Brazil's banks are prepared to cope with a potential rise in corporate loans in or at risk of default, the central bank said on Monday, a sign efforts by lenders to refinance looming debt maturities are slowly easing the country's worst credit crunch in two decades.
In a semi-annual report on banking industry stability, central bank policymakers noted that banks have so-called problematic loans - credit in default or with a high risk of falling in arrears - under control, even if they rose marginally. Nevertheless, the country's banking system remains highly resilient to an adverse credit event, even under some extreme scenarios, the report said. A series of simulation exercises found that banks could absorb massive default-related losses, albeit at the cost of declining profitability, the report showed.
Brazil's harshest recession on record has prompted banks to reclassify some 160 billion reais ($51 billion) in corporate loans as problematic over the past 18 months, eroding profits as banks struggle with all-time high bankruptcy protection filings. "The main risks have already materialised," said Anthero Meirelles, the central bank's board member in charge of banking oversight. "Problematic loans may rise marginally, and their reduction will depend on the pace of the economic recovery."
The report also underpinned the view among policymakers that lenders have mitigated the risk of growing financial interdependence between engineering firms, suppliers and services companies involved in "Operation Car Wash," Brazil's sweeping corruption probe. The probe, focusing on a graft ring in which builders won contracts with state firms through bribery, has caused a number of large firms to enter bankruptcy protection or restructure their liabilities in recent years.