Bank of America Sees a Storm in Brazilian Consumer Credit

Bank of America analysts have become more cautious about Brazilian consumer credit, highlighting a "gathering storm" in the market. The bank's report, titled "The Gathering Storm," draws from second-quarter results and shows a decline in the quality of Brazilian consumer credit. One key data point is that Brazilian households spent 28.5% of their income on debt servicing in May, the highest level since 2005.

When excluding home loans, the figure rose to 26.2%, also a record high. Household debt as a percentage of income has remained roughly steady at around 50% since May. Total system delinquency, which measures loans more than 90 days past due, stood at 4.7% in June and remained stable in July. While this is not a new record, it marks a shift from the previous month's high.

Bank of America identified Santander Brasil and Porto among the lenders that have experienced the most significant increase in credit costs. In contrast, Itaú Unibanco and Bradesco were considered more resilient, with a cost of risk remaining relatively stable. The central bank's Selic policy rate is currently 14.00%, despite a quarter-point reduction on August 5th.

This still makes borrowing in Brazil more expensive compared to international standards. Even after multiple cuts, the cost of credit in Brazil is high enough to potentially lead to increased defaults and arrears as household debt service burdens continue to rise faster than income levels. While the report does not predict a crisis, it underscores the potential risk to Brazilian consumer credit quality as households face limited room for error in their debt repayment capacity.

The next central bank credit release, scheduled for late August, will provide more data on whether this trend has plateaued.