Banks close 2022 with a profit of BRL 139 billion

According to the Central Bank (BC), the main reason for the decrease was the increase in expenses with provisions (reserve on credit risks), accentuated due to the case of Lojas Americanas. The information is from the BC’s Financial Stability Report, referring to the second half of 2022, which was released today (10).

In judicial recovery since January, Lojas Americanas faces a crisis since the revelation of “accounting inconsistencies” of R$ 20 billion. Later, the group itself admitted that debts with creditors could reach R$ 43 billion.

“Although the sharp increase in provision expenses in the last half of 2022 is related to this event (of the Americanas), the materialization of risk has resulted in a high increase in these expenses in general. The decline in the pace of growth in service income and the pressure of inflation on administrative expenses also contributed to the reduction in profitability,” says the document, citing even a slight deterioration in the institutions’ operational efficiency.

According to the BC, the system’s profitability should remain under pressure in the medium term, considering the prospect of weaker economic activity in 2023, lower credit growth and high defaults and inflation.

The report highlights that, although the credit market continues to grow at a high pace, the deceleration was more pronounced in higher risk operations of the National Financial System (SFN) with individuals, such as those linked to credit cards.

“In general, credit to individuals cooled down, except for rural credit and real estate credit, whose growth rates remained stable. Credit to companies decelerated at a smoother pace. This is because credit remained high due to emergency programs for micro-enterprises, financing of working capital and investment for small companies and financing of goods and ‘withdrawal risk’ operations for medium-sized companies”, says the BC, adding that the credit market capital continued to be a relevant source of financing, especially for large companies.

Even so, financial institutions continued to bet on riskier portfolios. “Despite the decline in the pace of growth, credit still grew strongly in riskier modalities for families, such as credit cards and non-payroll loans”, says the document.

stress tests

The BC report also presents the results of several risk analyzes and stress tests of the banking system, which “continue to indicate that there is no relevant risk for financial stability”.

“The capital stress tests indicate that there is no occurrence of non-compliance in a relevant amount in adverse macroeconomic scenarios. The results obtained in the sensitivity analyzes also indicate good resistance to the risk factors, simulated separately, in addition to stability of results in comparison with tests performed previously. The liquidity stress test indicates a comfortable amount of liquid assets in case of cash outflows in adverse conditions or a shock to market parameters in the short term”, explained the BC.

In the stress test, the BC simulates how much a situation of severe default and bank runs impacts compliance with the minimum regulatory limits by financial institutions and how much the monetary authority would need to contribute to the financial system. Among these limits are the maintenance of a cash reserve to ensure that banks pay all customers who withdraw money in times of crisis. Credit, interest, foreign exchange and property devaluation risks are also tested.

The BC considered two scenarios, the first of a drop in economic activity and household consumption, rising unemployment, falling inflation and interest rates; and the second scenario of increased uncertainty in the economy, with fiscal deterioration, exchange rate hikes, interest rate hikes and inflationary pressure.

weather events

The Central Bank also researched issues related to climate risks and their effects on the financial stability of banks. Droughts and floods are the physical weather events with the greatest impact on the assets of financial institutions, especially in horizons longer than five years.

“Climate transition risks are classified as having a low impact on assets. Default is the main way in which climate risks can threaten financial stability. In 2022, around 16% of financial institutions identified climate risk impacts on their credit operations. The financial system has sought to reduce both exposure to climate risks and its own environmental impact”, says the BC.

According to the report, defaults could result from a financial crisis in sectors that rely heavily on natural resources, which could suffer a severe climate effect. Examples include crop failures, transport losses, reduced service provision and disruption of production chains.