Brazil’s big banks shun riskier lending as household debt strains grow

Brazil’s biggest banks are adopting a more risk-averse approach to lending, shifting toward secured products and higher-income borrowers as household debt issues arise, despite a robust labor market and an economy surpassing expectations. Several major banks, including Banco do Brasil, Itau, Bradesco, and Santander Brasil, provided similar insights during earnings season.

Executives across the country’s largest publicly listed lenders all echoed a cautious stance on riskier borrowers and unsecured lending, hinting at a potential tougher period in the credit cycle after years of strong household borrowing supporting growth in Brazil’s largest economy. Analyst Katherine Hennings from BRCG noted that the banks’ defensive approach reflects concerns about the economy nearing a slower phase after a growth period partly fueled by household leverage.

Historically, periods of strong credit growth paired with rapidly increasing household debt have been followed by consumer spending slowdowns, similar to Brazil’s experience after a sharp increase in household debt between 2011 and 2015. What distinguishes the current situation is the sharp deterioration in household finances even as unemployment remains low and household incomes improve.

Household debt burdens have reached near-record levels at around 50% of disposable income. Hennings suggested that a combination of structural factors, such as regulatory changes, fintech expansion, and the rapid adoption of digital payments, along with cyclical government policies aimed at boosting consumption and credit, have contributed to this trend.

Banks are increasingly targeting higher-income clients and secured lending, while moving away from unsecured consumer credit. Banco do Brasil, for instance, expects only around 1% growth in 2027, down from about 2% this year. Itau’s CEO warned that the volume of credit distributed in the market is far above its capacity to absorb, and the bank is now more selective, focusing on secured lending and reducing exposure to lower-income clients.

Bradesco CEO stressed a lower appetite for lower-income clients and a more collateral-backed portfolio. Santander Brasil also reduced its exposure to higher-risk borrowers, particularly those earning less than 4,000 reais per month, citing concerns over the sustainability of strong employment levels and government support if the economy slows.

Banco do Brasil’s CEO emphasized increasing high-value clients by 25% by 2030 as a key strategic priority. Even Brazil’s largest digital lender, Nubank, experienced a rise in loans more than 90 days past due to 6.9% in Q2, despite posting larger-than-expected profit growth.