Skype: Signal2forex / Whatsapp: +79065178835

No products in the cart.

Brazil banks ready for latest stress test

The financial fallout from the coronavirus in emerging markets is hitting Brazil hard, but the solidity – and profitability – of its banking sector is helping alleviate the pain.

A recent report from Goldman Sachs highlighted the extent of Brazil’s financial exposure to Covid-19: Brazil has seen its equity markets sell off more than any other large country and the real has also been one of the worst-performing currencies.

However, the country’s banking sector looks set to withstand this latest crisis.

Large banks in Brazil may have several flaws… But there is one thing nobody can deny – they are rock-solid 

 – Eduardo Rosman, BTG Pactual

A report from BTG Pactual highlights the positive aspects of having a consolidated banking system – it increases ease of coordination and regulation during crises and tends towards strong profitability of those players during good times and bad.

“Over the years, banks faced hyperinflation, price freezes and the Collor Plan, which hijacked savings accounts,” argues Eduardo Rosman, financial institutions analyst at BTG Pactual. “They survived the Lehman bust in 2008 and the largest corporate crisis in Brazil’s history in 2015/16 without many bruises.

“Large banks in Brazil may have several flaws. Their apps aren’t the best, credit and fees are arguably expensive, and service channels are time-consuming and oftentimes full of paperwork. But there is one thing nobody can deny – they are rock-solid.”


This solidity is based on several factors. First, the financial system is mainly in the hands of five large, profitable banks. Financial system return on equity (ROE) totalled 16.5% in September 2019, when the average of the largest private banks was 21%; and the banks are well capitalized, with core capital around 14%.

The banking system is also liquid, with more than 90% of large banks’ funding sourced locally and denominated in local funding (mostly from deposits). Reserve requirements represent R$416 billion, or roughly 6% of GDP (as of January 2020), and the central bank has also reacted to the crisis caused by Covid-19 with R$2.7 trillion of liquidity and capital measures, which combined represent 36.6% of GDP (much higher than the amount pumped into the economy in 2008, which was then R$200 billion, or 5.9% of GDP).

Among the most important of the central bank’s actions was its decision to reduce compulsory deposits and enhance the short-term liquidity rate calculation (LCR). 

And as expectations of the impact of the coronavirus increased, the CMN announced measures to help banks, such as waiving the requirement to provision renegotiations of non-overdue debts with clients, and reducing banks’ conservation capital requirement from 2.5% to 1.25% for one year, unlocking R$56 billion in capital for banks (estimated to enable a potential extra R$640 million of lending into the economy).


BTG Pactual’s Rosman has modelled the likely impact on the large banks: “Every crisis has its unique characteristics. But past crises showed the resilience and soundness of the Brazilian financial system, and we stick with this view.”

The models imply an increase in net income of about 5% for the large banks. With a 50% increase in provisions among the large private banks (equal to a 165 basis point increase in the cost of risk), then consolidated net income shrinks 22% when compared to 2019 results.

Past crises showed the resilience and soundness of the Brazilian financial system, and we stick with this view 

 – Eduardo Rosman, BTG Pactual

Even if the models assume an increase in provisions of 75% and 100%, it would only result in a 36% and 39% fall in income respectively – a hit to ROEs but only depressing profits and in no way threatening quarterly. 

In the worst-case scenario (a 100% increase in provisions), the banks would still generate ROEs that would be the envy of any bank based in a developed market during good times: with BTG forecasting ROE of 12.5% for Bradesco, 11.8% for Itaú, and 8.6% for Santander (while state-owned Banco do Brasil would be expected to decline to 4.5%).

It is too early to see the impact of the crisis on the numbers released by the banks but Rosman reports that Santander Brasil’s CEO, Sergio Rial, told him that he was “confident of sustaining its bottom line”.

However, pockets of weaknesses may emerge elsewhere in Brazil’s banking system. 

According to Fitch’s senior director and head of South America and Caribbean financial institutions, Claudio Gallina, medium-sized banks are vulnerable because a part of them focus on the small and medium-sized enterprise segment, which is usually more sensitive to problems than large corporates: “Many of the medium-sized financial institutions are in the midst of strategic changes with reference to their business models and have had significant expenses in the elaboration of their projects. 

“The current crisis may lead to a longer delay for these institutions to be able to profit from their projects. Greater liquidity and capital cushions in cases like these should support current ratings. Creativity to develop new products, focus on customers’ genuine needs and agility in implementation will be crucial.”