brazil lending market report -2016 - creditas€¦ · relatively low 3.4% 3. three unsecured...

©2017– CreditasConsultoriaFinanceiraLtda.

Brazil lending market report - 2016Released on March 6th, 2017 at Lendit

©2017– CreditasSoluçõesFinanceiraLtda. 2

1. With 200 million population and US$500+ billion in outstanding debt, Brazil represents a unique opportunity to disrupt the lending space

2. Average spread of 32% create a revenue pool of US$160 bullion despite average NPLs stand at a relatively low 3.4%

3. Three unsecured products (personal loans, credit cars and overdraft) combine US$56 billion in outstanding debt that is priced at above 200%; these category represents 70%+ of the industry’s net interest margin despite it provides less than 15% of all outstanding debt

4. Secured lending is clearly underpenetrated, with mortgages at 12% of GDP and auto financing representing less than US$1k per active car

5. With severe economic crisis, banks have hit the breaks of loan origination and further increase margins, despite NPLs remained stable

Executive summary


Brazil has $505 billion in outstanding household debt with 31.9% spread

OutstandingDebt ($ mn)

AnnualOrigination

($ mn) Term (months) APR % Spread % NPL %

Market-rates debt 218 127 40.7 85.2 72.9 6.0Payroll loans 93 37 69.9 29.3 17 2.3Auto loans 46 28 42.4 25.7 13.4 4.6Personal loans 33 24 36.7 139.4 127.1 8.8Credit cards 16 9 1.8 409.4 397.1 29.0Overdraft 8 10 0.0 328.6 316.3 17.4Renegotiations 10 8 35.4 54.2 41.9 18.3Purchase loans 3 2 12.4 95.1 82.8 11.7Others 9 9 23.6 34.2 21.9 6.7

Earmarked debt 243 76 267.4 10.4 3.5 1.7Mortgages 173 38 347.3 10.8 n.a. 1.5Rural credit 53 29 29.8 9.1 n.a. 2.2BNDES credit 16 5 96.3 8.55 n.a. 1Others 2 4 11.9 28.7 n.a. 6.7

Cards (not carried) 44 23 0.0 0.0 0.0 0.0

Total debt 505 226 112.9 41.5 31.9 3.4


Outstanding household debt has been falling for 2 years in real terms

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Inflation adjusted outstanding household debt

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The last ten years have been characterized by a rapid growth of outstanding household debt. In 2006 consumers had borrowed R$330 billion (R$602 billion at current prices) in loans from the financial system; ten years later, the volume stands at R$1.6 trillion (10% inflation-adjusted CAGR). Credit kept 15% growth rates even in the 2008-09 turmoil while Brazilian GDP was collapsing by 5%

In the last couple of years though, credit growth has lost its shine, contracting in real terms by 3% annually in 2015 and 2016

With inflation decelerating in 2016 and now expected to be below 5% in 2017, we expect credit expansion to recover towards the second half of the year


Household debt stands at 24.8% of GDP

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Today household credit in Brazil represents 24.8% OF GDP (down from 25.6% a year ago)

Household debt to GDP has doubled in a decade, from 12.3% in 2006

Non-earmarked resources (market-rates debt), those not related to compulsory deposits or government funds, have been dropping since 2012

Despite doubling its share as a percentage of GDP, 24.8% is a relatively modest ratio when compared to international standards


At 42% debt-to-income, Brazil has low indebtedness level

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Household debt to income ratio In line with the rise of household debt to GDP, debt as a percentage of disposable income has increased to 42.2%, falling from 46% 2 years ago

At this level, Brazil is highly underleveraged compared to international markets


Despite low 42.2% debt ratio, debt service still at 21.6%

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High installments of Brazilian families’ debt, related to both high interest rate and short maturities, are impacting the debt service ratio

Debt service peaked at 22.9% and has been increasing and remains high at 22.7% after peaking at 23.9% in 2011.

High debt service ratio is not related to high indebtedness: at 42.2% of disposable income, Brazilians are less leveraged than other economies. Instead, high interest rates and short loan maturities (both related to the low penetration of secured lending products) are at the root of the problem. On average, Brazilians are paying 42.0% annually for their credit and 84.5% annually when we exclude subsidized earmarked products and non-carried balances of credit cards. Although the maturity of new operations has been steadily increasing to 169.4 months, outstanding debt has a maturity of 64.2 months. Combining high interest rates and low maturities, Brazilians face high installments to be repaid for their loans.

