ANNUAL
REPORT
2018

BANKING
SECTOR
DYNAMICS

The Country’s sound solvency has functioned as an important buffer against possible negative impacts arising from the international economy

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ECONOMIC OUTLOOK

In 2018, the pace of economic recovery fell short of expectations for the year. Several factors contributed to this, such as the increase in risk aversion with regard to emerging country assets in view of a quicker-than-expected rise in interest rates in the United States; the truck drivers’ strike; and the uncertainty surrounding the outcome of the presidential elections.

Despite the difficulties, the Brazilian economy recorded moderate GDP growth, in the range of 1.2%. Inflation remained under control and reached 3.75% at the end of 2018, its second year below the target of 4.5%. This allowed the Central Bank to further reduce the Selic base rate from 7% per annum (p.a.), to 6.5% p.a., the lowest level in history.

External accounts remained adjusted, with a low current account deficit (-0.77% of GDP), which was again financed by the inflow of foreign direct investment (4.7% of GDP). In addition, Brazil maintained its high level of international reserves of approximately US$375 billion.

The Country’s sound solvency has functioned as an important buffer against possible negative impacts arising from the international economy.

Also noteworthy was the performance of the credit market, which saw the total balance of operations grow by 5.5% in the year, after declining for two consecutive years.

The recovery of the credit market was also reflected in the propositions drafted by FEBRABAN in line with the Central Bank’s BC+ agenda. Some of these made significant progress in 2018, such as the reduction of compulsory deposit rates (sight deposits from 40% to 21%, savings deposits from 24.5% to 20% and time deposits from 34.0% to 33%).

Public finances are still Brazil’s greatest challenge. The federal government posted a primary deficit of R$121.0 billion, the fifth consecutive year of negative results, although better than the performance in 2017, when the primary deficit stood at R$130.5 billion. As a result, gross debt set a new record, reaching 76.7% of GDP, reinforcing the need for urgent implementation of structural reforms capable of reversing this growth trajectory to ensure the solvency of the public sector.

Finally, faced with a still very modest recovery, labor market figures remain negative. The average unemployed population in 2018 was 12.8 million, in addition to the more than 14 million underemployed or disheartened workers.

The adoption of reforms, especially of Social Security, is imperative for changing this scenario, not to mention reducing the risk of fiscal insolvency, while spurring economic growth and reducing the high unemployment rates.

For 2019, expectations are relatively optimistic. The market consensus points to a GDP growth of 1.1%, which still falls short of the Country’s needs.

Inflation should remain well-behaved and should end the third consecutive year below the target. In this context, Selic should remain at 6.5% p.a. for most of the year.

External accounts are not expected to spring any surprises, with the trade surplus remaining strong at around US$50 billion, while the current account deficit will continue contained, with the inflow of foreign investment considerably offsetting the external deficit.

The credit market will continue its march towards recovery, especially in the unrestricted segment. The Central Bank expects growth of 6% in the total balance, while unrestricted credit is expected to advance by approximately 10%.

Finally, the two major challenges, public accounts and unemployment, will continue to be an obstacle to growth. The government promises to zero the public deficit, but this would only be possible in case of a very large inflow of exceptional revenues, either through privatizations, concessions, or assignment for consideration, in addition to strict expenditure control.

It is worth remembering that the savings expected from the Social Security reform will take time to come to fruition, depending on the transition rule to be adopted.

Regarding employment, even if economic growth accelerates, the drop in the unemployment rate will be slow. The unemployment rate is very high, not to mention that every year approximately one million people enter the labor market. Therefore, one can expect to reach a rate of less than two digits only after 2021.

The total balance of National Financial System (SFN) lending increased by 5.5% in 2018, after two consecutive years of decline.

In the unrestricted segment, the performance was even better, showing an increase of 11.2% in both the personal – PF (+11.3%) and corporate – PJ (+11.2%) loan segments.

In contrast, the balance of the earmarked segment continued to fall (-0.6%), reflecting the substitution of funding sources by Brazil’s Economic Development Bank (BNDES) for the capital market and the new policy that aims to reduce the size of the institution.

More access to credit for small and medium-sized companies was considered a priority by FEBRABAN's Executive Committee. Some priority measures for the segment have already been initiated, such as increased access to information held by public entities.

  • Ícone representando cédulas.
    5.5%
    growth in the balance of SFN credit transactions
RURAL CREDIT

In the agricultural year 2017-2018 (between July 17,2017 and June 30, 2018), according to data from the Central Bank, the financial volume of rural credit transactions amounted to R$171.4 billion, an increase of 11.7% compared to the previous crop year (R$153.4 billion). Most of it was allocated to cover costs (53.7%) and investment (24.6%).

In the distribution of rural credit contracted through funding sources, the growth trend in the volume of funding from issues of Agribusiness Credit Notes (LCA) stands out. For the 2017–2018 crop year, these securities accounted for 12.1% of lending transactions (R$20.8 billion) compared to 11.2% in the previous period (R$17.1 billion).

The main funds provided for in the period came from earmarked funds (with government-mandated rates) and rural savings, each with a 31% share. The total balance of the rural credit portfolio in July 2018 was R$253.4 billion, against R$245.1 billion in July 2017.

It should be noted that in 2018, Brazil’s National Monetary Council (CMN) issued Resolution 4641, which established new rules for the supervision of rural credit transactions, and CMN Resolution 4669, which reduced the percentage of mandatory earmarked funds resulting from sight deposits, from 34% to 30%, starting in the 2018–2019 crop year.

