ECR: ‘There’s no Brazil credit bubble’

While investors may be worrying about the rapid growth of consumer credit in Brazil, most local analysts are quick to puncture any talk of a domestic bubble.

The recent increase of non-performing loans has focused investor attention on the growth of credit over the last five years, which has almost doubled from 24% of GDP in 2004 to 46.5% in January 2011.

Central Bank figures for the second quarter show that the 90-day delinquency rate rose to 5.1% of total credit, with above average rates for credit card and credit line borrowers. With the average debt service-to-income ratio reaching 21.5% at the end of 2010, many investors believe that Brazilian consumers are becoming overstretched.

But this mood of pessimism has puzzled locals, who believe that Brazil’s banking system is in better shape than those of many developed economies

Andre Loes, chief economist at HSBC Brazil, says: “Some of the articles written in the foreign press about Brazil have been total bananas. If you were to ask me whether the present rate of credit growth in Brazil is unsustainable, I would entirely agree. But I don’t have any concerns about the formation of a credit bubble.” He sees credit growth normalizing in line with GDP growth over the next five years.

No problem

In comparison with other countries, Brazil doesn’t appear to have an obvious problem with credit. At under half the size of GDP, credit is a small proportion in comparison with most developed countries, and is also lower than in the Czech Republic, South Africa and Thailand.

Elizabeth Johnson, a director at London-based consultancy Trusted Sources, says: “Equating credit growth with a bubble is quite irresponsible. Brazil is still largely a cash economy. It’s difficult for most Brazilians to get a bank account, let alone easy access to credit.”

There’s also the nature of consumer credit in Brazil. Hire purchase-style consumer lending makes up over 70% of total credit, while mortgage lending equates to just 4% of GDP. Furthermore, most consumer loans are fixed rate, protecting borrowers from interest rate hikes.

As if that wasn’t enough to puncture the bubble-mongers, the short tenor of most consumer credit also protects banks from future volatility: the average maturity of consumer credit is still under two years, according to central bank figures.

“We don’t finance houses, we finance people,” says Domingos Abreu, CFO at Bradesco. “We don’t have a shadow banking industry in Brazil, and less than half a percent of the population have withdrawn equity from their homes.”

High credit

Credit has increased across all income segments in recent years, but a significant proportion of this growth has been among higher income A-, B- and C-rated borrowers. Luis Santacreu, an analyst at rating agency Austin Rating Servicos, says: “In the last two years, there has been a big increase in good quality payroll loans, which account for almost 60% of total consumer credit. The delinquency rate for these loans is maybe 1% – a level that will not overly concern the banks.”

The Central Bank recently increased the minimum monthly credit card payment borrowers must make to 15%. Brazilian banks have already begun increasing NPL provisions; they reported an average tier-1 capital ratio of 17.4% in June.

Analysts also dispute the notion that new borrowers with little previous experience of credit may have misjudged their ability to pay back high-interest credit card and overdraft debt. “Our internal studies show that the debt-to-total-income ratio is highest in category A, B and C borrowers, who generally have more experience of credit and therefore present a lower risk of default,” says Domingos Abreu of Bradesco. “The average debt-to-income ratio for category B borrowers is 52%, whereas the average for category D and E borrowers is closer to 35%.”

Increases in credit have come as consumer goods have become more affordable for lower-middle class Brazilian households. “Ten years ago, Brazilians earning the minimum wage would have needed to spend 100% of their salary to feed a family of four,” says Elizabeth Johnson. “Today, they would need only 50%.”

Most analysts agree that credit growth will slow in the next five years. Andre Loes at HSBC says: “Brazil has experienced a period of catch up in recent years after the high volatility of the 1990s suppressed credit. But that period of catch up is coming to an end.” 

For full current rankings visit www.euromoneycountryrisk.com.

A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.