Defaults should continue to rise, but banks do not see a credit crisis – 02/24/2023 – Market

Credit data from the beginning of the year show a drop in concessions and a worsening in defaults, but with data still far from the most critical periods of recent decades and which do not show signs of a crisis in this market.

Preliminary data from Febraban (Brazilian Federation of Banks), for example, point out that the banking system’s credit portfolio should shrink by 0.8% in January, interrupting a sequence of 11 months of growth, a movement seen as seasonal by the institution. In January of last year, there was stability.

For companies, a retraction of 3.3% is expected, the worst result in the series started in 2018 for the month. For individuals, the 0.9% growth is practically the same result as in 2022.

The 12-month stock growth rate, which was at 17% in August 2022, is expected to stay at 13% by January of this year. This Friday (24), the institution released a survey with banks that shows an expectation of growth of 8.2% at the end of this year.

The sector’s expectation is that the default of the non-earmarked credit portfolio, which excludes real estate loans, rural credit and BNDES (state development bank), goes from the current 4.2% to 4.7%.

Luiz Rabi, chief economist at Serasa Experian, says that this is a time of rising defaults and insolvency, but it is unlikely that this will turn into a credit crisis.

According to him, the main statistics of this credit market show a relevant distance from other more critical periods, such as the 2008 international financial crisis.

Provisions against loan losses from financial institutions, for example, ended the year representing 6% of the portfolio, below the 6.9% verified in the two most recent peaks, in May 2017 and June 2020. In the financial crisis of 2008, the indicator reached 7.2%, according to data from the Central Bank.

Individual defaults ended the year at 3.85%, below the peak of 5.5% in the historical series started in 2011, which was reached in May 2012. The indicator for companies is at 1.7%, less than half of the April 2017 record of 4%.

Rabi claims that the basic interest rate, also identified as a complicating factor in this scenario, has already been higher in other periods in the last 20 years, even in real terms (discounting inflation).

Serasa data already shows that the number of defaulting people started to rise in September 2021 and hasn’t stopped anymore. It went from 62 million to 70 million consumers in that period. In the case of companies, it went from 5.8 million to 6.4 million.

“Delinquency has grown a lot, mainly due to conjuncture factors, such as inflation, which has destroyed the purchasing power of millions of Brazilians, and we are living with high interest rates, but we have always lived with a reasonably high default”, says the economist.

For him, only a recession with the destruction of jobs could lead to a deep deterioration in the credit market and an explosion in arrears.

“These are indicators that still do not reflect a possible credit crisis. These requests for judicial recovery by retail companies are more a sector problem than a systemic problem. much more of a supporting actor than the lead actor.”

An executive from the banking sector claims that there is a tendency for credit to slow down, related to the restrictions imposed by monetary policy and the high basis for comparison, for example, but that it is far from being a catastrophe scenario.

For him, there is no problem of lack of resources to support credit, which makes it unnecessary to reactivate measures to inject resources into the banking system, as was done in 2008 and 2020.

On the other hand, there is an issue of increased credit risk that can be alleviated through government action. He also sees as positive measures that help in the renegotiation of debts of low-income people.

Only a scenario of significant worsening in the fiscal risk, which postpones the cut in interest rates for a long time and disturbs the process of falling inflation, could lead the country to a scenario of greater turbulence with additional deterioration in the credit market.