Brazil, July 28, 2020 – Brazil’s Confederação Nacional do Comércio de Bens, Serviços e Turismo (the national confederation of commerce of goods, services and tourism or CNC) published its July survey which showed that consumer indebtedness had reached record levels and that delinquency pressures have intensified. The rise in household indebtedness is credit negative for Brazilian banks with significant consumer lending exposures, mainly large retail banks, because it will lead to higher asset risk on banks’ balance sheets and be reflected in rising problem loan levels as well as renegotiations and restructurings. The increase also illustrates the challenges Brazilian consumers face in managing their loan exposures.
The record level of indebtedness is particularly credit negative for Brazilian banks with large exposures to unsecured consumer lending. Such banks include Caixa Economica Federal (Ba2 stable, ba31), Banco do Brasil S.A. (Ba2/(P)Ba2 stable, ba2), Banco Bradesco S.A. (Ba2 stable, ba2), Itau Unibanco S.A. (Ba2 stable, ba2) and Banco Santander (Brasil) S.A. (Ba1 stable, ba2), which combined account for the lion’s share of consumer lending in Brazil.
Higher indebtedness indicates rising asset risk, particularly amid challenging economic conditions in Brazil because of the coronavirus pandemic. We expect Brazil’s economy to contract by 6.2% this year, with high unemployment negatively affecting household income. Since the onset of pandemic, banks’ problem loans ticked up to 3.3% in April from 2.9% in December 2019, driven largely by rising problem loans for consumers, which rose to 4.1% in April from 3.6% in December 2019 (see Exhibit 1). However, 90-day problem loans have since ticked down to 2.9% for the system as of June 2020 and to 3.6% for consumer loans as banks began renegotiating their loan exposures amid rising asset risk.
Based on available central bank data, BRL594 billion of loans were renegotiated and received loan payment extensions due to the pandemic between 16 March and 29 May, which equates to about 16.5% of total systemwide loans as of June 2020. Loans to households and small and midsize enterprises (SMEs) comprised 91% of these renegotiated loans. The payments were deferred for of up to 180 days and equal 11% of the sum of all renegotiated contracts (principal plus interest), most of which supported SMEs and households.
At the onset of the coronavirus crisis, the central bank eased provisioning requirements for any accruing loans being renegotiated until September 2020. The measures that postpone provisioning will likely delay credit losses, requiring banks to reinforce reserve coverage levels during the third and fourth quarters. In this context, rising household indebtedness to a record level in July is a sign that asset risk pressures will continue to build on banks’ balance sheets
The results of CNC’s survey showed that 67.4% of all Brazilian families have debt outstanding, the highest level on record since 2010. The levels of indebtedness were driven by lower income households, defined by those who earn up to 10x the minimum wage, of which 69% of families were indebted. For households earning over 10x the minimum wage, the level was at 59% as of July, elevated compared with historical levels (see Exhibit 2).
The CNC survey also showed that the percentage of families in the lower income group with debt payments in arrears rose 260 basis points from a year ago to 29.7%, while for higher income groups the level was 11.2% versus 10.6%, indicating rising delinquency pressures. The percentage of households unable to pay off their debts also rose in July across both income levels – up 240 basis points to 13.7% for lower income households and up 150 basis points to 4.9% for higher income households.
For indebted households, 21.6% have more than 50% of their monthly earnings dedicated to debt service, and the largest type of exposure is credit card debt, according to the survey. Following that category is payment by installments via booklets. Both categories are unsecured consumer loan classes, highlighting that banks are particularly susceptible to a deterioration in borrower repayment capacity.
Credit Outlook: 3 August 2020. Pg. 16
Moodys
Atlantic Investors Service 