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Banking Industry Country Risk Assessment: Brazil


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Banking Industry Country Risk Assessment: Brazil

Major Factors


S&P Global Ratings classifies the banking sector of Brazil in group '6' under its Banking Industry Country Risk Assessment (BICRA). Other countries in group '6' include China, Colombia, Portugal, Indonesia, Brunei, Thailand, Trinidad & Tobago, South Africa, and Uruguay (see chart 1). Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Brazil is 'bb+'.

In our opinion, Brazil's low-income levels and the government's weak fiscal position constrain the country's economic resilience. The fiscal profile is set to improve in 2021 following a severe deterioration amid the pandemic, but debt will remain elevated. We expect economic growth of 4% in 2021, although economic performance will remain mediocre in the medium term, absent a faster pace of reform approvals. We forecast lower provisioning needs for Brazilian banks in 2021 because we expect businesses and individuals' debt payment capacity to improve as the economy continues to rebound. Asset quality has so far performed better than we expected, but it's likely to worsen as loan deferral programs end. However, the rise in provisioning coverage last year puts banks in a good position to deal with this deterioration.

Our industry risk assessment for Brazil reflects its well-developed financial regulation that is broadly in line with international standards, and the regulator's good track record that has helped the domestic financial system withstand the last economic downturn. Brazilian banks' profitability was relatively resilient in 2020 thanks to the strong margins, high provisioning coverage prior to the pandemic, and diversified revenue mix. We expect profitability to improve in 2021 as provisioning needs moderate. The Brazilian banking system has an adequate funding mix with a large and stable core customer deposit base.

Chart 1


Economic And Industry Risk Trends

Our economic risk trend is stable, which reflects our expectation that credit losses will remain manageable. This is owing to banks' resilient profitability, high provisioning coverage, and conservative growth strategies in previous years that focused on granting payroll deductible loans to government employees and retirees, mortgages with conservative loan-to-value (LTV) ratios, and corporate loans with stronger guarantees. These factors enabled the Brazilian banking system to mitigate the impact of the economic contraction on its credit portfolio in 2020 and will support an improvement in 2021.

We view the industry risk trend as stable. We expect the Brazilian financial system's funding structure and competitive dynamics to remain healthy and that Brazil's central bank (BCB) will continue introducing regulation in a proactive matter as needed when shifting away from the measures that it introduced to contain the impact of the pandemic on the financial system.

Economic Risk  |  7

We base our economic risk score for Brazil on our assessment of economic resilience, economic imbalances, and credit risk in the economy, all of which our criteria define.

Economic resilience: Low-income levels and government's weak fiscal position

Economic structure and stability.   Brazil, along with the global economy, has felt a material impact from the COVID-19 pandemic and the resultant economic downturn last year. Nevertheless, the Brazilian economy's real GDP contraction of 4% in 2020 was relatively modest compared with many regional peers, as a result of the authorities' large fiscal response.

International commodity prices have rebounded with greater global demand, supporting an improvement in Brazil's terms of trade. Owing to base effects from the 2020 contraction and external strengths, we forecast economic growth in Brazil will rebound to 4% this year, before moderating to 2.2% in 2022-2024. However, the enduring nature of the pandemic creates significant uncertainty for Brazil's economic and fiscal performance in the near term. The pace of recovery for domestic demand will depend largely on the authorities' ability to effectively distribute the vaccine.

The approval of microeconomic reforms in a number of sectors, benign external conditions, and a large program of concessions should bode well for investment. Nevertheless, the acceleration of inflation and the monetary tightening cycle could hurt the resumption of economic activity. In addition, structural impediments--particularly, cumbersome tax rules, weak investment expenditure, fiscal rigidities, and trade barriers--are likely to continue to weigh on medium-term growth. Brazil's growth prospects have been below those of other countries at a similar stage of development, in our view. We expect GDP per capita of US$7,107 for 2021.

Macroeconomic policy flexibility.   Fiscal results deteriorated sharply because of the economic contraction in 2020 and the government's large policy response to the pandemic. Last year, the general government deficit reached a historical high of 13.6% of GDP, leading to an increase of the government's net debt burden to about 68% of GDP in 2020 from 54% in 2019. With the rebound in economic activity (leading to higher tax revenue) and the removal of extraordinary support measures, we estimate the fiscal deficit is likely to be about 8% of GDP in 2021.

