
spreads over the risk-free rate), explaining as much as 50% of the total spread.
By contrast, reserve requirements, which are similarly extremely high by
international standards, explain, according to the central bank, only around 5%
of the loan spread. Thanks to improving macroeconomic conditions and a fall in
nominal and real interest rates, Brazil has experienced a moderate lengthening
of loan maturities in recent years. This trend will continue as domestic interest
rate continue to decline over the medium term.
10
01
In terms of the composition of bank lending to the private sector, consumer
credit has experienced the largest increase. This is to a large extent a direct
consequence of the reforms mentioned above. Bankruptcy reform has improved
creditor rights, making banks more willing to lend. Payroll-deducted lending,
allowing for civil servant social security payments to be used as a collateral, has
induced banks to boost lending. Lower nominal and real interest rates, although
they continue to be very high by international standards, have made borrowing
more affordable for consumers (and businesses). Last but not least, solid
economic growth and a booming labour market, in turn, have helped improve
overall credit conditions.
11
Public-sector banks
Domestic private-sector banks
Foreign banks
Source: BCB
In spite of the rapid growth in domestic bank lending, the substantial increase in
riskier consumer lending and the lengthening of loan maturities, the Brazilian
banking sector (in the aggregate) remains in solid shape.
... but Brazil is not unusual in this
respect
3
Ownership, % of banking assets
— The capital adequacy ratio remains high. As a matter of fact, Brazil has the
highest CAR of the major EM-9 countries.
— In terms of liabilities, Brazilian banks’ dependence on wholesale funding is
high, but manageable overall, not least because banks typically hold large
amounts of liquid assets in the form of government debt securities.
100
75
— Brazil’s reliance on foreign funding (as a share of total liabilities) – of special
concern given the persisting risk of further rounds of global volatility – is
quite low.
50
25
0
BR CN
ID
IN
State
Private
KR MX PL
RU TR
Foreign banks
— Due to very high reserve requirements (far higher than in other emerging
economies), the authorities have an important crisis-management tool at
their disposal (as the 2008 shock demonstrated).
Source: Fitch
1
2
| June 15, 2012
BCB, Lending interest rates and bank spreads, 2008.
Research Briefing
Brazilian banking sector - a view from 30,000 feet
Strong capital position
4
Capital adequacy ratio, %
18
16
14
12
10
8
6
4
2
0
The outlook for the Brazilian banking system is also helped by Brazil’s solid
economic fundamentals, its sensitivity to commodity price developments and the
recent decline in economic growth notwithstanding.
BR
CN
ID
IN
KR
MX
PL
RU
TR
Source: Fitch
Banks relying on wholesale funding ...
5
Loan-to-deposit ratio, %
140
120
100
80
60
40
20
0
BR CN
ID
IN
KR MX PL
RU TR
Source: Fitch
... but almost exclusively on
domestic funding
6
Foreign funding, % of total liabilities
25
20.8
20
12.9 16.3
15
10
7.8
5.5
8.9
3.0
5
0.7
0
BR
CN
IN
Source: Fitch
3
— Banks’ liabilities and assets are largely denominated in local currency and
local foreign-currency lending is prohibited (unlike in Eastern Europe, for
instance) and banks face strict limitations in terms of the FX risk they are
allowed to run.
| June 15, 2012
KR
MX
PL
RU
TR
First, external vulnerability (as opposed to sensitivity) is low. Brazil has been
experiencing significant capital inflows over the past few years. However, a
large equity component has helped limit potential risks related to the now
sizeable stock of portfolio liabilities owed to non-residents, as has the very
significant increase in FX reserves. FX reserves have increased from
USD 200 bn in early 2009 to USD 365 bn today. Brazil’s external solvency and
liquidity position remains strong. In net terms, both the sovereign and the
economy as a whole are net foreign (currency) creditors. While the currency
itself is vulnerable to a sharp depreciation in the event of a balance-of-payments
shock, such a shock, unlike in the past, would not have systemically
destabilising consequences, including for the banking sector.
Second, the creditworthiness of the government is solid. For what it is worth, it
carries an investment grade rating. The fiscal stance is sufficiently conservative
to ensure the continued decline in the net debt-to-GDP ratio. On current trends,
it might fall to as low as 30% of GDP by 2015-16 from 36-38% of GDP at the
moment. Gross debt remains relatively high, but to a significant degree this
reflects public sector asset accumulation (e.g. lending to official financial
institutions and FX reserve accumulation). The government’s capacity to support
the financial sector in the unlikely event of a crisis is considerable and will
continue to grow as government debt continues to decline.
The government has ample scope to recapitalise the banking sector. A back-ofthe-envelope calculation demonstrates this. Gross general government debt at
present amounts to 55% of GDP or so. Assuming – very conservatively – a real
‘equilibrium interest rate’ of 7%, real GDP growth of 3% and a primary surplus of
2.4% (below the present 3.1% of GDP target), the government could afford an
increase in debt of 10-20% of GDP (equivalent to 20-40% of total bank lending)
without undermining debt sustainability. Given that the general government has
claims on official financial institutions (mostly BNDES) amounting to 7-8% of
GDP, with the latter accounting for 10% of GDP of bank lending, it is clear that
the government’s ability to support the banking sector is actually far greater,
potentially amounting to 2/3 of all domestic bank lending – and this assumes
that the government would not impose any losses on banks’ equity and debt
holders. In short, the government is in a position to provide a very substantial
backstop in the unlikely event of a banking sector crisis.
Given large capital buffers at the systemic level actual losses will obviously be
far smaller. Brazil and Brazilian banks are currently benefiting from strong labour
markets, rising real incomes, ample capital inflows and historically low real
interest rates – and the economy is expected to pick up steam in the second
half of this year. Historically, however, periods of rapid credit growth usually lead
to an increase in credit risk. Brazil is unlikely to be an exception. The good news
is that – at the systemic level – capital buffers look adequate to cope with rising
default rates.
In short, the outlook for the banking sector is fair. True, Brazil has experienced
bank failures over the past ten years, but they never represented a serious risk
to systemic banking sector stability.The same is likely to hold true in the
foreseeable future. That said, a sustained economic downturn, including a
weakening of the labour market, would negatively impact on banks’ consumer
loan portfolios, not least because this segment has experienced the highest
Research Briefing
Brazilian banking sector - a view from 30,000 feet
Government able to support banking
sector, if necessary
7
% of GDP
140
120
CN
Loans
Markus Jaeger (+1 212 250-6971, [email protected])
KR
100
growth in recent years. A moderation in consumer lending is desirable.
Consumer lending (excluding mortgage lending) is already quite high. For
consumer lending to continue to expand at a solid but sustainable rate,
mortgage lending would have to take off. Declining nominal and real interest
rates, if sustained, might yet make this a possibility.
80
60
TR
RU
40
PL
BR
IN
ID
20
MX
0
0
20
40
60
80
Government debt
Sources: Fitch, IMF
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