The economic and political crisis that Brazil has experienced in the last two years has impacted the banking sector. For the first time since the beginning of the last decade, lending fell in 2016 and there are still no signs of it picking up. The slide has been exacerbated by the collapse of loans to companies, hurt by the weak economic environment and, in several cases, by corruption scandals.

The slight rise in GDP foreseen for this year could lead to an increase in lending. But, if that does occur, growth will be modest. The high level of indebtedness of companies and families limits any expected recovery in loans. In addition, there are ongoing judicial investigations into large companies and their suppliers, which also restrict banks' appetite for risk.

The other impact on credit is tied to the new role of public banks. After years in which the main mandate of the state entities was to expand lending to sensitive sectors such as agriculture and small enterprises, the new objective with the change of government is focused on improving balance sheets.

At the same time, this change of focus of public banks will be another factor that drives the already high levels of profitability of the banking system. The high spreads that persist despite the drop in the benchmark rate, coupled with the high level of concentration of the market, promise to sustain profit margins.

In this report we describe credit trends in Brazil in recent years and look at the prospects for 2017 and 2018. In addition, we analyze the factors driving the profitability of the system and whether there will be changes in the coming years. Finally, we explain the change of role of public sector banks and its effects on lending and profitability.

Figure: Loan Growth


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