Brazilian banks recently surprised the markets by reporting robust financial results for 2014 despite the country's ongoing economic and political strife.  In March, South America's largest country saw hundreds of thousands of protestors take to the streets against President Dilma Rousseff over a corruption scandal involving state oil firm Petrobras, among other concerns such as high inflation and stagnating growth. Many investors have begun to question when Brazil's economic woes will manifest themselves on bank balance sheets in the form of worsening asset quality and reduced profitability.

Although asset quality levels remained stable through 2014, doubts exist regarding how long NPL ratios can stay constant as consumers and corporates alike continue to feel the pinch of Brazil's subdued economy.

Banks appear relatively well-positioned to deal with these growing risks, but worsening asset quality and increasing loan-loss provisions are likely to impact profitability in 2015, with public sector banks appearing more vulnerable than their private counterparts.

Figure: Brazil Growth

Figure: Inflation

Figure: Asset Quality


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