DB stays course on asset quality, despite mixed press reports

- Tuesday, July 5, 2011

DB stays course on asset quality, despite mixed press reports

Deutsche Bank (NYSE: DB) reaffirmed its assessment of Brazilian credit quality, despite two separate reports from international and local media that presented mixed views on the issue, DB analyst Mario Pierry wrote.

A Monday (Jul 4) Financial Times article "Brazil risks tumbling from boom to bust" had a negative tone, indicating that the country has structural problems related to overburdened consumers and weak credit underwriting, and that consumers face significant a debt service burden given high interest rates on loans, as well as high consumer debt.

The newspaper added that to have a self-sustaining positive credit cycle, Brazil needs to increase collateralized lending and mortgages, create a positive credit bureau - which has been in the works for some time now - and increase the national savings rate.

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VALOR'S TAKE

By contrast, local financial daily Valor Econômico's article on the same day, written by former central bank BCB president Gustavo Loyola, had a positive tone, citing five reasons for why there is no credit bubble growing in Brazil.

Loyola's positive highlights are that credit growth is occurring from a low base and with a solid macroeconomic background; high credit spreads indicate proper pricing of credit risk; new products such as payroll lending have reduced credit risk; an underpenetrated mortgage market, which should lead growth in the coming years; and that local banking regulation is stricter than in the US and Europe.

Loyola's take on this issue was affirmed by BCB's current president, Alexandre Tombini, who at a hearing on the Brazilian senate's economic affairs committee said that consumer delinquency is pointing to a downward trajectory and that mortgage credit growth has a solid base, local media outlet Exame reported.

DEUTSCHE BANK'S VIEW

DB's Pierry said the investment bank is maintaining its May assessment on credit asset quality, which is bound to deteriorate given "rising credit spreads, slowing loan growth and decelerating economic growth." DB noted that consumer delinquency is at historical lows, from 21 months of continued improvement.

Despite DB's expected quality deterioration, Pierry said it does not expect this cycle will be worse than previous ones, considering the strong correlation between delinquency and unemployment levels, which remain at historically low levels; that net interest margins are bound to rise, "following the sharp pick-up in credit spreads since December 2010"; and that banks are well reserved.

To view Tombini's presentation on Brazil's economy, in Portuguese, go to this link