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Brazil's central bank: Rising delinquencies to hit bank margins in 2016

Rising delinquencyrates in Brazil will put pressure on the financial system in 2016 as banks see financialmargins squeezed by higher provision expenses in preparation for an adverse outcome,Banco Central do Brasilsaid April 7.

In its most recent financial stability report the central bankalso noted that efficiency gains tend to be lower, since efforts in this directionhave already been adopted by financial institutions for a long time, and now "thereis exhaustion in this result."

The central bank also forecasts lower growth for lending operations while income from services,insurance and credit cards will support a higher contribution to the banks' profits.

To put this in balance, Brazil's financial system saw loan deals gain steam in thesecond half of 2015, with banks conducting renegotiationcampaigns and restructuringclients' debts, as well as selling nonperforming loans.

The balance of active operations in loan portfolios that wererenegotiated increased to 7.6% in the second half of 2015 from 6.7% in the firsthalf of the year, while the balance of restructured operations rose to 1.9% from1.6% in the same period, the central bank data showed.

The central bank affirmed that the financial system's solvencyis appropriate, given high capitalization levels and the results obtained from stresstests.

"In the simulation of stressed scenarios, the Brazilianbanking system had adequate capacity to withstand the effects of shocks resultingnot only from adverse macroeconomic scenarios — for six consecutive quarters — butalso from abrupt changes in interest and exchange rates, delinquencies, or generalizeddeclines in real estate prices, even though the effects are not homogeneous forall institutions and some present declassification in some requirements and/or restrictionson profits distribution," the central bank noted in the document.