April 26, 2017 / 1:28 PM / 3 months ago

Fitch: Economy to Limit Brazil Banks' Problem Loan Recovery Rate

11 Min Read

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, April 26 (Fitch) Loan recoveries will likely remain challenging for Brazilian banks alongside a continued tough macroeconomic environment in 2017, says Fitch Ratings. Asset quality should also remain a key issue. Corporate NPLs are likely to improve only marginally while increasing unemployment should continue to weigh on retail NPLs and household indebtedness. Asset quality and provisioning trends in 2017 are unlikely to be as negative as in 2016, especially considering the high concentration of problematic cases in the corporate sector last year. However, asset quality trends will still be challenging for banks until there is greater evidence of recovery in certain key sectors and more solid growth trends in the economy. Fitch forecasts economic growth in Brazil to rise to just 0.7% this year following deep contractions in 2015-2016 and maintains a negative sector outlook on Brazilian banks. Final credit losses (gross of recoveries) at Brazil's three largest private banks have increased significantly through the recession period of 2015-2016, reaching BRL58 billion last year versus BRL44 billion in 2014, an increase of 32%. Similarly, renegotiated loans for this group of banks reached BRL56 billion in 2016, which represents an increase of 38% from the pre-recession period in 2014. Historically, rising revenue from loan recoveries is an important factor in strengthening net interest margins, particularly when asset quality has weakened and provisioning expenses remain high. However, recovery revenues (net of taxes) were below average in 2016, averaging roughly 17% of banks' net income versus the 22% average recorded in 2008-2010 following the global financial crisis. According to central bank rules, loans classified as level H -- loans already in arrears for more than 180 days -- should be written off from banks' balance sheets after six months of classification, and any future recovery will be recorded as revenue and in banks' net interest margins. The combined loss ratio (loans charged off to total loans) of the three largest private banks rose to 5.1% in 2016 from 4.2% in 2015 and 2014. This increase reflects the prolonged rise in NPL ratios. The system NPL ratio increased to 3.8% in December 2016 from 2.8% in December 2013, mainly driven by corporates where NPLs rose to 3.5% from 1.8% in the same period. Heightened losses in 2015 and 2016 highlight sizeable concentration risks faced by an increasingly consolidated banking sector, in addition to broad-based macroeconomic pressures. Brazil's largest banks increased exposure to the country's leading corporates during the period of rapid economic growth immediately preceding the recession. At the same time, M&A activity increased concentration, with the top six banks now holding around 80% market share. Large corporate defaults at major firms including Oi, Samarco and Sete Brasil have forced banks to renegotiate their debts. Renegotiated credits for this group of banks reached 5.0% in 2016, up from 4.4% in 2015 and 3.9% in 2014, though renegotiated loans may include non-problematic assets. Fitch's base case does not incorporate a significant impact from renegotiated loans on large private banks' solvency. They remain strongly capitalized and well provisioned. However, forming a full view of asset quality may be challenging until we have more clarity on the performance of the recent vintage of renegotiated loans. Such assets were not necessarily tested during 2016 as renegotiations usually incorporate expanded tenors. Also, it should be noted that NPLs can show a discrepancy arising from the increasing amount of charged-off credits that are not being accounted as past-due loans once removed from banks' balance sheets. Contact: Raphael Nascimento Associate Director Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7 andar, Cerqueira Cesar Sao Paulo Claudio Gallina Senior Director, Financial Institutions +55 11 4504-2216 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below