Authorities have approved moderate spending above the constitutional cap this year (so far, about 1% of GDP), including extensions of emergency aid until July and of other support programs. Risks to our deficit projection in 2021 include potential additional above-cap spending as the pandemic lingers, given the government has signaled the possibility of further extending emergency aid. Over 2022-2024, we forecast fiscal deficits will average 6.2% of GDP as room to reduce mandatory spending remains limited absent additional fiscal reforms, especially ahead of the presidential elections. Extraordinary revenue, including additional transfers from the Brazilian Development Bank (BNDES by its Portuguese acronym) and other public banks, as well as the public funds to repay debt, could help stabilize the debt burden at about 90% of GDP. In net terms, we expect general government debt to maintain an upward trend toward 74% of GDP in 2024, from 68% this year.

A favorable composition of debt, large government liquid assets, and limited contingent liabilities mitigate the risks of managing Brazil's high debt burden. Since the end of last year, the National Treasury has been able to strengthen its liquidity cushion, reducing uncertainty regarding debt management in the coming months. The government has now taken the opportunity to reduce its local currency issuances in the domestic market, as well as the concentration on short-term fixed-rate instruments. As a result, maturities have slightly increased, and the pressure on the yield curve has diminished.

Table 1

BICRA BRAZIL--Economic Resilience
(%) 2017 2018 2019 2020 2021f 2022f
Nominal GDP (bil. $) 2,063.2 1,917.1 1,877.6 1,444.2 1,522.0 1,614.8
Per capita GDP ($) 9,917.3 9,143.2 8,888.2 6,788.4 7,106.8 7,493.2
Real GDP growth (%) 1.3 1.8 1.4 (4.1) 4.0 2.1
Inflation (CPI) rate (%) 3.4 3.7 3.7 3.2 6.4 4.0
Monetary policy steering rate (%) 7.0 6.5 4.5 2.0 5.0 6.0
Net general government debt as % of GDP 56.4 56.4 54.2 68.1 68.2 71.0
f--Forecast. Source: S&P Global Ratings.
Economic imbalances: Credit losses to moderate from the peak in 2020 but to remain elevated

We forecast lower provisioning needs in 2021 for Brazilian banks. As the economy continues to rebound, we expect businesses and individuals' debt payment capacity to improve. On the other hand, although asset quality has so far performed better than we expected, it's likely to worsen as loan deferral programs are phased out. However, the sharp rise in provisioning coverage last year puts banks in a good position to deal with the possible deterioration.

Lending growth in Brazil was strong in 2020, at 15.5%. Growth was mainly due to the higher credit demand from corporations as they enhanced their liquidity to prepare for difficult conditions and due to the incentives from the central bank to boost lending, which included liquidity support, and capital and provisioning relief. Moreover, mortgage lending surged because of the low interest rates.

However, we expect lending growth to be much lower in 2021, about half of last year's level. This is because of the absence of the extraordinary measures from the government and banks' lower risk appetites, given the uncertain conditions stemming from a new wave of infections in Brazil. We expect lending growth this year to stem from retail lending, rather than corporate lending, because of a likely lesser demand from the corporate sector and retail expenditures to pick up from lower levels last year as social distancing-restrictions are lifted.

Chart 2


Chart 3


Real estate prices.  House prices have been declining since 2014 due to recession, and we expect their recovery to take longer due to the virus-induced economic contraction. The share of mortgages as a percentage of total loans rose during the past few years, as banks focused on low-risk products. However, mortgages only account for about 18% of total lending as of March 30, 2021. On the other hand, we don't expect asset quality of mortgages to deteriorate because underwriting standards have been adequate over the past few years. LTVs averaged 57% as of December 31, 2020, with a very limited presence of home equity loans and no subprime lending. In addition, Caixa Economica Federal (Caixa; BB-/Stable/B) holds about 40% of total mortgages.

Equity prices.   In our view, the fluctuations in equity prices don't indicate higher economic imbalances, and major Brazilian banks have very limited direct exposure to stock market.

Current account and external debt position.   Brazil's current account is experiencing cyclical uplift as a result of improving terms of trade from higher commodity prices, stronger demand from the U.S. and China for Brazilian exports, local currency depreciation, and weak domestic demand. We expect that for the first time since 2007, Brazil will post a small current account surplus in 2021, following a deficit of 1.7% of GDP in 2020. Commodity prices and strong external demand, led by China, support Brazil's iron, soy, and oil-based good exports.

