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Fitch: Political Uncertainty Raises Brazil Banks' Credit Risks
May 22, 2017 / 4:46 PM / 6 months ago

Fitch: Political Uncertainty Raises Brazil Banks' Credit Risks

(The following statement was released by the rating agency) SAO PAULO/NEW YORK, May 22 (Fitch) The increased political uncertainty triggered by recent corruption allegations involving Brazilian President Michel Temer will further pressure the operating environment for banks while potentially raising asset quality risks over the medium and long terms, says Fitch Ratings. Brazil is facing political uncertainty after one of the main shareholders of JBS group -- the world's largest beef and leather producer -- reached a plea bargain in which he alleges President Temer endorsed bribery. The deterioration in Brazil's political environment should not cause a sharp and immediate deterioration in Brazilian banks' asset quality or any significant losses through securities' exposures. However, as this implicates the presidency, the heightened political risk could increase policy and legislative uncertainty. This is at a time when economic reform and the legislative agenda are critical for an economic recovery, following a deep two-year recession. The political crisis has the potential to hamper the pace of the economic recovery and underscores the still deeply challenging operating environment facing Brazilian banks. Fitch's outlook for the Brazilian banking sector remains negative with the weak economic environment and its spillover effects on asset quality core factors weighing on the outlook. There have been some signals of stabilization in the operating environment, but these remain tepid and short-lived. The potential for improvement on Brazilian banks' asset quality is likely to be hampered by broad macro challenges, but the corruption scandal could have particular effects for the protein business and protein production chain portfolios. Fitch-rated small and medium banks' exposure to the protein industry is moderate. Major private banks do not have large direct exposures to this sector and have been reducing their overall single-borrower concentrations, given the high leverage and still limited cash generation among nearly all corporate industries in Brazil. Public banks usually have larger exposures in certain sectors such as agribusiness, in part due to their social and development roles. Therefore, Fitch believes there may be some need for additional reserves or mark-to-market adjustments of specific securities within this segment of banks. The average Fitch core capital ratio of the three largest public banks as of December 2016 was 11.1% (Banco do Brasil: 10.24%, Banco Nacional de Desenvolvimento Economico e Social: 13.51% and Caixa Economica Federal: 9.62%). This offers a limited cushion against a potentially material deterioration in asset quality, but a potential decline in reserve buffers means that public banks would be less prepared for an unforeseen jump in credit losses. As such, the political environment could be another challenge for this group of banks' capital position, even if the impact on bottom-line profitability was moderate. Occasional provision needs would eventually also pose limitations to growth. Similar to other Latin American countries, Brazil has a relatively high bank concentration -- the 10 largest banks represent 86% of the system's total assets. Since a significant majority of the assets of Brazil's largest banks are credit related, market risk exposure is limited. Therefore, market volatility brought about by any political turmoil should have limited immediate effects for this group of banks. Volatility could have a significantly greater impact on investment banks and fund managers. If political uncertainty results in sustained instability in asset prices, it could impact their earnings. Nevertheless, Fitch-rated investment banks' market risk limits and controls should have limited significant exposures. Contact: Claudio Gallina Senior Director, Financial Institutions Fitch Ratings Brasil Ltda. Alameda Santos, 700 -7 andar, Cerqueira Cesar Sao Paulo +55 11 4504 2216 Esin Celasun Director, Financial Institutions +55 21 4503 2626 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 33 Whitehall Street New York, NY Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.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. 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