Debt market loses steam amid rising interest rates

The debt market – which has been one of the main supports of the economic recovery – is beginning to show signs that it may be at a turning point. With the end of the emergency programs implemented last year, the balance of credit for companies has been falling for seven months in a row. The stock for families is still growing robustly, but with inflation and interest rates on the rise and the projections for activity losing strength, analysts say that this segment should also start to lose strength.

The slowdown should not be abrupt and there is no mention of a contraction, but it is one more element in a less optimistic scenario.

The interest rates charged by banks reached the highest value in 16 months in August, reflecting the monetary tightening by the Central Bank, which increased the cost of funding for financial institutions. The average rate on credit operations reached 21.1% per year, with an increase both in loans to individuals and to companies.

This month, however, the banking spread did not go up – as a matter of fact, it had a slight decrease, from 14.6% per year to 14.5% per year. Usually, interest rate hikes by the Central Bank also cause an increase in spreads, since monetary tightening is followed by a slowdown in the economy and greater risk of default.

In free credit, in which the rates are freely defined by the market, there was an increase of 1 percentage point in the rate charged by banks, from 28.9% per year to 29.9% per year. The free credit reflects more the monetary tightening cycles than the directed credit, whose rates went up to 7.9% per year from 7.6%.

“The increase in interest rates charged by banks is consistent with the evolution of the economy’s benchmark interest rate,” said the head of the Central Bank’s statistics department, Fernando Rocha. “The total banking spread was stable, which means that the interest charged by banks is rising in the same proportion as banks’ funding costs.”

In August, the average cost of banks’ funding rose to 6.6% per year, up from 5.8% per year in July. In free credit, the cost of funding jumped to 8.2% per year from 7.2% per year.

According to Everton Gonçalves, superintendent of the economic advisory services of the Brazilian Association of Banks (ABBC), the slowdown in credit may become worse in the coming months, as the demand from consumers cannot offset the sharp reduction in the demand from businesses. “The expectation is for a firm deceleration of credit in the remainder of this year and 2022 may be even worse. The recovery scenario is threatened, with fears about inflation, rising interest rates, internal and external uncertainties.

According to Rubens Sardenberg, chief economist at the Brazilian Federation of Banks (Febraban), it is not yet possible to speak of a sharp slowdown in credit, but there must be accommodation. “There may be a decrease in the growth rate, but it is still not possible to say that there will be a stronger slowdown. We can´t imagine credit is insensitive to deterioration in the economic activity scenario, but a more significant retreat will only happen if there is, in fact, a stronger deterioration.”

The Central Bank increased the basic interest rate from 4.25% p.a. to 5.25% p.a. in the beginning of August. The cost of funding to banks is based on the future interest curve of the market, which, in turn, reflects the expectation of new interest rate hikes by the Central Bank in the future.

Of the 21 lines of credit to companies monitored by the Central Bank, 17 had higher interest rates and 4 were stable or reduced. Among individuals, the high rates covered 8 of the 10 lines surveyed by the monetary authority.

“The cycle of rapid adjustment of the Selic rate is not being reflected, in the same proportion, in credit costs, indicating an important contraction in bank spreads and, potentially, allocative gains derived from microeconomic changes that have occurred in recent years, such as more competition and positive registration,” says BRCG in a report for clients.

The stock of credit in the economy increased 1.5% in August, reaching R$ 4.335 trillion. The operations with individuals are accelerating, with an advance of 1.9% in the month. The growth rate in 12 months in operations with families rose to 18.8%, a good advance in comparison to the 10.9% observed in January.

In the case of companies, however, there is a deceleration. In August, operations grew 1%. In the period of 12 months, the expansion rate reaches 12.2%, presenting a real growth, considering the inflation of 9.7% in the period, measured by the Broad Consumer Price Index (IPCA). But at the beginning of the year, credit to companies grew more strongly, with a rate of 23%.

“This may have been a first impact on the pace of concession of the current phase of increases in the Selic policy interest rate by the monetary authority, since the end of the first quarter of 2021, in response to rising inflation. It is worth mentioning that as of mid-June the Central Bank intensified its interest rate hikes from 0.75 basis points to 100 basis points,” says the Institute for Industrial Development Studies (Ieadi) in a note. “It is a movement that tends to discourage the expansion of credit in the coming months, especially in the free segment, which has been showing greater dynamism in 2021,” it adds.

Mr. Rocha says that this deceleration has two reasons. First, loans taken by companies during the pandemic are leaving the calculation base. Large companies took out large volumes of loans to cope with a feared liquidity squeeze. In addition, the government has created some new targeted credit lines to maintain funding sources especially for small and medium-sized companies.

Another reason for the less buoyant bank credit market is that large companies this year have started borrowing again in the capital markets. The raising of funds through debt securities increased 23.1% this year.

A consequence of this is that among the large companies, bank credit grew by only 3%. Among micro, small and medium-sized companies, the expansion rate was 26.7%.

The seasonally adjusted concessions of credit to companies, on the other hand, had a retraction of 2.1% in August. Mr. Rocha explained that the drop is due to the one-time increase of more than 50% that occurred in July in the operations of Pronampe, a line directed to small companies, in the resumption of the program. In August, credit to companies returned to its previous trend.

The Credit Suisse analysts point out that private banks continue to lead credit concession and that the improvement in the mix, with the advance of lines of credit with higher interest rates, is already starting to be reflected in the spreads. “It is important to note that the resumption of revolving retail credit lines has already helped to offset the impact of the drop in directed credit spreads (mainly real estate).

Source: Valor international