We expect the current account will revert to structural deficits in 2022. Therefore, we forecast the current account deficit will average 2.1% in 2022-2024 and will be fully covered by net foreign direct investment (FDI). Despite a drop in inflows last year, we expect net FDI to gradually recover and remain the largest source of financing of the current account deficit. We think Brazil could be vulnerable to sudden changes in FDI flows because net external liabilities, which include the high stock of FDI in the country, account for almost 150% of current account receipts in 2021.

Table 2

BICRA Brazil--Economic Imbalances
(%) 2017 2018 2019 2020 2021f 2022f
Annual change in claims of resident depository institutions in the resident nongovernment sector in % points of GDP (6.1) (2.4) 0.4 8.2 (1.4) 0.9
Current account balance/GDP (1.1) (2.7) (3.5) (1.7) 0.1 (1.7)
Net external debt / GDP (%) (2.5) (3.9) (2.5) (5.3) (6.7) (6.2)
f--Forecast. Source: S&P Global Ratings.
Credit risk in the economy: Asset quality metrics are better than expected, but the full impact of the pandemic will be felt later

Private-sector debt capacity and leverage.   Loan moratoriums are delaying the worsening of nonperforming loan (NPL) ratios. While, asset quality has been stronger than we expected, we believe that hurdles remain: a high level of informal economy and fragile conditions for small and midsize enterprises (SMEs) will pressure loan portfolios as government relief measures are withdrawn. The economic rebound we expect in 2021 is a crucial factor that could help cushion asset quality deterioration. We expect nonperforming assets (NPAs) to surge in 2021, reaching about 3.5% and 3.6% in 2022.

At the peak, 26% of total loans were within the cure or deferment period or 30 days in arrears, a level that has decreased to about 14% in December 2020. Of the R$1.2 trillion in renegotiated loans (see chart 4), R$632 billion have been cured (resumed payment, and paid at least three installments), R$193 billion are still in grace period (mainly corporate and SME loans), R$321 billion already resumed payment but have not yet paid three installments given the payment resumption of less than three months ago, and only R$68 billion are in 30 days arrears.

Chart 4


Banks implemented conservative growth strategies prior to the pandemic that focused on granting payroll deductible loans to government employees and retirees, mortgages with conservative LTV ratios, and corporate loans with stronger guarantees. These strategies have helped the banks mitigate the harm to asset quality metrics. As such, we expect credit losses to be lower than in previous crises, given that the composition of the credit portfolio has shifted significantly. In addition, banks raised significant levels of provisions during 2020 and in previous years. Therefore, we expect the need to raise additional provisions to be lower than in 2020.

As of the end of 2020, household debt represented 30% of GDP (up from 27% the previous year) and 56.5% of household annual disposable income (up from 48.8%), while debt service accounted for 31.2% of household monthly revenue. The household portfolio's NPLs dropped to 2.8% in 2020 from 3.5% in 2019 and net charge-offs were 2.5% in 2020.

Corporate NPLs slipped to 1.2% in 2020 from 2.1% in 2019. We saw an increase in corporate lending due to the incentives to lend to this segment and the higher demand from this sector, but we expect credit growth in this segment to moderate.

Lending and underwriting standards.   Construction loans accounted for only 0.7% of total loans as of December 2020 and foreign-currency lending accounted for just 4.1% of total loans. In addition, these loans are adequately matched on the balance sheet. Banks have maintained low single-name concentration; we estimate that top 20 borrowers account for 10%-12% of total loans or 0.4x-0.5x reported equity.

Payment culture and rule of law.   In our opinion, Brazil's payment culture and the rule of law are weak, further weighing on credit risk. According to the Transparency International Corruption Perceptions Index 2020, Brazil ranks 94th out of 179. There's still significant room for improvement, but Brazil's ranking is above some of other Latin American countries, such as Mexico and Bolivia (124), and Paraguay (137), while tied with Peru (94).

