Banco do Brasil faces one of its worst farm credit crises, CEO says

Medeiros sought to temper those concerns, stressing that Banco do Brasil’s business extends well beyond agriculture and that its net interest income remains strong. Still, there are few clear signs that earnings have bottomed out. The deterioration in agricultural credit forced the bank to set aside R$21.23 billion in provisions for loan losses between July and September.

The executive–who is considered unlikely to remain in her position during the next term of President Luiz Inácio Lula da Silva (Workers’ Party, PT)–insisted that Banco do Brasil (BB) had not been caught off guard and had been taking steps to address the agricultural crisis for nearly two years.

“As early as the first quarter of 2025, when we identified an unprecedented deviation from our expectations for timely payments in agriculture, we decided to suspend our guidance. When we reinstated it in the second quarter of 2025, we gave you a full assessment of what we were seeing at the time. As Brazil’s leading agricultural lender, we were the first to identify this trend as unusual,” Medeiros said.

Agricultural defaults

The bank’s agricultural loan delinquencies are “concentrated among medium-sized and large borrowers in soybean farming, corn production and cattle ranching, particularly in the Center-West,” Medeiros said.

Some of these producers deliberately failed to repay or renegotiate their debts even after the bank contacted them, behavior she described as “moral hazard.” BB also identified borrowers who appeared to be holding off on payments while awaiting the outcome of the elections.

“Last year, I pointed out that these defaults were a recent development among customers who had always paid on time. [Some] 85% of these customers became delinquent starting in 2024. Our response was intensive. We introduced a resilience matrix for new lending, reviewed our entire collateral framework, added fiduciary liens and completely overhauled our collections and recovery process.”

Under provisional presidential decree 1,376, the bank renegotiated R$13.4 billion in debt, falling short of the R$30 billion it had considered achievable.

Medeiros said BB had stepped up legal action and issued more than 20,000 out-of-court notices. Of the producers who received them, 24% subsequently contacted the bank to bring their accounts into good standing.

The lender also plans to begin selling portfolios of loans classified as losses to outside investors. Until now, such transactions had largely been conducted in bulk with Ativos S.A., a company owned by BB.

“We expect to gain traction very quickly,” Medeiros said.

Congress approved legislation converting the provisional decree into law this week. BB is awaiting presidential approval and any potential vetoes before assessing its impact, but sees the legislation as another opportunity to restructure troubled loans.

“For those who need help, there is a solution. […] For those who refuse to negotiate and do not pay, the response is debt collection,” she said.

Capital pressures

BB’s third-quarter net profit of R$1.27 billion heightened analysts’ concerns about the bank’s capital position.

Chief Financial Officer Geovanne Tobias acknowledged that those concerns “are legitimate” but said the lender had been closely monitoring the situation and taking action.

BB has identified more than 15 potential measures involving regulatory and corporate matters, although Tobias did not provide details.

“We naturally expect capital to strengthen organically as earnings improve throughout 2027.”

The bank projects a common equity Tier 1 (CET1) capital ratio of 10.5% at the end of next year. The ratio stood at 10.8% in September, down from 11.16% a year earlier.

Chief Risk Officer Felipe Prince said BB is not considering a scenario in which its capital ratio falls below 10%.

“The target is tight at 10.5%. We would like to be delivering 11%, but we are not working with a level below 10%,” Prince said.

To preserve capital, BB announced that it would cut its dividend payout ratio this year from 30% to the regulatory minimum of 25%. It also set a 25% payout ratio for 2027, provided that doing so remains consistent with its capital projections.

Tobias also mentioned the possibility of initial public offerings (IPOs) for companies within the BB group. Prince, however, said potential IPO proceeds were not included in the bank’s 2027 capital projections and would represent an additional benefit if they materialized.

Tax credits

Another measure under consideration involves converting deferred tax assets (DTAs) into presumed tax credits under an existing legal provision.

“The payment will be made by the Treasury, on its own timetable,” Tobias said.

The bank has between R$12 billion and R$14 billion in deferred tax assets eligible for conversion into presumed tax credits.

Tobias initially suggested the measure could boost the bank’s capital ratio by 1.2 percentage points, potentially as early as 2027. BB’s investor relations team later clarified that the estimated benefit would materialize over several years rather than entirely in 2027.

Analysts said the third-quarter results were significantly worse than expected, with continued credit deterioration raising doubts about when the bank might begin to recover.

Citi identified asset quality as the main concern, citing little evidence so far of a turning point.

“Overall, we see the quarter as clearly negative: earnings fell short of our already depressed expectations, asset quality deterioration continues to outweigh revenue resilience, and capital remains constrained. Importantly, the results still give us little reason to believe that credit trends have reached a turning point,” Citi’s analyst team wrote.