A study by UBS BB identifies Brazil as having the worst credit dynamics among the major Latin American markets. Analysts identify a simultaneous deterioration in credit to households and in the corporate segment—and highlight that the cost of risk for Brazilian banks is already "materially higher" than that of their peers in the region.
The survey assessed the asset quality of banks in Mexico, Peru, Colombia, Chile, and Brazil—the only country, according to the report, where the decline is occurring simultaneously among individuals and companies.
Although the bank sees signs of deterioration in Mexico, the country has maintained a controlled level of non-performing loans, as has Chile. Peru and Colombia, on the other hand, show a positive trend, with a consistent decline in default rates since 2023.
The report bases its diagnosis of Brazil on data from Serasa Experian and the Central Bank. There are 83.5 million people with negative credit records in the country — and household debt has reached about 30% of income, the highest level in the historical series.
The outlook ahead is not encouraging either. With expectations that the Selic rate will remain high for longer, the cost of credit is simultaneously putting pressure on already indebted families and companies that need to roll over their debts.
With the exception of Chile , where leverage comes from mortgage credit, Brazil is the most indebted country among the economies of the region, with 54.4% of credit relative to GDP. In Mexico , this ratio is 23%; in Peru , 31.7%; and in Colombia , 49.5%.
The larger the stock of credit in the economy, the greater the impact of a prolonged cycle of high interest rates on default rates. But the storm brewing in the credit market is not expected to affect all banks equally.
According to UBS BB, incumbents Itaú , Bradesco , and Santander Brasil managed to maintain "relatively positive" trends, without a significant increase in the cost of risk. On the other hand, analysts see new entrants feeling more pressure, highlighting the 74% increase in Nubank 's provisions in the first quarter and the deterioration of "almost all of its indicators" at Inter .
Nubank , in particular, ended the first quarter with the highest cost of risk of all UBS BB's Latin American coverage, reaching 19.2%. "The cost of risk in Brazil is materially high," analysts say.
On the incumbent side, UBS BB highlighted the maintenance of relatively positive trends, without a significant increase in the cost of risk, which is explained by the mix of clients and products.
For the coming quarters, analysts see a "more benign" trend for Itaú, Bradesco, and Santander Brasil. Itaú has the lowest NPL in the group, at 1.9%, followed by Santander Brasil, with 3.3%, and Bradesco, with 4.2%.
In the stock market, counterintuition.
Itaú, however, is the only one of the three incumbents for which analysts have a neutral recommendation. One of the main reasons is the price, since the bank's shares are trading at 2.2 times book value, above its competitors.
For Bradesco and Santander Brasil, which trade at lower multiples, UBS BB sees an upside of 34% and 64%, respectively, compared to only 8% for Itaú shares.
Santander's upside potential is second only to Inter's, according to UBS BB, which projects a target price of US$9.40 for the bank's shares, 68% above the current level. Inter's shares have fallen 34% this year and, according to analysts, already reflect the deterioration of its portfolio, which would represent a buying opportunity.
UBS BB also has a favorable recommendation for Nubank shares, with a target price that implies a 24% upside. Despite the high cost of risk, analysts expect a positive impact on Nu's upcoming earnings reports due to the new Desenrola program .
Focused on low- and middle-income customers with credit card, overdraft, and personal loan debt, the federal government's refinancing program directly targets its customer base.
