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Moody's: Brazilian banks' woes continue as market volatility lingers

Brazilianbanks will continue to face pressures on their asset quality and profitabilityas market volatility continues, Moody's said April 5.

Banks'heightened risk aversion and growing conservative approach in lending will furtherweigh down on credit growth and strain borrowers' liquidity and refinancingcapacity, the rating agency added. It noted that private banks' loan bookscontracted 9.8% in real terms in the year ending February, worse than the 2.5%fall from a year earlier.

"Atthe same time, public banks — which had been slower to respond to the downturn— have also started to pull back, keeping their portfolios almost unchanged inreal terms in the 12 months to February, down from a 9% real expansion a yearago," Moody's said.

As bankslimit their lending, dependence on liquid assets such as short-term governmentbonds and repurchase agreements with the central bank has increased. Banks alsotend to decrease their participation in open interest contracts in the domesticderivatives exchange, Moody's observed.

Inaddition, banks will find it more difficult to continue widening creditspreads, which had partially offset the negative effect of rising loan-lossprovisions on their profitability.

"Withthe recession placing more pressure on borrowers, Brazilian banks have lesspricing power and increased asset quality risk," Moody's Vice PresidentAlcir Freitas said. "It is going to be hard for these banks to continueincreasing credit spreads at this pace and any boost they can get will offerlimited relief."