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According to its annual report on Brazil’s banking industry, Moody’s Investors Service says that its stable outlook for the average D bank financial strength rating of the rated Brazilian banks is mostly driven by the relative financial flexibility and diverse franchise of the largest banks. Moody’s financial strength rating excludes external support and measures a bank’s stand-alone creditworthiness.

“Credit growth has been particularly strong in the consumer and installment loan segments,” the report states, adding that “such loan growth persists, despite recent rate increases, and fortunately it has yet to affect the banks’ asset quality, which remains largely stable.”

Moody’s notes that recovery in the Brazilian economy and reduced interest rates boosted consumer spending and allowed for improving real income and higher employment, with a resultant jolt to credit demand.
According to the report’s author, senior vice-president Celina Vansetti, “the banks’ revenue dynamic is gradually shifting, in line with the change in banks’ asset allocation, as recurring, credit-related earnings replace traditionally high gains from securities”.

“Assuming that the resumption of economic growth proves to be sustainable and that a new cycle of easing monetary policy is feasible,” she says, “we would expect lending to remain active, with lasting effect on the banks’ revenue dynamics.” Also, indications of growing capital investment should give rise to increased corporate credit demand.

The analyst points out that acquisitions of small banks and specialised lenders such as consumer finance companies by the larger banks continue to support the long-term view of an increasingly concentrated banking system. “The big banks continue to pursue gains of scale and market share,” Vansetti explains, “while shaping up their presence in product areas that offer greater revenue perspectives in a scenario of economic stability.”

She is generally optimistic, and says that “we see selective upside potential for the bank financial strength ratings of Brazilian banks in the coming months.” This positive scenario reflects specific franchise enhancements as well as improvements in their financial performance.
“More importantly,” Vansetti states, “as Brazilian banks manage to reduce their exposure to government risk and improve the quality of their earnings, we expect that their BFSRs could be reassessed in the medium term.