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Credit FAQ: Why Brazilian Digital Banks Aren't Exposed To The Same Risks As SVB

The failure of U.S.-based Silicon Valley Bank (SVB) and Signature Bank (SB) in recent weeks has led to questions about the creditworthiness of banks around the world, including in Brazil. U.S. authorities took action to reduce contagion risk, protecting all deposits at SVB and Signature Bank (see "The Fed's Plan For U.S. Banks Should Reduce Contagion Risk," published March 13, 2023). Here, S&P Global Ratings presents frequently asked questions from investors about the potential impact of these developments on rated Brazilian digital banks.

Frequently Asked Questions

Are Brazilian digital banks exposed to SVB?

Brazilian digital banks don't have material direct exposures to SVB or SB, and none of these banks have similar business structures or vulnerabilities to those of the two U.S. banks. However, we could see the indirect effects--in the form of institutional investors' increasing risk aversion--result in higher funding costs and scarcer funding for Brazilian digital banks.

Are unrealized losses and interest rate risks concerns for Brazilian digital banks?

Brazilian digital banks' securities portfolio is largely composed of floating-rate or inflation-linked government bonds, which have low durations and, thus, are less likely to incur losses associated with changes in the yield curve. In addition, only a small part of Brazilian digital banks' securities are classified as held-to-maturity, with the majority allocated as trading securities or available for sale. Therefore, changes in these securities' fair value are immediately recognized in capital, and unrealized losses are immaterial for these banks.

What's the funding composition of Brazilian digital banks?

Brazilian digital banks' funding base is mostly comprised of a very broad pool of retail depositors, most of which are insured by FGC (Fundo Garantidor de Crédito). In our view, these features reduce the likelihood of massive withdrawals. In addition, many of these digital banks' funding bases have significant proportions of time deposits with no daily liquidity, which allows for a better asset-liability management. On the other hand, we still think that Brazilian digital banks are more susceptible to a confidence crisis than larger banks due to their smaller scale and shorter operating records.

Overall, what are the main risks for Brazilian digital banks?

We see interest rates as a secondary risk for Brazilian digital banks. Instead, we think the main risks for these banks relate to challenging economic conditions, revenue resilience, and side effects from their significant growth rates. In general, digital banks have grown quickly over the past few years, and most of them have reported low profitability due to high expansion expenses. In addition, some of them faced increased delinquency rates in their loan books in 2022 due to a combination of rapid expansion and challenging conditions such as high inflation and interest rates.

This report does not constitute a rating action.

Primary Credit Analyst:Henrique Sznirer, CFA, Sao Paulo + 55 11 3039 9723;
Secondary Contact:Guilherme Machado, Sao Paulo + 30399700;

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