Chart 5


Chart 6


Table 3

BICRA Brazil--Credit Risk In The Economy
(%) 2017 2018 2019 2020 2021f 2022f
Per capita GDP ($) 9,917.3 9,143.2 8,888.2 6,788.4 7,106.8 7,493.2
Domestic credit to the private sector & NFPEs as % of GDP 46.9 46.6 47.0 54.0 52.8 53.7
Household debt as % of GDP 25.0 25.7 27.2 30.1 28.7 29.7
Corporate debt as % of GDP 21.9 20.9 19.7 30.1 21.5 21.2
Foreign currency lending as a % of total domestic loans 2.9 3.3 3.0 4.1 4.0 4.0
Domestic nonperforming assets as a % of systemwide domestic loans (year-end) 3.2 2.8 2.9 2.1 3.5 3.6
f--Forecast. Source: S&P Global Ratings.

Base-Case Credit Losses

We expect the Brazilian financial system's credit costs to diminish in 2021 after the peak in 2020 of 4.1%, given that banks boosted their provisions to cover for future losses during the past two years, and we expect them to decrease in 2021 to 3.0% and 2.6% in 2022 as economy recovers. Our credit-cost estimate for Brazil in the next two years incorporates the following assumptions:

  • GDP growth of 4% in 2021 and 2.5% in 2022;
  • Unemployment to remain high in 2021 and slowly decrease in 2022;
  • Inflation to pick up in 2021 and gradually decrease in 2022; and
  • NPAs to increase to 3.5% in 2021 and remain stable in 2022.

Industry Risk  |  5

We base our industry risk score for Brazil on our assessment of institutional framework, competitive dynamics, and system-wide funding.

Institutional framework: Extensive regulatory coverage with gradual improvements

Banking regulation and supervision.   We consider that Brazil's banking regulation has extensive coverage of financial institutions and adequate supervision with satisfactory enforcement capabilities, along with a comprehensive set of tools to monitor risks in the system. The country's banking regulation is broadly in line with international standards in terms of accounting, capitalization, money laundering, related-party transactions, and financial statements disclosure. Banking regulation in Brazil has been improving, and authorities are adopting international standards. Brazil has fully implemented Basel III, in line with the international phase-in arrangements. The central bank supervises all banks, credit unions, nonbank financial companies, and other financial intermediaries (i.e. exchanges, securities brokers, etc.). Supervision is carried out on a risk-based basis; coverage is extensive; and there are specific rules for liquidity, derivative exposures, single-name and geographic concentrations, foreign currency operations, credit, market, and operational risks, capitalization, compensation, and information disclosure. In our view, regulatory minimum requirements are adequate, and authorities foster a preemptive risk culture.

BCB, through its agenda BC#, has introduced a set of measures in order to achieve the following goals: promote financial inclusion; increase competitiveness; enhance transparency; and encourage financial education and sustainability. As part of this agenda, BCB has introduced the following initiatives:

  • In November 2020, the BCB launched the PIX tool, an instant payment system that allows everyone who has a bank or payment account to transfer money and make payments at any time, with no cost for individuals.
  • At the end of March, BCB approved Facebook Pay to act as a payment initiator service provider. This entity will be responsible to run a payment tool inside the WhatsApp application trough Visa and Mastercard payment schemes, allowing card holders to transfer money.
  • The implementation of the open banking in Brazil through four stages during 2021, after its introduction in April 2019.
  • The consolidation of positive credit bureau, cadastro positivo, which was approved in December 2019, a set of databases that contains information from individuals or companies (related to obligations paid or currently being paid), which financial institutions use to check a borrower's default history.
  • In April 2021, BCB published a consultation paper on a proposed normative that establishes rules for the disclosure of information on social, environmental, and climate risks for the financial institutions. In the first phase, contemplating qualitative aspects, the focus is on the disclosure of clear, consistent, and comparable information on governance, strategies and management of social, environmental, and climate risks. The second phase, scheduled for 2022, will establish mandatory disclosure of quantitative information (targets and metrics) (

In response to the COVID-19 pandemic and economic impact of the social-distancing restrictions, BCB has introduced a comprehensive set of measures to limit the harm to the financial system. These include liquidity measures (reduction of the reserves requirements and facility lines); loan moratoriums; and a reduction in the capital conservation buffer; limits on dividend payments and capital relief on restructured loans to SMEs. In addition, the interbank rate (Selic) was lowered to record low levels and the government offered government guaranteed loans for SMEs.