  • Ícone representando cédulas.
    11.7%
    increase in the volume of rural credit

Throughout 2018, in line with the monetary policy cycle and the drop in the Selic base rate, the average interest rate on credit transactions was 23.3% p.a., thus showing a fall of 2.4 percentage points (p.p.) compared to the previous year

There was a 4.7 p.p. fall in unrestricted funds (35.6% p.a.) and 1.1 p.p. in operations with earmarked funds (8% p.a.).

The total spread followed the same downward trajectory: 1.9 p.p. (17% p.a.), down by 4.1 p.p. in the unrestricted segment (27.8% p.a.) and 0.7 per year in the earmarked segment (3.6% p.a.).

Accordingly, the Credit Cost Indicator (ICC), which evaluates the average cost taking into account the effect of the rates agreed in the past, fell to 20.5 p.a., against 21.4% in the previous year. The spread on unrestricted credit was 31.3% p.a. (-3.0 p.p.), while on earmarked funds it was 8.7% p.a. (-0.2 p.p.).

In 2018, the total default rate (more than 90 days) fell to 2.8% in relation to credit transactions, the lowest level since January 2015.

With respect to the unrestricted lending portfolio, the fall was even more pronounced, to 3.8% of credit transactions, the lowest level since the beginning of the historical series (March 2011). This result reflects the improvement in both the unrestricted portfolio for personal (PF) and corporate (PJ) loans, which achieved default rates of 4.8% and 2.7%, respectively, both at the lowest historical level.

Within the scope of earmarked funds, the default rate reached 1.7% (+0.2 p.p.), stemming from a 2% (+0.8 p.p.) increase in corporate portfolio defaults. On the other hand, personal (PF) loan defaults declined to 1.5% (-0.2 p.p.) in December 2018, also the lowest historical level.

Arrears (from 15 to 90 days) also dropped slightly: from 4.4% to 4.2% of the overall loan portfolio, more significantly in the unrestricted segment, which reached 3.3% (the lowest level since March 2011) compared to 3.7% in the previous year. In contrast, the earmarked portfolio remained stable at 5.1%, a relatively high level by historical standards.

The indebtedness of Brazilian households to the financial system remained at 42.5% against 41.2% in the previous years. Excluding housing finance debts, the debt increased from 22.8% to 24.0% in 2018.

On the other hand, housing finance indebtedness was practically stable at 18.6% (against 18.5% in the previous year), suggesting that households are still wary of taking long-term loans, in the face of high unemployment and the delay in a more consistent recovery in economic activity.

Default and debt rates

Gráfico de taxa de inadimplência e endividamento
Arrears (from 15 to 90 days) – total (%)
Default rate (more than 90 days) – total (%)
Source: Central Bank of Brazil.
The total default
rate (more than 90
days) fell to 2.8% in
relation to credit
transactions

Raising of capital by financial institutions resumed growth in 2018, reflecting a modest economic recovery and income growth.

It is worth mentioning that the performance between modalities is directly related to the return that each of them offers.

Thus, the highlight in 2018 was funding from time deposits, whose balance reached R$989.4 billion, an increase of 14.6% compared to the previous year.

Next, come savings accounts. With positive net funding of R$38.3 billion (the best result since 2014), the balance in this modality recorded growth of 10%, rising from R$724.6 billion to R$797.3 billion in 2018.

Moreover, the balance of sight deposits reached R$187.2 billion, an increase of 6.2% compared to the same period in the previous year.

  • Ícone representando banco da moeda.
    In 2018, funding from time deposits rose by 14% over the previous year

Funding volume (R$ billion)

Gráfico de volume de captações

According to the Brazilian Central Bank’s 2018 Financial Stability Report for the second half of 2018, the gross interest margin – which represents the difference between the return on loan and securities portfolios and the cost of funding – interrupted a period of two years in the context of negative growth rates

The banking system increased financing to non-financial corporations, both by purchasing securities and resuming unrestricted credit.

The credit margin played a key role in the sound performance achieved by the banks in 2018, with emphasis on credit expansion in the banking products segments with unrestricted funds, and the reduction of expenses with provisions for doubtful debtors (PDD).

The four largest banks together earned R$73.2 billion, an increase of 12.77% in relation to the previous year.

In 2018, spreads on banking products with unrestricted funds remained at 27.8% p.a., a 4.1 p.p. fall. Default rates declined to 3.8% (-1.1 p.p.), the lowest level in the historical series. The loan portfolio grew significantly, with a 5.5% increase (11.2% for the unrestricted segment, with R$1.8 trillion).

Interest margin

Gráfico de margem de juros

Financial stability depends on the resilience of the institutions to absorb risks and shocks

In this respect, the banking system shows strong levels of capitalization and low leverage in relation to the current regulatory and Basel III rules.

The Basel Ratio (Total Capital) for Brazilian banks remained practically stable and went from 18.2% in December of the previous year, to 18.0% in December 2018, confirming the adaptation of the Brazilian banks to new prudential requirements under Basel III, whose schedule is due to continue until 2022.

In relation to higher quality Core Capital, banks recorded a ratio of 13.3% in December 2018 against 13.5% in December of the previous year.

Evolution of the Basel Ratio

Gráfico de evolução do índice de basileiaSource: Central Bank of Brazil.