Loan delinquencies in Brazil's banking system fell in June for the first time since March, in a sign that private-sector lenders' efforts to slow credit growth were finally bearing fruit. Loans in arrears for 90 days or more, the industry's benchmark gauge for credit delinquencies, fell to 5.2 percent of outstanding loans last month from 5.5 percent in May, where it had remained since March, the central bank said in a report on Friday.
Private sector banks are stepping away from riskier loan segments, a move that leads to a decline in interest-rate income but minimises the risk of defaults, while the loan book of state-run banks is growing faster than the amount of overdue credit. Lower delinquencies in June were driven by a 0.3 percentage point decrease in consumer loan defaults, followed by a 0.1 point decline in corporate loan defaults, the report showed. "The main highlight in the credit figures for June was the widespread improvement in credit quality data, led by private-sector and foreign-controlled banks relative to public-sector banks," Carlos Firetti, head of equity research for Bradesco BBI, wrote in a client note.
Brazil's current credit cycle, in which defaults spiked and credit growth faltered, has lasted 22 months - the longest in more than a decade. Even as non-performing loans show a significant recovery this year, efforts by the central bank to fend off inflation by hiking borrowing costs could reverse this trend next year, Jorg Friedemann, an analyst with Bank of America Merrill Lynch, said.
This week, second-quarter results at Banco Bradesco SA, the nation's No 2 private-sector lender, showed a steeper-than-expected drop in defaults in the wake of efforts to tighten credit risk assessment and move toward less-risky types of credit. The default ratio fell especially in segments where banks like Itaú Unibanco Holding SA are pulling out. Forward-looking indicators for delinquencies, such as the default ratio between 15 days and 90 days, also showed a slight decline, the report said.
"The still-high level of non-performing loans in the system means private banks remain somewhat defensive," said Alberto Ramos, chief Latin America economist with Goldman Sachs Group. Last year, when defaults hit a record, Itaú and its peers began to focus on credit that requires borrowers to put aside more collateral, slowing some fast-growing loan segments. That happened as those lenders had to grapple with a weak economy, and government pressure to step up lending and cut rates.
Outstanding loans in Brazil's banking system rose 1.8 percent from May, hitting a record 2.53 trillion reais ($1.12 trillion), the report said. In the 12 months through June, credit growth accelerated to 16.4 percent, the slowest pace since January 2010, according to Thomson Reuters data.
On an annual basis, state-run banks disbursed loans at a pace almost six times faster than their private-sector rivals, which have turned more cautious as Brazil's economy enters a third year of sub-par growth. President Dilma Rousseff has used state-controlled Banco do Brasil SA and Caixa Econômica Federal to cut credit costs in Brazil - which remain among the world's highest - and to foster competition.
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