beyondbrics

There’s been quite a debate this week on Brazilian credit. First Paul Marshall and Amit Rajpal of Marshall Wace, a hedge fund, said Brazil risked “a fully fledged credit crisis”. Then Tony Volpon of Nomura Securities said it faced no such thing – although he did agree consumers were overstretched and that this was “an under-appreciated downside risk to future economic growth”.

Taking the debate further are Roberto Attuch and Fabio Zagatti of Barclays Capital in São Paulo, who say consumers are not overstretched at all – and certainly not to the extent of threatening future credit expansion.

“Looking into official data,” they write, “we believe credit conditions are far from alarming and find it hard to question whether Brazilian credit standards are lax.”

While admitting that the ratio of debt service to income in Brazil is not low (Figure 1), they present a list of reasons why figures from the central bank need careful interpretation:

1. Income data in Brazil is probably underestimated, given the high level of informality;

2. The Brazilian banking industry is passing through a structural change, in which more secured types of loans (longer tenors, lower risk, lower spreads) are replacing unsecured types – average consumer credit terms are still at 570 days, and 60% of consumer credit is secured (by autos, payrolls, or real estate);

3. Whilst average consumer credit rates are currently admittedly high in Brazil (on average 47% per year on new credit), rates have been falling lately, and recently were around 40-41% (2010′s average), from as high as 60% approximately in 2006 (Fig.3);

4. The bulk of Brazilian household debt is settled at fixed interest rates – 97% of total consumer debt excluding earmarked lending, as of May-11 – which is thus not affected by the level of benchmark rates; and

5. Mortgage-related payments account for only 1% of household income in Brazil, vs. 10% in the US.

Perhaps more tellingly, they quote nationwide research by Fecomércio, the São Paulo-based retail and wholesale industry association, to suggest that neither the size nor the rate of growth of credit present cause for alarm (our emphasis):

1. The average debt ticket held by the typical household in Brazilian capital was R$1,527 during January-May 2011, which compares with the national average real monthly wage of R$1,581, according to IBGE (as of May 2011);

2. The average debt carried by Brazilian households grew 18% y/y in January-May 2011, which is consistent with 17.6% y/y growth in consumer credit tracked by CB (as of April 2011, the latest); and

3. The number of families holding debt went up by only 5% for the national average in the January-May 2011 period, to 64% of total.

Attuch and Zagatti also take issue with the idea that delinquency rates are deteriorating. They point out that early-stage delinquency (loans overdue by 15 to 90 days) on consumer credit improved in May for the second month in a row. They see this as more of a leading indicator than the recent deterioration in loans overdue by more than 90 days, which they regard as backward looking.

They conclude (their emphasis):

All told, we agree the creation of a positive bureau in Brazil is a welcome initiative, which combined with the solid macro fundamentals in Brazil (lowest-ever unemployment, rising income) will likely build the conditions which should lead towards more credit, lower spreads, longer terms and lower delinquency in coming years – and eventually even better debt affordability.

Oh, and one closing comment:

Separately, we also believe there is no “failure risk” among the smaller banks we cover in Brazil (as the article [by Marshall and Rajpal] suggests), and we feel that recent cases that may have prompted the BCB to take action should be seen as very specific situations (such as in the case of Panamericano).

Related reading:
Brazil risks tumbling from boom to bust, FT
Guest Post: Brazil – no credit bubble, but an overstretched consumer nonetheless, beyondbrics
Brazil credit bubble fear as defaults rise, FT
Guido Mantega: What, me worry? beyondbrics
Keeping an eye on the Brazilian bubble, beyondbrics