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Fitch: Brazil Central Bank Moves Won't Lift Credit in Short Term
December 22, 2016 / 3:12 PM / a year ago

Fitch: Brazil Central Bank Moves Won't Lift Credit in Short Term

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, December 22 (Fitch) Policy measures announced this week by the Brazilian central bank (BCB) designed to reduce credit costs and improve efficiencies in the financial system are unlikely to provide a major boost to credit in the short term, according to Fitch Ratings. However, the policies may have positive effects in the medium term. Fitch believes that macroeconomic variables are likely to remain far more relevant for credit growth and banking sector profitability, although the proposals signal a commitment to bolstering institutional capacity and enhancing the regulatory framework, which could be important steps toward aligning Brazil to global best practice. The measures were announced in a press conference by the BCB president and fell under broad objectives that include reducing borrowing costs, improving the efficiency of the local financial system, strengthening legislation pertaining to financial infrastructure and enhancing financial education. It is difficult to determine the precise effects of these objectives on individual banks and the banking system as there has not been significant detail released on the specific policies that will be part of the plan. The legislative and policy changes that will be required to achieve these objectives also remain uncertain and subject to political initiative. However, Fitch believes that the objectives are broadly positive for improving the institutional capacity of regulators and development of the financial system. BCB mentioned measures such as improving credit scoring systems and electronic receivables controls, allowing for collateralized long-term funding instruments, segmenting financial institutional regulation based on size and type of institution, regulation of fintech companies and adding tools to the central bank to better control liquidity and monetary transmission. Altogether, these could be important reforms to providing the banking system with a more robust operational and legal environment. The BCB's initiatives are part of a broader plan by the Brazilian government to reduce interest rate spreads and ease consumer credit conditions locally. In recent years, this has included loosening regulations on payroll lending by lengthening maximum tenors and raising the maximums allowed. This month, the National Congress approved a provisional measure that would allow private sector employees to put up to 10% of their balance in a Funds for Length of Service account (Fundo de Garantia do Tempo de Servico) as a guarantee for payroll discount loans. Over the past few years, changes in the legal framework of residential lending guarantees to enhance lenders' security with 'fiduciary alienation,' where borrowers only take possession of a property when they have paid off the loan, is another example of a reform aimed at increasing banks' appetite for different forms of consumer lending. Fitch maintains that these measures could help narrow spreads and rates on consumer lending over the medium to long term. However, they are unlikely to have a significant short-term effect on overall system lending. Also, Fitch believes that material negative implications on profitability, as well as ratings implications, are unlikely over the foreseeable future as a result of these initiatives. Macroeconomic variables should remain more relevant for banking sector growth and margins in 2017. Consumer credit demand remains low while household debt continues to increase. In addition to the challenging external environment, domestic high unemployment and protracted low economic growth will continue to weigh on consumer and investor confidence. There is potential for faster credit growth following the marked contractions in total credit to GDP since 2015 and as the economy stabilizes. However, Fitch expects banks to remain cautious and maintain tight underwriting standards. Fitch maintains a negative sector outlook for Brazilian banks in 2017. Contact: Raphael Nascimento Associate Director, Financial Institutions +55 11 3957 3664 Fitch Ratings Brazil Ltda Alameda Santos, 700 - 7 andar, Cerqueira Cesar Sao Paulo, 01418-100 Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Justin Patrie, CFA Fitch Wire +1 (646) 582 4964 33 Whitehall Street New York, NY Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, 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. Related Research 2017 Outlook: Brazilian Banks (Macro Picture Seemingly Stabilizing, but Banking Sector Not Out of the Woods Yet) here 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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