Argentina's Mirror: Brazilian Banks Also Suffer Record Delinquency

Credit quality indicators in Brazil are at an all-time low, and banks in the South American giant do not foresee an improvement in the coming months while interest rates remain high.{#p-1786549232399-49377}

Currently, borrowing costs are expected to decrease more slowly than initially anticipated at the beginning of the year, driven by the rise in crude oil prices due to the conflict in Iran, which forced the central bank to tighten its policy. Despite having implemented a 25 basis point cut in interest rates last week, the monetary authority refrained from anticipating further advances in the upward bias, conditioned by an economic scenario marked by uncertainty.{#p-1786549390739-68176}

Brazil's benchmark rate, known as Selic, has remained above 10% for the past four years, and expectations for it to return to single digits have been repeatedly frustrated.{#p-1786553003903-15642}

The Detail {#p-1786549959959-96219}

Similarly to what happens in Argentina, delinquency on consumer loans reached a record 5.6% in May and remained at that level in June, according to Brazil's central bank. Thus, Brazilians are experiencing more defaults than in 2015 and 2016, when the country went through its deepest recession in decades, and even more than during the Covid-19 pandemic, when interest rates fell to a historic low and banks postponed customer due dates.{#p-1786549833322-56423}

Delinquency on consumer loans reached a record 5.6% in May and remained at that level in June, according to official sources.{#p-1786555803255-49087}

These figures are unlikely to improve for the remainder of the year, and market analysts indicate that they could deteriorate in 2027. Gustavo Schroden, an analyst at Citigroup Inc., noted that "there is an excess of liquidity in the system due to all the income transfers and subsidized credit for some categories." He added that "this has cushioned what could be a bigger problem."{#p-1786549981954-47890}

This is the landscape in which banks are presenting their second-quarter results. Banco Santander Brasil SA, one of the first major banks in the country to report the situation, recorded a decline in its profits and growing pessimism among its executives.{#p-1786552336703-56334}

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An analysis using artificial intelligence tools of the earnings calls from the last five quarters showed that the tone of Santander's executives describing their outlook shifted from cautious optimism in the first four to a distinctly pessimistic tone in the most recent one. Much of the change revolved around the expectation that interest rates would remain higher than anticipated.{#p-1786552428722-95399}

Santander Brazil executives show pessimism about the improvement of credit margins until 2027.{#p-1786555208720-9174}

"Personally, I am not optimistic," said Santander's Chief Financial Officer, Carlos Muñiz, during the firm's conference call, adding that risk-adjusted margins are unlikely to improve until "if I had to set a date, it would probably be early 2027 and not the end of this year," the executive noted.

Itaú Unibanco Holding SA and Banco Bradesco SA expressed confidence in their internal risk mitigation strategies, although they maintained a cautious stance regarding the evolution of the global economic landscape.

Itau, Brazil's largest bank, reported only a slight deterioration in delinquency, as its higher-income customer base shielded it from macroeconomic pressures. However, the bank has been cautious about lending outside this segment and maintains that Brazil is experiencing a hangover after several years of credit expansion.

Overindebtedness: Excess credit and credit cards per person create a vicious cycle of selective payments.

In this context, CEO Milton Maluhy stated that "there was an excess of loans in the market and also in regulation, which notably opened the market." He added that Brazilians now have around six credit cards per person. "Most of the credit growth comes from new participants, and customers have over-indebted themselves," he emphasized.

This creates a vicious cycle of "sudden death," according to Maluhy: when heavily indebted customers choose to pay the bank with which they have a closer relationship, they stop paying other entities. Debt obligations currently absorb about a third of Brazilians' monthly income, according to the central bank, a level also close to a record.

Overindebtedness and policy

This overindebtedness led Bradesco to halt the growth of higher-risk products, such as credit cards, especially among low-income customers, who make up the core of its consumer banking.

This overindebtedness led Bradesco to halt the growth of higher-risk products, such as credit cards.

High household spending counteracts the effects of unemployment, which is near historical lows, and the increase in monthly wages. With an eye on the upcoming presidential elections, Lula introduced a new national debt renegotiation program, which began in May. Under this program, banks offer discounts and better payment conditions for customers to settle their debts, while the government acts as a guarantor in case of default.

It is worth noting that Lula implemented a similar first program in 2023 and 2024, and it was part of his program in 2022 when he defeated then-President Jair Bolsonaro. However, current participation levels are lower than expected by some analysts.

For Itaú, the new program reduced consumer delinquency in Brazil by 2 basis points, a negligible level. Other banks in Brazil share the lack of enthusiasm for the government program.{#p-1786553686285-207}

It is worth noting that Lula implemented a similar first program in 2023 and 2024, and it was part of his agenda in 2022, when he defeated then-president Jair Bolsonaro.{#p-1786555746412-41465}
Gustavo Schroden from Citigroup indicated that the initiative is aimed at low-income Brazilians and debts such as credit card debts, which are the most concerning for banks. However, it does not address the structural factors behind the high levels of indebtedness.