Regulatory track record.   Brazil's regulatory track record is, in our view, intermediate. BCB has a proactive approach towards regulation. Brazil's financial system has been resilient to the weak economy in the past few years, and the government's measures were effective in offsetting potential liquidity problems. The central bank was also successful in identifying potential risks among consumer lending products and took measures to reduce them (i.e. higher-risk capital charges on auto loans and long-dated consumer lending.) However, ten banks have failed since 2010, some of which were allegedly involved in unlawful activities. These institutions were very small and didn't cause systemic damage. In addition, authorities have taken steps to strengthen supervision to avoid unlawful practices in the system, such as requiring supervision for lower retail loan amounts. In our view, the central bank's biannual financial stability reports also contribute to an effective monitoring of the financial system and the promotion of proactive measures. .

Governance and transparency.   We assess governance and transparency as at least adequate. Brazil has adequate banking regulation that fosters satisfactory governance practices. In our view, there's also a satisfactory level of transparency in the system. Banks publish their financial statements on a quarterly basis and make them available online. Banks also prepare annual financial statements, which third parties audit. In addition, the central bank publishes a broad set of information on the financial system on a quarterly basis, including a consolidated balance sheet, and profit and loss statements, detailed information on loans and their performance, capitalization ratios, along with other important indicators. Moreover, BCB publishes the minutes of the Financial Stability Committee that meets four times per year.

Investigations of the government-owned banks during 2015 and 2016 have raised concerns about governance of these institutions. Investigations resulted in imprisonments of the involved individuals but haven't resulted in systemic drawbacks for the financial system. Moreover, the implementation of the Law 13,303/16 (the State-Owned Company Act) in 2017 has significantly improved governance of state-owned banks, in our view, promoting greater transparency in the decision-making process and limiting the political appointments to the banks' executive positions. We believe that the diligent execution of such measures may reduce political risk for banks while increasing their ability to perform their policy roles.

Competitive dynamics: Market distortions from government-owned banks' likely to moderate but their presence to remain significant

Risk appetite.   We consider the Brazilian banking sector's risk appetite as moderate. During the recent downturn, the banking sector has outperformed other economic sectors. Its profitability has been resilient due to high net interest margins (NIMs) and business diversification, which includes insurance and asset management. Banks' profitability, measured by return on equity (ROE), has averaged at 15.1% for the past three years, below the 18.9% average in 2007-2011, but stronger than during previous recession, given that it dropped to the lowest point in September 2016 of 11.8%.

Our risk appetite assessment also incorporates the sector's low exposure to high-risk lending. As of December 2020, real estate construction loans accounted for only 0.7% and foreign-currency loans for 4.1% of total loans amid limited use of securitization. There are no subprime loans, and the share of home equity loans is almost negligible. Additional exposures to other vulnerable sectors, such as agriculture, are also limited, representing 6.6% of loans.

Chart 7


Table 4

BICRA Brazil--Competitive Dynamics
(%) 2017 2018 2019 2020 2021f 2022f
Return on equity (ROE) of domestic banks 14.1 14.4 18.2 12.8 13.5 15.0
Systemwide return on average assets (%) 1.2 1.3 1.7 1.2 1.3 1.6
Market share of largest three banks* 59.8 57.0 55.4 52.3 52.0 52.0
Market share of government-owned and not-for-profit banks** 54.1 51.2 47.1 45.0 44.0 43.0
f--Forecast. Source: S&P Global Ratings.

Industry stability.   The Brazilian financial system consisted of 136 banks, four development banks, and other 1,178 financial institutions (including credit unions, mortgage lenders, micro-financing, and consumer finance companies) as of Dec. 31, 2020. The ten largest banks control about 80% of the market in terms of deposits as of Dec. 31, 2020. Market share among the largest players has been fairly stable in the past five years, and we don't expect major changes in the medium term. The three largest banks have controlled 53%-57% of the market in the past five years.

Demand for digitalized banking in Brazil is rising primarily because of the convenient and speedy use of services, lower costs as opposed to the high fees that traditional banks charge, and the relatively low access to credit, in our view. Fintech firms are also benefiting from the relatively widespread ownership of smartphones and the "millennial factor", given that younger customers are more keen on digital banking solutions. Moreover, we consider that a supportive regulatory framework has prompted this emerging slice of the sector to boom, fostering competition. We believe large banks' embrace of new technological platforms, superior capacity to invest, and the universal banking model will help preserve their dominant market share. However, smaller banks will find it increasingly difficult to keep up with these trends. In the medium term, we expect competition to intensify and profitability to fall until the benefits from cost reduction through digitalization level off. This will likely lead to further consolidation among the struggling banks and fintechs.

