Brazilian banks can expect losses this year

Rising provisioning expenses in Brazil will likely lead two large private sector banks, HSBC and Citibank, as well as four public banks and a number of medium banks to report losses this year, said rating agency Moody's.

Provisioning expenses are expected to rise 26% as a weak local economy, increasing borrowing costs and the fallout from recent corruption scandals impact asset quality, said the agency.

The economy is expected to contract around 1% in 2015, while the central bank continues its round of Selic rate hikes to bring inflation under control. At the same time, refinancing risks have risen on account of the Car Wash scandal involving state oil firm Petrobras.

NPLs remained flat at 2.8% in March, according to figures released by the central bank.

Nevertheless, early delinquencies in the market-based corporate lending and unsecured consumer credit segments – which combined make up around 52% of total system loans – were up at the beginning of the year.

While HSBC and Citi should see losses in 2015, other large private banks have enough earnings to absorb an unexpected rise in provisions, as do federal banks Banco do Brasil and Caixa Economica Federal, said Moody's.

Real credit growth moderated to 2.8% year-on-year in March, compared to 6.8% in the prior year month, reflecting the heightened perception of macroeconomic and unemployment risk, which has dampened both the supply and demand for credit, said Goldman Sachs.

Despite the slowdown in loan growth, however, profits at Brazilian banks have remained strong over the past year.

Additionally, Brazilian lenders are expected to post another round of healthy profits in the first quarter of 2015, as asset quality remains stable for the time being and banks benefit from higher interest rates.

"While loan growth is likely to be slow, given the weak economy, this can be offset by resilient NIMs [net interest margins], benefiting from the higher Selic and less competition, as well as no significant asset quality deterioration, and tight cost control," said Deutsche Bank.