No signs of credit bubble, although higher indebtedness is concern - Fitch

Wednesday, March 2, 2011

Although Brazil has seen a strong credit expansion over the last couple of years, which has even raised macroeconomic concerns, it is still premature to call it a credit bubble, although individuals' indebtedness has risen significantly, Fitch managing director and chief credit officer for Latin America Peter Shaw told BNamericas.

The issue was recently brought once again into discussion after an article published by the Financial Times, which suggested that debt affordability was at "exorbitant" levels and that Brazil may be heading for a subprime-type credit crisis.

Central bank BCB last year took macro-prudential measures such as increasing reserve requirements and demanding additional capital on certain types of loans to restrain lending growth.

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Consumer credit was up 18.8% in 2010, with corporate credit rising 15.4%, according to the end-December BCB data.

"I think it's premature to say that we have an overall credit bubble in Brazil. There have been a couple of sectors where we have seen much faster growth than others. Probably the one that sticks out the most is car financing, which continued to grow at very high paces in 2010," Shaw said.

"Mortgage lending has also been growing rapidly, but that is a very small portfolio on the banks' balance sheet and we don't see any real estate bubble, as lending in this segment is still being done under very conservative terms," he said.

With the exception of 3Q08-3Q09, loan growth in the country has been very robust, especially in lending to individuals.

This has increased the level of indebtedness among Brazilians significantly over the last few years, which Shaw admits it is a concern for the agency.


According to Barclays Capital, official and hard numbers prove that debt affordability levels are not too stretched to undermine further credit expansion in Brazil.

"We acknowledge that household debt has grown significantly since 2006 in Brazil, from approximately 25% in June 2006 to almost 40% of income in November 2010," analysts Roberto Attuch, Fabio Zagatti and Henrique Caldeira wrote in a report.

"However, extended loan terms and lower interest rates, both a result of increased penetration of secured types of consumer loans (auto and payroll loans explain roughly 70% of the growth in consumer credit), led households to manage to keep total debt service fairly stable throughout the period, at 20-25% of total income," the report reads.

As BCB's measures did slow down consumer credit demand recently, the analysts think it is reasonable to expect long-term loan growth of 3-4 times real GDP in Brazil, granted macro fundamentals remain solid, spreads trend downward, loan terms trend upward, and a positive credit bureau is formally implemented.