Market distortions.   Despite the government's efforts to reduce the market share of public banks, it remains high almost 45% (see chart 8). This creates market distortion, given a still high spread differential between public and private banks. We expect government-owned banks to focus on their traditional areas of expertise and reduce their share in non-core businesses. As such, we expect Banco Nacional de Desenvolvimento Economico e Social (BNDES; BB-/Stable/--) to focus on key infrastructure projects and key economic sectors for the country, Banco do Brasil S.A (BdB; BB-/Stable/B) to continue fostering the agricultural sector, and Caixa to grant financing to the lower-income borrowers and promote housing. We believe that the administration plans to continue divesting BNDES's large shareholdings in listed companies and BdB to continue focusing on selling non-core assets rather than divesting its core units. Therefore, the bank could sell its investments in other financial institutions. Caixa is currently considering IPOs of its insurance and credit card subsidiaries, which could occur this year, and IPOs of its other operations, such as asset management and lottery, could happen afterwards. The bank may also divest assets from its equity investments and sell real estate assets.

Chart 8


Systemwide funding: The banking sector benefits from a sizeable and stable source of retail deposits.

Core customer deposits.   Our system-wide funding assessment reflects the Brazilian banking sector's low exposure to external funding, and large and stable core customer deposit base. Core customer deposits (considering 100% of retail deposits and 50% of corporate deposits) accounted for 78% of total loans for the past five years. Core deposit base has been stable. With the subdued credit growth in 2018 and 2019 and contraction in the previous years, banks' liquidity positions have strengthened. We expect lending to pick up in years to come, with growth rates at 8% for the next two years, which will require additional funding. We believe deposit growth, a slight increase in domestic issuances, and a reduction in liquidity levels will be sufficient to fund this growth.

External funding.  The Brazilian banking sector's exposure to external funding is moderate, and refinancing risk is low. The sector's net external funding has averaged 9% of total loans for the past two years. Low reliance on external funding is mainly due to the sector's large customer deposit base and limited foreign-currency lending.

Domestic debt-capital markets.  In our view, Brazil's debt capital markets are moderately broad and deep. Market depth has been improving in the past five years as pension and mutual funds' appetite for private-sector debt increased. As of year end 2020, pension and mutual funds held assets representing approximately 80% of GDP. Currently, a large percentage of these funds are invested in government securities; however, these entities are also looking for instruments with attractive returns and longer maturities. We expect that in the next three years, the appetite for higher returns will broaden available funds for banks and corporate issuers. In addition, we expect that longer-term maturities will become available, as pension funds will also be looking to match their balance sheets.

Table 5

BICRA Brazil--Systemwide Funding
(%) 2017 2018 2019 2020 2021f 2022f
Systemwide domestic core customer deposits by formula as a % of systemwide domestic loans 79.1 80.5 78.7 89.6 84.8 82.5
Net banking sector external debt as a % of systemwide domestic loans 8.0 8.8 9.7 12.4 11.0 10.2
Systemwide domestic loans as a % of systemwide domestic assets 36.4 36.1 36.4 35.2 37.9 37.9
Outstanding of bonds and CP issued domestically by the resident private sector as a % of GDP 32.5 33.6 35.9 40.8 39.1 39.8
f--Forecast. Source: S&P Global Ratings.

Government role.   The government has a satisfactory track record in providing liquidity to the financial system under stressful conditions, and the central bank serves as a lender of last resort. A deposit insurance entity, Fundo Garantidor de Créditos, covers up to R$250,000 per depositor per entity and up to R$1 million aggregated in all entities. This institution is also part of the safety net and plays a significant role in the various bank resolution mechanisms.

Peer BICRA Scores

Countries in BICRA group '6' are very diverse. Compared with Colombia, Brazil has a stronger regulatory framework and alignment with international standards, but this strength is moderated by the distortions stemming from a large market share of government-owned banks, which isn't the case in Colombia. China continues to post much stronger (although moderating) GDP growth pace than Brazil, which supports the former's economic risk assessment although debt leverage is much higher. On the industry risk side, China's banks have stronger funding profiles, while we consider the institutional framework to be stronger for Brazilian banks.