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Increasing share of earmarked loans is extending average loan maturity

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Brazilian car fleet stands at 51.3 million, growth decelerating since 2012

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Evolution of car fleet in Brazil


According to Denatran, Brazil’s Department of Motor Vehicles, we reached 51.3 million registered cars in December 2016, compared to approximately 130 million in the U.S.

Car fleet growth has been slowing down in the last 10 years, with the exception of 2012, when a set of tax rebate measures broke the otherwise constant slowdown in car fleet growth

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Car purchase transactions remain stable with share of used cars reaching 85%

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Evolution of car fleet in Brazil


Although the car fleet growth has been moderating in recent months, the transactional sales market remains strong, mostly due to a liquid used car sales industry. The share of used car transactions has steadily increased and today already represents 84.6% of all monthly transactions

With fewer new cars and a growing used car fleet, the age of vehicles in operation is growing rapidly. Today, 47% of vehicles are older than 10 years, 19% are between seven and ten years old, and 25% are between three and six years old. Only 9% of cars are less than two years old. In the U.S., 38% of vehicles are older than 10 years, 22% are between 7 and 10 years old, and 26% fall between three and six years old. Vehicles less than two years of age account for 13% of the American fleet

Car sales (thousand) per month % of used cars vs. total transactions

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Auto financing origination had its weakest year since 2008

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Inflation adj auto loans

Monthly loan origination in R$ billion


The auto finance industry peaked in November 2010 and has been decreasing in monthly originations despite the fact that the auto sales market peaked in 2012

In real terms, the contraction has been tremendous, from the equivalent of today’s R$16.7 billion in November 2010 to a current level of R$7.3 billion

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Car fleet with lowest leverage levels in a decade

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Car fleet leveraging (R$ Thousand per fleet or sales)


Leverage of the car fleet has been decreasing since 2012

Current ratio of outstanding debt to car fleet has fallen to R$2.8k per car from R$6.k at the peak when adjusting for inflation

Average financing of car sales is now R$6.7k (vs. R$11.9k at the peak or R$18k when adjusting for inflation)

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Widening margins despite stable NPLs

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Auto loans key economics


The 2007-2008 period came with huge spreads for the entire industry. Little competition and a relatively scarcity of funding created the highest net margins of the decade (net margins of 18.5% and NPL at 3.0%!!!!)

Then, post-crisis, banks poured billions into the auto financing, reaching inflation- adjusted maximums by the end of 2010. Full employment in the Brazilian economy (5% unemployment at that time) helped to achieve NPLs of 2.5%. With banks hungry for loans, spreads went down, origination grew and as a result, the period of 2011-2012 registered an increase in overall NPLs up to 7.2% in May-2012. Net margins suffered the most in 2012 and 2013, with spreads remaining low for Brazilian standards (around 10% p.a.) and NPLs relatively high (5-7%)

As predicted last year, banks kept an ultra-conservative risk attitude, keeping low volumes, increasing margins (now above 14%). However, NPLs remained at 4.6%

AUTO VERTICAL


Mortgages deceleration continued in 2016

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Real Estate financing has been the most active segment in the local household lending market, growing at a higher pace than the overall credit market

Totaling R$534 billion, it accounts for more than one third of overall household debt or 8.5% of GDP. In January 2012, it was 4.22% of GDP.

The growth has been falling in recent years following stabilization of real estate pricing and lower residential demand.

MORTGAGES

Outstanding credit (R$ billions) % YoY increase


Mortgages origination fell by 25% in 2016

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In 2016 we saw the weakest year of the series with origination volume falling by 25% YoY. Annual origination in 2016 was close to R$83 billion.

Monthly mortgages originations peaked in July 2013 at R$15 billion in real terms. Since April of 2015, there has been a significant decline in the value of monthly originations with the latest print at almost half the peak.

The trough of the series was reached in January of this year R$5.4 billion, representing a drop of 64% peak to trough.

MORTGAGES

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Widening margins despite stable NPLs

Mortgages key economics


New loan originations have been slowing down for the last two years due to weaker consumer demand and banks’ increasing selectivity when it comes to underwriting and depleted sources of funding

Banks are increasing lending rates because of the weak labor market punctuated with unemployment at record highs and real income levels falling since February 2015.

To date mortgages have performed well, especially when compared to other consumer loan categories, with an average NPL of 2% since 2011

Despite recession and higher unemployment rates, Brazilians are managing to pay their mortgages; with NPLs a 1.5% and widening spreads at 3.5%, we expect banks to increase origination during 2017

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Sergio Furio

Founder & CEO, Creditas

[email protected]

Contact details

Nicole Simms

Funding & Research analyst, Creditas

[email protected]

brazil lending market report -2016 - creditas€¦ · relatively low 3.4% 3. three unsecured...

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