The asset quality of Brazilian banks broadly deteriorated over the first quarter of 2015, yet many of the country’s banks, particularly the larger private banks, demonstrated profit resilience, says Fitch Ratings. Asset quality deterioration was in line with Fitch’s expectations outlined in March. In general, Brazil’s small and midsize banks were outperformed by their larger peers.Across the 21 banks covered in Fitch’s report published today, loan loss provisions rose 34%, while first-quarter annual loan growth slowed to 12.9%, down from 15.8% on a year-over-year basis. These growth rates exceeded the accumulated inflation rate of 8.1% in the 12-month period ending March 2015.The pressures on Brazilian banks’ net interest margins are partially offset by the yields on Brazilian government debt (Issuer Default Rating BBB/Rating Outlook Negative), which comprises an average of about 30% of these banks total earning assets. Brazil’s SELIC rate stands at 13.75%, up 300 bps from the end of first-quarter 2014.The diversified product base of Brazil’s largest private banks Bradesco, Itau, Santander, Safra and BTG helped these firms remain resilient in the first quarter. These banks have been able to limit the impacts of asset quality pressures on returns through insurance and other fee-based services. Impaired loans for the large private group averaged 8.0% at the end of the first quarter, versus 7.9% at the end of 2014. Credit costs rose 22% year over year, almost twice their average annual credit growth of 10.1%, excluding BTG, whose credit costs were 2.6 times higher year over year due to the deterioration of a few corporate exposures. ROAA for the large private group was 1.5% in the first quarter, while average ROAE was 18.6%, about flat versus the same quarter one year ago.Brazilian government-owned banks, which include Banco do Brasil (BB) and other state-owned banks (Banese, Banrisul, Banestes and BRB) posted the largest drop in first-quarter 2015 results. The results were in line with Fitch’s expectation that their asset quality metrics would be more vulnerable to weakness due to their strong loan growth over the last two years. Average ROAA for this group of banks decreased to 0.9% at the end of the first quarter from 1.1% a year ago. ROAE for the group was 14.0%, down from 15.1% a year ago. Credit costs for public-owned banks were roughly 56% higher than observed in first-quarter 2014, reflecting pushes into more unsecured and riskier loans.Small and midsize banks reported an average ROAA of 0.7%. Indusval and Pan reported net losses and Pine reported negative operating results mainly due to higher costs of credit. On the other hand, investment-grade rated banks, including ABC and Daycoval, continued to perform relatively better than their peers with below investment-grade viability ratings (VRs), including banks with national ratings equal or below ‘AA-(bra)’.Fitch’s outlook on the Brazilian banking sector remains negative based on expectations for Brazil’s economy to underperform due to high inflation, weak GDP growth, sovereign fiscal challenges and the weak real.
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