Table 6

Republic of Brazil Peer BICRA Scores






Trinidad and Tobago

South Africa


Anchor bb+ bb+ bb+ bb+ bb+ bb+ bb+ bb+
BICRA Group 6 6 6 6 6 6 6 6
Economic Risk 7 7 7 6 7 7 7 5
Economic Risk Trend Stable Stable Stable Stable Negative Negative Negative Stable
Economic Resilience 5 3 4 3 4 5 5 4
Economic Imbalances 3 4 4 4 2 3 4 2
Credit risk in the economy 4 5 4 4 6 4 4 4
Industry Risk 5 5 5 6 4 5 5 7
Industry Risk Trend Stable Stable Stable Stable Stable Stable Stable Stable
Institutional framework 3 4 4 3 3 4 3 4
Competitive dynamics 4 4 3 4 4 4 3 4
Systemwide Funding 3 1 3 4 2 2 4 4
Government Support Assessment Supportive Highly supportive Supportive Uncertain Highly supportive Supportive Uncertain Supportive

Government Support

We classify the Brazilian government as supportive of the domestic banking sector. We believe the government will provide extraordinary support to systemically important banks (whose failure could compromise the country's payment system) in the event of a crisis. Brazil has defined various resolution mechanisms that include private-sector solutions.

Table 7

Five Largest Brazilian Financial Institutions By Assets (March 31, 2021)
Assets (R$ Mil) Counterparty credit rating Systemic importance
Itau Unibanco Holding S.A. 2,124,817.0 BB-/Stable/B High
Banco do Brasil S.A. 1,829,203.0 BB-/Stable/B High
Banco Bradesco S.A. 1,612,801.0 BB-/Stable/B High
Caixa Economica Federal 1,437,101.0 BB-/Stable/B High
Banco Nacional de Desenvolvimento Economico e Social (BNDES) 737,237.0 BB-/Stable/- High

In December 2019, the administration sent Congress a draft of a resolution regime bill for discussion and approval. The Complementary Bill (PLP) 281/19 creates two mechanisms to resolve financial institutions , such as banks, insurers, and private pension entities: the Stabilization Regime and the Compulsory Liquidation Regime. Depending on the regulated market, the two regimes may be established by BCB, the Securities and Exchange Commission, or Superintendence of Private Insurance. In addition to implementing the resolution regimes, these regulatory bodies may require financial institutions to draw up recovery plans, with measures to restore business viability, and organized exit plan, with information to support a rapid and orderly resolution of the institution.

The regulators may enact the resolution regime, which they consider most appropriate for the case. The Stabilization Regime should be applied to institutions of systemic importance, whose financial failure would cause instability in the economy, but other banks could also be treated under that regime. For such scenarios, BCB will perform an analysis of viability, including the balance sheet analysis and the availability of instruments for bailing in. Once the central bank decides on a stabilization regime, it will decide the order of the necessary instruments: bailing in instruments or using the funds, or both (the bill provides the order of resources and bail in instruments to be used for loss absorption purposes). It will be executed by an administrator appointed by the regulators, who must seek a private solution for the resumption of business. Immediately, the Stabilization Regime suspends the exercise of shareholder rights and removes the directors of the failing institution. The Compulsory Liquidation Regime will be applied if the risk to financial stability is determined to be low. The Compulsory Regime, executed by an appointed liquidator, involves the closure of the institution's activities, submission to the concursal regime (which classifies creditors by order of priority), and the sale of assets. Situations that can lead to the enactment of the resolution regimes include insolvency, exposure to risk incompatible with equity, insufficient assets to cover losses, and repeated violations of legal and regulatory standards.

The draft also establishes the creation of Credit Guarantee Funds, to pay out guaranteed deposits and provide liquidity to the system, and Resolution Funds, to grant loans to and capitalize institutions under the Stabilization Regime. The resources for the capitalization of the funds will come from the financial system. In case of Stabilization Regime, the resolution fund may constitute a transitional financial institution ("bridge bank"), which will be capitalized to receive the institution's assets and liabilities under resolution until they are assumed by third parties or discontinued. If private resources are not sufficient to ensure financial stability, the government may lend to resolution funds. In this case, some conditions must be met, such as the exhaustion of shareholder resources and the possibility of serious threat to the financial system. The government will be the first to be reimbursed when the institution recovers.

Related Criteria And Research

This report does not constitute a rating action.

Primary Credit Analyst:Cynthia Cohen Freue, Buenos Aires + 54 11 4891 2161;
Secondary Contact:Sergio A Garibian, Sao Paulo + 55 11 3039 9749;

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