Macroeconomic outlook for 2025 signals slowdown in loans and rising default rates
02/03/2025
The earnings season for Brazil’s major banks in the fourth quarter of 2024 is expected to reflect what analysts are calling “the last rays of sunset.” In other words, the numbers from October to December are likely to be positive, with rising profits and loan portfolios, while default rates remain stable. However, the forecasts presented by financial institutions and what their top executives say about 2025 in earnings calls are more important than the results themselves. With the Selic policy interest rate remaining high, credit is expected to lose momentum in 2025, and concerns over the country’s fiscal outlook loom large.
Together, Itaú Unibanco, Bradesco, Banco do Brasil, and Santander are expected to report combined profits of R$29.363 billion in the fourth quarter, up 1% from the previous quarter and 22.7% higher than the same period in 2023, according to the average projections of ten financial firms surveyed by Valor. For the year 2024, total profit is projected at R$112.4 billion, an increase of 16%.
In a report titled The Last Rays of Sunset, Itaú BBA noted that despite strong fourth-quarter results, a key factor will be the banks’ outlook for the year ahead. According to analysts, the combined profit of the four largest banks is still expected to rise around 10% in 2025 but growth will likely be concentrated in the first half of the year, making full-year guidance a challenge.
“Providing guidance is a tough task given the increasingly volatile and deteriorating scenario. Worsening macroeconomic indicators, such as interest rates and inflation, are raising barriers to credit, which tends to curb demand for new loans. We expect these concerns to be reflected in executives’ statements and guidance, with a forecast of moderate loan portfolio growth (below 10%) and stable financial margins,” Itaú BBA stated.
Bradesco BBI also highlighted that investor focus will be on 2025 guidance and pointed to the adoption of the new IFRS 9 accounting standard, which could impact banks’ bad debt provision levels. “Notably, we believe banks will factor in a more challenging macroeconomic scenario for 2025, which may result in slower loan portfolio growth. Additionally, as banks deal with the expected impact of IFRS 9, some may face higher provisioning requirements in 2025.”
Bank of America projects that the major banks’ loan portfolios will grow by 9% this year but net interest income should expand at a faster pace, driven by client margins—supported by higher interest rates—though partially offset by lower market margins. “We also expect asset quality to deteriorate and risk costs to increase. Finally, we believe fee revenue will rise in line with operational expense growth,” BofA analysts stated in a report.
Bernardo Guttmann, head of financial sector analysis at XP, pointed out that a snapshot of credit data published by the Central Bank for December does not indicate any slowdown in lending. However, he noted that recent conversations with bank executives suggest a more cautious stance. “It has become clear that banks’ sentiment regarding the economy is aligning more with that of financial markets, which have a more pessimistic outlook,” he said.
Mr. Guttmann added that no specific sector stands out as the most likely to increase default rates, except for agribusiness, where court-supervised reorganization cases are expected to peak between February and March.
XP also noted that IFRS 9 will lead to a raft of reclassifications beyond provisioning adjustments. Items previously recorded as fee income—such as real estate appraisal fees for mortgage applications—will now be accounted for as part of financial margins. Conversely, some expenses that were previously recorded as administrative costs, such as debt collection fees, will now be entered into bad debt provisions. Additionally, commissions paid to correspondent banking networks, which were previously paid upfront, will now be amortized over the contract term. “This will alter some balance sheet line items and complicate comparisons with previous periods,” said analyst Matheus Guimarães.
Another factor that could impact fourth-quarter results, particularly for some mid-sized banks, is payroll-deductible loans for Social Security (INSS) beneficiaries. Banks such as Banco do Brasil, Itaú, Santander, Pan, BMG, Mercantil, and Banrisul suspended these loans through correspondent banking networks late last year due to high operational costs relative to the 1.66% monthly interest rate cap.
In January, the National Social Security Council (CNPS) raised the cap to 1.80%, a level banks argue is still insufficient. The Brazilian Association of Banks (ABBC) has taken the matter to the Federal Supreme Court (STF), questioning whether the CNPS and the National Institute of Social Security (INSS), which are linked to the Ministry of Social Security, have the authority to set interest rate caps.
Analysts project that Itaú will post a record quarterly profit of R$10.831 billion. The bank is also expected to announce an extraordinary dividend payout of nearly R$20 billion.
According to analysts at Genial, Itaú’s highlights for the period should include loan portfolio expansion—continuing the pace of previous quarters and closing with 12.5% growth, at the top of its guidance range—higher financial margins, albeit at a slower rate than loan growth, and controlled provisioning expenses, reflecting stable asset quality and default rates. “It is the leader of the pack, with a return on equity (ROE) of 23% in 2025,” Genial analysts said.
Banco do Brasil is the only major bank expected to report a slight quarterly profit decline (-0.2%). Citi analysts believe its financial margin should remain resilient but do not foresee a turnaround in the agribusiness segment’s difficulties. “We expect loan portfolio growth of 11% in 2024, with persistent provisioning pressures slightly offset by strong treasury results. Agribusiness loan defaults should remain high compared to historical levels, although client margins should continue to rise steadily.”
Bradesco is expected to continue its turnaround trajectory, with profit surging 84.5% from the fourth quarter of 2023 when higher provisions and a leadership transition impacted the bank’s earnings (Marcelo Noronha replaced Octavio de Lazari Jr. as CEO). According to Santander analysts, client margins should improve and asset quality should remain stable, while market margins could be a downside risk. They estimate this line will total R$312 million in the fourth quarter “due to high volatility in the yield curve and a lack of hedging instruments to mitigate this impact.” Given the Selic outlook for 2025, some analysts are already forecasting a zero result for Bradesco’s market margin this year.
Santander is expected to report a R$3.702 billion profit, with financial margins growing in line with loan portfolio expansion and fee revenue standing out amid the bank’s efforts to engage customers and boost cross-selling. “Meanwhile, we expect operating expenses to grow at a similar pace to the third quarter but below inflation on an annual basis. We also anticipate the effective tax rate will continue rising to 16%, though likely still below sustainable levels,” Goldman Sachs stated.
Nubank, which is not included in Valor’s aggregate results, is expected to report a profit of approximately $565 million (around R$3.2 billion based on Friday’s exchange rate). Analysts believe the bank may be affected by currency fluctuations, and fourth-quarter figures will be a key indicator of the fintech’s risk appetite amid a tougher macroeconomic scenario. “We see 2025 as a challenging year for Nubank. Unsecured loans in Brazil may slow if credit conditions worsen due to inflation and higher interest rates, along with rising default rates. Although Nubank is gaining market share in secured lending, we believe returns on these products remain unattractive,” Citi analysts stated.
*By Álvaro Campos — São Paulo
Source: Valor International