(Bloomberg) — From the US to Europe to Australia, banks are bracing for a drop in their biggest source of revenue as interest rates start to fall. But in Brazil, it’s rate hikes that could break the industry’s momentum.
The nation’s central bank last month announced its first increase to the Selic benchmark in two years on the same day the Federal Reserve had its first cut since 2020. Higher borrowing costs in Latin America’s biggest economy may upend recent growth in lending revenue — known in the industry as net interest income — that has been among the best in the world.
“I have an opinion that is a bit counterintuitive — that a lower interest rate is better for banks than a higher one,” Thiago Batista, an analyst at UBS BB Investment Bank, said in an interview in Sao Paulo. “Since we are now getting an increase in the Selic, that could be bad for banks’ NII.”
That outcome is decidedly not the expectation in the US, where the Federal Reserve last month lowered its benchmark for the first time in more than four years. The move — if not the size of the move — had been widely expected, as are several more cuts, and industry executives have been trying for months to temper expectations for NII as a result.
Jamie Dimon, for one, has said the bonanza that fueled record NII at the four largest US lenders last year can’t last forever, warning shareholders of JPMorgan Chase & Co. that the bank he leads has been “over-earning.”
It’s a different story in Brazil, where higher interest rates will mean higher funding costs for banks, Batista said, since their local-currency liabilities mostly carry floating rates. And lenders would only be able to pass along those costs to clients as credit portfolios turn over, with about half of banks’ loan books carrying fixed interest rates.
The result? Lower net interest income in the short term, according to Batista, although the impact on earnings is likely to be marginal.
Interest rates at higher levels for a longer period than previously expected are also likely to strain borrowers in Brazil, potentially weakening banks’ asset quality and forcing them to keep high provisions for loan losses, Standard & Poors said in a report last month. Delinquency rates reached 3.2% in July, down from 3.5% in July 2023, and that encouraged banks to increase their loan books at a faster pace this year. S&P expects nonperforming loan rates to rise back to 3.5% of total portfolios or even increase to 4% through the end of this year.
“While we still expect banks’ earnings to benefit from high interest rates due to strong margins, credit losses may rise,” S&P said.
More lending helped Brazil’s four biggest banks — Itau Unibanco Holding SA, Banco do Brasil SA, Banco Bradesco SA and Banco Santander Brasil SA — boost their combined NII 7.7% in the first half of 2024 from the same period last year. The firms were also slowly taking on riskier, more profitable loan categories, such as credit cards and consumer loans.
Higher NII was one reason Itau posted record profit in the second quarter, as stronger-than-expected economic growth in Brazil increased demand for credit.
But the likelihood of a repeat is dimming ahead of more central bank rate increases.
“At first, there would be a negative impact for all banks, as happened in 2021 when the government started raising the Selic,” said Carlos Daltozo, head of equity research at Eleven Financial Research. “But then they would be able to reprice their credit portfolios.”
On average, banks in Brazil take about 18 months to renew their loan books, according to Matheus Guimaraes, an analyst at XP Inc., Brazil’s biggest equity brokerage by trading volume.
“Everyone is paying attention to this scenario of rising interest rates, because it could eventually affect banks’ appetite to offer some lines of credit, especially for lower-income customers,” he said. “Right now, we don’t see it, we don’t see banks considering reducing credit limits to clients, at least in their speech.”
Since the pace of Selic increases is expected to be more moderate than during the 2021 tightening cycle, the impact on net interest margins should be milder, Guimaraes said, including for the banks most affected last time, such as Bradesco and Santander.
In 2021, the central bank raised the Selic rate to 13.75% from 2% over just 17 months. This time, expectations are for the rate to move no higher than 12.5% from 10.5% in the beginning of the current tightening cycle.
Also working to ease the pain this time are the lessons learned from past cycles. Brazil’s biggest banks now typically hedge floating interest-rate exposures, at least on part of their liabilities, according to Bernardo Guttmann, XP’s head of banking sector research.
“As delinquency rates continue on this downward trajectory, which is what we are seeing, we’re beginning to observe an important change in banks’ risk appetite,” Guttmann said. “They are returning very selectively to credit lines with a higher risk profile.”
He said banks are being careful not to return to sectors that lost money in the past, but they are increasing credit-card originations.
“This combination of credit lines with larger spreads and the growth of the credit portfolio tends to increase NII, and that’s a movement that, in our view, should continue,” he said.
Felipe Prince, Banco do Brasil’s vice president for internal controls and risk management, said he doesn’t see demand for credit cooling off, or a reduction in concessions, “but banks will become more selective.”
He said he looks with “skepticism” at the idea of advancing too much in lending to micro and small companies, because the segment “deserves caution” right now. “All banks are improving their risk models and the fight for the best customers will become fiercer.”
–With assistance from Giovanna Bellotti Azevedo, Rachel Gamarski, Raphael Almeida Dos Santos and Giovanna Serafim.
©2024 Bloomberg L.P.
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Publish date : 2024-10-01 02:06:00
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