The combination of high interest rates and income-eroding inflation means a very favorable environment for nonperforming loans, both from individuals and companies. The figures do not confirm a substantial advance for now, which can be explained by the efforts by banks to renegotiate with their clients and give them more time or even a grace period to pay debts. Yet, several market players say the warning is blaring.

Defaults were previously expected to end this year very close to the level seen before the pandemic. Now there are concerns that they will rise substantially beyond that. At this beginning of the cycle, defaults affect first the low-income population and riskier lines of credit, such as the revolving credit card.

The latest available data provided by the Central Bank shows that defaults on non-earmarked loans, both for individuals and businesses, rose to 4.6% in January. The data is quite outdated because a strike prevented the monetary authority from releasing the credit statistics for February. Yet, even as there was growth, the figures show that the default rate is still far from the level seen before the pandemic, of 5.6%.

Those who follow the market believe that the default rate will continue to rise this year but, right now, it is difficult to predict at what pace. Experts acknowledge that the current macroeconomic scenario is a great challenge for the models. Brazil’s benchmark interest rate Selic is rising more than expected – the market already foresees a policy rate between 13% and 14% a year at the end of the tightening cycle, compared with 11.75 % now – while inflation faces even more pressure as the Russia-Ukraine war weighs on commodities prices. This impacts the population’s income and the ability of companies to generate revenue.

The banks’ hands-on approach to renegotiations prevented the most pessimistic forecasts from materializing, said Flávio Esteves Calife, the chief economist at Boa Vista. He recalled that the rate of nonperforming loans was expected to skyrocket when social distancing measures were put in place back in 2020. “That didn’t happen. The curve flattened instead: defaults didn’t skyrocket, but they spread.”

Banks are still negotiating with clients who signaled that they will not be able to pay loans on time, which helps to limit, if not totally avoid, the advance of defaults. Boa Vista’s figures, which include clients with payments in arrears, including those of credit cards, suggest that the number of defaulters rose 5.1% in March compared to February (seasonally adjusted data). In the first quarter, there was a 9.2% year-over-year growth, or a 6.7% increase compared with the fourth quarter of 2021.

“There is pent-up default and that is why we think it will grow gradually over the coming months and also in 2023,” Mr. Calife said. In the revolving credit card segment, the default rate is already at 36.2%, the highest since October 2020. “The default rate will grow. It remains to be seen how fast. Contracts paused during the pandemic turned into nonperforming loans [with at least 90 days in arrears] in the first quarter,” said Michael Burt, an analyst at LCA.

In March, credit bureau Serasa held a large event aimed at people with a bad credit score and encouraged 3.3 million agreements with a combined discount of R$5.7 billion. The company saw a 0.54% increase in the number of indebted people from January to February, to 65.17 million people, the highest since May 2020. The main debts are: bank/credit card (28.6%), utility bills (23.2%) and retail (12.5%).

“Inflation has eroded purchasing power, especially among low-income people, and this directly affects the default rate. The first thing they stop paying is the credit card because they need to prioritize utility bills and buy food,” said Matheus Moura, a manager at Serasa.

Isabela Tavares, an economist at Tendências Consultoria Integrada, said that the bank’s very active renegotiation drive has slowed down growth in defaults. For this reason, she projects that defaults on non-earmarked loans will remain below the levels seen before the pandemic: 4.7% among individuals and 2.1% among companies. In February 2020, these rates were 5.1% and 2.3%, respectively. A recent survey by the Brazilian Federation of Banks (Febraban) with its members found that the projection for default in free credit at the end of this year increased to 4% from 3.7%.

However, Ms. Tavares stressed that the data changes according to the income bracket. In December 2021, the default rate among households earning up to two minimum wages (R$2.424) a month was 4.87%, compared to 4.03% in the same period in 2020. The default rate among those earning more than 20 minimum wages (R$ 24.240) a month fell to 0.5% from 0.71%. “The scenario is very risky, and the delay in updating the Central Bank data may bring some surprises,” she said.

Felipe Salgueiro, a partner at Multiplica Capital and head of special credits and nonperforming loans, said that “we have not yet realized the default caused by the pandemic.” Banks have moved ahead of potential delays from customers, both individuals and companies, and made renegotiations, extending deadlines or even offering grace periods for the payment of debts, he said. This effort cushioned the crippling effects of the pandemic on the economy. But the impact is expected to be seen clearly in the form of defaults during the second half of this year and in 2023. “Banks are clearing out their stock of distressed loans to prepare for the new stock of distressed loans that is being created,” he said.

This more complex credit environment is likely to make banks more selective. And, on the other hand, it will further heat up the activity of distressed asset managers, who have already been expanding their portfolios in recent years. According to Guilherme Ferreira, a partner at Jive Investments, sales of distressed portfolios – including both non-performing loans and those seen as likely to become non-performing – are expected to range from R$40 billion to R$60 billion this year. In 2021, they ranged between R$25 billion and R$45 billion, including banks and other financial firms.

Mr. Ferreira links the beefed-up portfolios of loans in arrears to the economic backdrop of low growth, high unemployment and political instability. At the same time, high inflation shrinks the margin of companies and the disposable income of households. “Companies don’t have now the time they had when the Selic was at 2%,” Mr. Ferreira said. “Many will have a hard time paying off their debts.”

This greater supply of portfolios of outstanding loans was noticed by Strategi Capital, an asset manager focused on alternative and illiquid investments. According to founder Cristian Lara, the company had planned to allocate all the R$75 million raised by its new fund over the next two years. But in the first quarter of this year, the fund has already allocated 25%. “If we continue at this pace, we will have almost 100% of the capital invested in the first year.”

Source: Valor International

https://valorinternational.globo.com