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Big Brazil banks are set to ride out of economic downturn

Big Brazil banks are set to ride out of economic downturn

Posted by Laura Zúñiga on October 15, 2014

Brazil's economy has stagnated and will remain weak well into 2015 but its big private-sector banks are poised to safely weather the downturn thanks to a cautious business model that keeps a lid on risky lending and costs.

Latin America's largest economy is in its fourth year of disappointing growth and slipped into recession in the first half of the year. Weaker consumer spending, a cooling labor market and a slide in investor confidence mean 2015 is also likely to be tough.

Modest credit growth and higher default rates may also persist next year regardless of who wins this month's presidential election - the leftist incumbent, Dilma Rousseff, or the centrist favored by investors, Aecio Neves.

All of those problems typically drag on bank earnings, but giants like Itaú Unibanco Holding SA (ITUB4.SA), Banco Bradesco SA (BBDC4.SA) and state-run Banco do Brasil SA (BBAS3.SA) could all buck the trend.

By streamlining costs and focusing lending on the most creditworthy borrowers, private-sector banks look well-positioned to navigate any choppy waters ahead, said Saúl Martínez, a senior analyst at JPMorgan Securities.

"The question here is, if there's a shock in unemployment or an abrupt downturn in economic growth, how each player in the banking sector will act, how their asset quality indicators will perform," he said. "Private-sector banks look relatively well-prepared to face that situation."

State-run banks, on the other hand, look more exposed to a weak labor market that may spark an uptick in defaults and force them to make additional loan-loss provisions.

In that group, analysts said the risks look greater for Caixa Econômica Federal [CEF.UL], an unlisted government lender that has aggressively increased lending and charged lower interest rates since 2009, than for Banco do Brasil, the nation's largest bank by assets.

Earnings at Itaú and Bradesco, Brazil's top-two private-sector lenders, could expand 10 percent or more next year as their strategy of growing credit in low-risk segments like payroll-deductible lending and mortgage loans will help keep a lid on provisions, Deutsche Bank Securities' Tito Labarta said.

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