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Your Three Minutes In Banking: Brazil Floods Could Take A Toll On Local Banks, Less So On Insurers

Although it's too early to assess the full impact of recent extreme flooding on the state of Rio Grande do Sul's economy, S&P Global Ratings believes the damage will be material and could hurt the asset quality of Brazilian banks, but expects contained losses for local insurers.  We think there could be significant fallout for the state's agricultural sector, services industry, private property, and public infrastructure. We also anticipate risks for small and midsize enterprise (SME) loans, consumer loans, and credit cards.

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What's Happening

Extremely high rainfall caused unprecedented flood damage in the Brazilian state of Rio Grande do Sul in recent weeks.   In addition, in the first half of 2023, an extraordinary cyclone affected the state that caused intense rainstorms and wind up until September of that year. And in 2022, the state faced the most severe drought in its history.

Why It Matters

Rio Grande do Sul's agricultural sector is important for Brazil, and it has faced several recent setbacks.   Overall, Rio Grande do Sul contributes 5.9% of Brazil's GDP. The state's agricultural sector contributes about 69% of the country's rice production and 8.6% of soy production. In addition, dairy products from the state represent 12.9% of Brazil's production and livestock 4.6%.

We think measures by Brazil's central bank will delay the reflection of loan losses on banks' balance sheets.   The central bank has announced measures for individuals and companies affected by the floods. These include grace periods for loans by 90 days with a rate review.

We placed our ratings on Banco do Estado do Rio Grande do Sul S.A. (BB-/Watch Neg/--) and Banco Cooperativo Sicredi S.A. (BB/Watch Neg/--) on CreditWatch with negative implications because the banks have significant exposure to flood-affected areas in the state.  The placement reflects our view that the direct and indirect effects of this extreme weather event on the region's banks are still unclear. In addition, we think there could be implications for other Brazilian banks and insurance companies.

What Comes Next

In our view, the effects of the floods could also weigh on other banks in Brazil.  However, the impacts may not be material or there could be mitigating factors that offset a deterioration in their business fundamentals. We estimate that the banking system's exposure to the state is 7%-10%, and will keep monitoring the loans extended by individual banks to the area. In addition, there is risk of more rainfall that could lead to additional flooding, which could heighten the impact to the region.

We expect that agricultural loans offered in the area will likely be renegotiated, but risks exist for consumer loans and credit cards.   Individuals and SMEs with commercial activities affected by the floods could struggle to repay their loans, absent additional government support measures. In contrast, we expect payroll deductible loans offered to government employees and pensioners will continue to perform well because the state directly repays them. Bank deposits in the area will likely be exposed to withdrawals because individuals may need to use their savings.

The implications for the insurance sector are still unclear, but we think recent events could raise demand for catastrophic risk coverage.   We consider the most exposed segments to be loss of profit insurance and property and residential insurance. However, we believe there are factors mitigating the repercussions for local insurers:

  • Brazilian SMEs don't typically insure for catastrophic risk;
  • Flood coverage is optional for car insurance, and we believe it's relatively low;
  • Local insurers don't typically cover major risks such as airports and stadiums; and
  • Agricultural insurance coverage for rice and corn is generally very low.

On the other hand, we believe the floods could increase demand for catastrophic risk coverage, likely pushing up prices and premiums for this coverage type.

This report does not constitute a rating action.

Primary Credit Analyst:Cynthia Cohen Freue, Buenos Aires + 54 11 4891 2161;
cynthia.cohenfreue@spglobal.com
Secondary Contacts:Sergio A Garibian, Sao Paulo + 55 11 3039 9749;
sergio.garibian@spglobal.com
Guilherme Machado, Sao Paulo + 30399700;
guilherme.machado@spglobal.com

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