NEW YORK--(BUSINESS WIRE)--The recent 25 basis point interest rate hike by the Brazilian Central Bank may prolong the recovery of the asset quality ratios of Brazilian banks and continue to pressure them due to their relatively high borrowing costs. Fitch Ratings believes this could create a mid-term risk for Brazilian banks if trends continue for some time.
In the short run we do not expect the change to materially impact bank margins as most institutions anticipated the change. However, we remain cautious regarding the potential impact of credit costs on bank profitability ratios in 2013 because of the economic cycle and the increase in personal indebtedness.
Fitch views the rate hike as the beginning of a moderate monetary tightening cycle in Brazil. It shows that authorities are ready to use monetary policy tools to better anchor inflation expectations. Indice Nacional de Precos ao Consumidor Amplo Especial reports inflation remains in the upper bounds of the central bank's target range of 4.5% (+/-2%). Despite expected slow growth in 2013, inflation has proven to be resilient in the face of the tight labor market and persistently high services prices.
Most large Brazilian banks remain well founded because of high individual capital levels and strong funding ratios and overall financial profiles. However, a sustained period of above average credit costs may undermine their profitability and limit their lending capability. In Fitch's view, banks that rely on wholesale funding may need to create costs savings initiatives if higher rates translate into pressure on margins. In many cases, their concentration of loans to individuals and/or medium size companies results in less income diversification and less pricing flexibility for both loans and funding.
Additional information is available on www.fitchratings.com.
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