August 4, 2017 / 1:36 PM / a year ago

Fitch: Brazil Banks Mostly Ready for Net Stable Funding Ratio

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, August 04 (Fitch) The implementation of a net stable funding ratio (NSFR) rule in Brazil next year should help banks manage funding risks and limit excessive risk-taking, says Fitch Ratings. Furthermore, there should not be a significant direct impact on banks' profitability, growth or business models from meeting the NSFR rule. Brazilian banks have sufficient capacity to adjust structural liquidity as needed. Banks with a majority of assets in the system are well positioned to meet the requirements as indicated by a pro forma domestic measure of liquidity (ILE) reported by the central bank that uses the same NSFR methodology. The NSFR, in conjunction with the 2015 implementation of liquidity coverage ratio (LCR) requirements, should further strengthen local banks' liquidity framework and should be a credit positive for the system. The NSFR will be required for all banks unlike the LCR, which applies to banks with assets above BRL100 billion. The NSFR is a prudential structural liquidity rule that is part of the central bank's implementation of the Basel III regulatory process. The NSFR aims to reduce funding risk over the longer term relative to the LCR by requiring banks to fund their activities with sufficiently stable sources of funding and favoring long-term liabilities such as capital. Furthermore, it intends to measure the banks' ability to absorb shocks and complements the leverage limits and minimum capital ratios that mitigate excessive growth during periods of rapid economic expansion. The NSFR will likely further disincentive certain long-term assets such as real estate, payroll financing and auto loans for banks that lack sufficient access to a broader, diversified and stable source of funding. Most small banks have already been exiting these loan segments owing to existing competitive funding limitations. It could also mitigate credit growth should such growth pressure the NSFR at a given bank. The banking system ILE was reported at 1.07x as of YE16, indicating excess stable funding of about BRL243 billion, equivalent to 20% of long-term, non-earmarked credit portfolio. This suggests that the banking sector's stable funding is at a sufficient level to finance growth without compromising stability levels set by the NSFR. Most large banks had an ILE above 1.0x. Banks with ILE equal to or greater than 1 held 83% of system assets as of YE16. Smaller banks showed greater variation in the ILE with 32 banks (out of 130) having an index measure of less than 1.0, the minimum required by the central bank. However, only six, accounting for 0.9% of system assets, had insufficient liquidity to support short-term stress as indicated by an LCR of less than 1.0. Recent strong stable sector capitalization and subdued credit growth, especially in the larger private banks, will also help the sector manage the NSFR implementation. We expect Brazilian banks to continue favoring greater excess liquidity, lower leverage and weaker loan growth while economic conditions remain sluggish. Even for banks that have targeted growth in lending segments with higher levels of competition, such as payroll and vehicles, the cost of adjustment to the NSFR is likely to be low as it has been dominated by well-capitalized banks with greater access to funding. Greater reliance on small-term wholesale funding means that small and midsized banks will likely face more challenges. However, this will be partially compensated by the more short-term nature of their assets. The central bank's efforts to improve banks' access to funding sources through creating time deposits, which the Credit Guarantor Fund partially insures, have also enabled these banks to lengthen the tenor of their funding bases. Contact: Raphael Nascimento Associate Director Financial Institutions +55 11 3957 3664 Fitch Ratings Brasil Ltda. Alameda Santos, 700 -7 andar, Cerqueira Cesar Sao Paulo +55 11 4504 2216 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: 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. 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