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Moody's revises Brazilian banking system outlook to negative

Moody's on Oct. 9 revised its outlook on Brazil's banking system back to negative from stable.

The outlook revision reflects the risk on banks' financial fundamentals, particularly asset risk and profitability, due to ongoing political uncertainty. It also considers the negative outlook on Brazil's Ba2 sovereign rating given the close relationship between banks and the government.

The rating agency expects Brazil's economic growth will remain weak, at 0.5% in 2017 and 1.5% in 2018, despite continued recovery amid lower inflation and declining interest rates. Banks remain cautious and corporate loan demand is limited as large corporate borrowers focus on deleveraging rather than investment, Ceres Lisboa, Moody's senior vice president, said in a statement.

Moreover, even with banks maintaining manageable asset risks, delinquencies will remain high over the next 12 to 18 months due to still-high unemployment and weak corporate earnings, Moody's said.

However, the rating agency believes banks' liquidity will remain robust while funding needs will be limited. It also expects earnings will stabilize due to lower funding and credit costs.