Banco Central do Brasil's recent decision to lower its benchmark Selic rate to a record-low 6.0% is credit negative for local banks as it will weigh on their net interest margins, according to Moody's.
"Although a decline in funding costs on banks' predominantly floating-rate liabilities may mitigate the effect of repricing lending rates, increasing competition will lead banks to lower lending rates faster this time around than in the previous easing cycle," the rating agency said in a research report.
It added that the 6.0% rate will further reduce revenue from banks' investments in government securities and trading, which represented 27% of their total revenues in March, already down from 35% as of December 2016.
The stimulus from the central bank combined with key economic reforms has the potential to kick-start a stronger credit growth cycle in 2020, but Moody's does not expect loan growth to accelerate beyond 6% to 8% in 2019 due to the economy's "current dismal performance."
During the last monetary easing cycle from October 2016 to April 2018, a period in which the Selic rate fell to 6.5% from 14.25%, Brazilian banks reported net interest margins of under 6.0%, Moody's noted.
Still, bottom-line profitability will likely remain steady for large retail banks, supported by a gradual reduction of provision expenses, among other factors. Smaller banks, however, will likely report lower profitability than their large retail-oriented counterparts because the latter have more diverse revenue sources and access to cheaper funding, Moody's said.
Earlier in August, the rating agency said the rate cut will benefit nonfinancial companies across various sectors, which are now more likely to access funding without bank intermediation.