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Credit quality of retail and corporate loans to deteriorate slightly.

New York: Fitch Ratings said while it may be too early to estimate the final economic impact of the Brazilian truck drivers' strike, the credit quality of both retail and corporate loans in bank portfolios is expected to deteriorate slightly.

While the strike seems to be ending, the temporary economic headwinds could result in weaker financial performance, which would be a credit negative for the banking sector, even though the level of portfolio impact may be still difficult to quantify. The Brazilian banking system is highly concentrated, with the country's top five banks (Banco do Brasil, Itau Unibanco Holding, Banco Santander Brasil, Banco Bradesco and Caixa Economica Federal) holding approximately 70% of assets and 68% of total loans as of year-end 2017. Data recently released by the Central Bank and cited by Bloomberg states that personal loan defaults in April were 5.1% versus 5.0% in the prior month, with business loan defaults at 4.2% versus 4.4% in the prior month. We expect the strike to negatively affect both credit quality and loan growth in May and June.

Fitch Ratings is a nationally recognized statistical rating organization (NRSRO) designated by the U.S. Securities and Exchange Commission. Brazilian bank executives currently remain optimistic, indicating that the government was able to find a resolution and that the impact should not be material to earnings or capital. However, they recognize that if the strike has additional developments or lasts longer than anticipated, asset quality and profitability would likely deteriorate further, a credit negative. Depending on the extent and duration of the strike, asset quality and profitability could come under pressure for banks, especially smaller institutions lacking adequate reserves for loan losses, which could pressure ratings.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Aug 26, 2018
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