May 8, 2017 / 2:32 PM / 6 months ago

Fitch: Brazil NPLs Near Peak, but Bank Outlook Still Negative

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, May 08 (Fitch) Brazilian banks' first-quarter earnings results point to early signals of nonperforming loan (NPL) stabilization that could mark the beginning of an inflection point, says Fitch Ratings. However, whether this will translate into a sustained trend remains highly uncertain. Fitch maintains that the operational environment will stay deeply challenging, with asset quality deterioration continuing to be a key risk in 2017. There will also be continued performance differentiation between private and public banks. Data from Brazil's central bank through to March 17 showed the system NPL ratio (90 days) increased only marginally to 3.8%, up from 3.7% three months earlier. Corporate NPLs were the driver, rising by 0.3 ppts in the quarter. However, early NPLs - loans overdue 15 days-90 days - fell 0.5 ppts to 4.3%; this could indicate a broader turning point for the segment. Retail portfolio NPLs also remained flat at 4%, which is notable as seasonal factors tend to weigh on this segment in the first quarter. NPL ratios are stabilizing at a time when loan portfolios continue to contract, meaning that the improvement is not due to an expansion in lending but to factors affecting the ratio's numerator. Average return on average equity (ROAE) for Bradesco, Itau and Santander rose to 18.7% in 1Q17 versus 16.6% a year earlier, demonstrating solid earnings for the large private banks. This was despite weaker revenue generation from lower lending volumes. Lower provisioning was a key factor driving the improved earnings, with double-digit year-on-year percentage declines for each of the three banks. The bulk of major bad loan exposures had already been provisioned for in 2015 and 2016, which helped earnings even as aggregate NPLs rose slightly in 1Q17. As lower provisioning was the principal driver, the earnings trend could continue even if NPLs tick higher in the coming quarters. Fitch believes the trends for public banks and large private lenders will not necessarily be the same. Private banks have likely been more proactive in provisioning, especially for large problematic corporate exposures. Should it occur, a sustained NPL recovery at the private banks would likely be faster relative to public banks. Public banks' higher exposure to weaker credit segments and lower loan growth will be factors in slowing the recovery in their NPL ratios versus their large private counterparts. Fitch maintains a negative sector outlook and Ratings Outlook for Brazilian banks in 2017. The operational environment will likely be a contributing factor to broader credit pressures and risks to asset quality, profitability and growth. Even if the recent NPL stabilization, solid earnings and falling provisions mark the beginning of a broader inflection point for asset quality, the process will only be gradual and dependent on the macroeconomic environment. Despite some positive signs, Fitch believes the weak macro environment is the primary driver of banks' caution on their loan books and why credit demand continues to be weak. Average credit growth guidance is just 2% for the three largest private banks this year, and this is from a very low base in 2016. Quarterly results for individual banks underscore this with credit declining or, at best, remaining flat. After two years of contracting GDP growth, private banks have become much more selective in their loan allocations. Fitch believes the recent trend in NPLs is much more a consequence of stricter and more accurate underwriting standards than improvements in companies' and individuals' credit profiles or cash flows. Contact: Raphael Nascimento Associate Director, Financial Institutions Fitch Ratings Brasil Ltda. Alameda Santos, 700-7 andar, Cerqueira Cesar Sao Paulo +55 11 3957 3664 Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 33 Whitehall Street New York, NY Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at 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. 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