Banking in Brazil – Trouble in Paradise?

With a Gross Domestic Product of US$ 2.253 trillion in 2012, Brazil is the world's seventh wealthiest economy. However, the Brazilian economy slowed significantly over 2011 and 2012. The previous GDP growth of 7.5% decelerated to 2.7% in 2011 and came to 0.9% in 2012. The good news - Brazil’s gross domestic product gained 2.3 percent in 2013. The economic slowdown was driven by both domestic and external factors. While the stimulus measures undertaken have so far failed to lift economic activity, signs suggest that the business cycle may finally be gaining some forward momentum. Even as monetary conditions tighten, annual inflation rate in February accelerated to 5.68 percent from 5.59 percent a month prior. 

In October of 2013, the IMF expressed concerns about high volumes of credit from public-sector banks, which overtook loans from their private-sector rivals in mid-2013. Still, it is hard to tell whether the government will make good on promises to significantly and rapidly rein in aggressive lending growth by state-run banks because it could hamper support for the ruling party in the October presidential election. State banks, which now account for more than half of all outstanding loans in Brazil, have ventured into riskier credit markets such as consumer, auto and small-sized corporate lending - areas that private-sector lenders are shunning after triggering record defaults. 

As an interesting side note, Billionaire Carlos Slim is using a $45 million acquisition to participate more formally in Brazil’s financial market, betting it’s the best way to replicate his Mexican bank’s business model in Latin America’s largest economy. Grupo Financiero Inbursa SAB, controlled by Slim, announced the agreement last week to buy Standard Bank Group Ltd.’s Brazilian unit.