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Moody's maintains negative outlook on Brazil's banking system amid weak economic recovery

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Moody's maintains negative outlook on Brazil's banking system amid weak economic recovery

Moody's on Sept. 26 said it is maintaining its negative outlookon Brazil's banking system amid the country's weak economic recovery.

In a statement, the rating agency said it expects the system'sprofitability and asset quality "will continue to face pressure due to thelagging effects of a deep recession from which Brazil is just beginning to emerge."

"The operating environment for banks has begun to stabilizeas consumer spending and investment start to rebound, but the recovery remains fragileand banks will continue to face challenges stemming from economic weakness,"Moody's senior vice president Ceres Lisboa said in a statement, adding that "thegovernment's capacity to support banks will also remain under pressure."

Moody's forecasts the Brazilian GDP to contract 3.5% in 2016and to register a modest 0.5% rise in 2017. "Despite these headwinds, the bankingsystem will emerge from the recession with adequate capitalization and strong liquidity,"Moody's noted.

Notwithstanding the incipient recovery, Moody's expects corporateearnings to remain weak as unemployment will continue to increase, triggering furtheroverdue payments and delinquencies.

However, the agency predicts the pace of asset quality deteriorationto start easing "as banks responded to the recession by making fewer loans,strengthening provisioning coverage and reducing exposure to riskier borrowers."

Nevertheless, Moody's believes eased inflationary pressures andmuted credit demand may lead to lower interest rates and pressure banks' margins,while problems with loans will continue to drive up provisioning expenses.