April 26, 2017 / 1:32 PM / 7 months ago

Fitch: Economy to Limit Brazil Banks' Problem Loan Recovery Rate

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, April 26 (Fitch) Loan recoveries will likely remain challenging for Brazilian banks alongside a continued tough macroeconomic environment in 2017, says Fitch Ratings. Asset quality should also remain a key issue. Corporate NPLs are likely to improve only marginally while increasing unemployment should continue to weigh on retail NPLs and household indebtedness. Asset quality and provisioning trends in 2017 are unlikely to be as negative as in 2016, especially considering the high concentration of problematic cases in the corporate sector last year. However, asset quality trends will still be challenging for banks until there is greater evidence of recovery in certain key sectors and more solid growth trends in the economy. Fitch forecasts economic growth in Brazil to rise to just 0.7% this year following deep contractions in 2015-2016 and maintains a negative sector outlook on Brazilian banks. Final credit losses (gross of recoveries) at Brazil's three largest private banks have increased significantly through the recession period of 2015-2016, reaching BRL58 billion last year versus BRL44 billion in 2014, an increase of 32%. Similarly, renegotiated loans for this group of banks reached BRL56 billion in 2016, which represents an increase of 38% from the pre-recession period in 2014. Historically, rising revenue from loan recoveries is an important factor in strengthening net interest margins, particularly when asset quality has weakened and provisioning expenses remain high. However, recovery revenues (net of taxes) were below average in 2016, averaging roughly 17% of banks' net income versus the 22% average recorded in 2008-2010 following the global financial crisis. According to central bank rules, loans classified as level H -- loans already in arrears for more than 180 days -- should be written off from banks' balance sheets after six months of classification, and any future recovery will be recorded as revenue and in banks' net interest margins. The combined loss ratio (loans charged off to total loans) of the three largest private banks rose to 5.1% in 2016 from 4.2% in 2015 and 2014. This increase reflects the prolonged rise in NPL ratios. The system NPL ratio increased to 3.8% in December 2016 from 2.8% in December 2013, mainly driven by corporates where NPLs rose to 3.5% from 1.8% in the same period. Heightened losses in 2015 and 2016 highlight sizeable concentration risks faced by an increasingly consolidated banking sector, in addition to broad-based macroeconomic pressures. Brazil's largest banks increased exposure to the country's leading corporates during the period of rapid economic growth immediately preceding the recession. At the same time, M&A activity increased concentration, with the top six banks now holding around 80% market share. Large corporate defaults at major firms including Oi, Samarco and Sete Brasil have forced banks to renegotiate their debts. Renegotiated credits for this group of banks reached 5.0% in 2016, up from 4.4% in 2015 and 3.9% in 2014, though renegotiated loans may include non-problematic assets. Fitch's base case does not incorporate a significant impact from renegotiated loans on large private banks' solvency. They remain strongly capitalized and well provisioned. However, forming a full view of asset quality may be challenging until we have more clarity on the performance of the recent vintage of renegotiated loans. Such assets were not necessarily tested during 2016 as renegotiations usually incorporate expanded tenors. Also, it should be noted that NPLs can show a discrepancy arising from the increasing amount of charged-off credits that are not being accounted as past-due loans once removed from banks' balance sheets. Contact: Raphael Nascimento Associate Director Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7 andar, Cerqueira Cesar Sao Paulo 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: elizabeth.fogerty@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. 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