Banks see worsening credit and signal tightening in loans given the rise in defaults

"I think the credit cycle will be challenging," said Milton Maluhy, president of Itaú Unibanco, the country's largest bank, during a conference call with analysts this Wednesday (5). "Today we are experiencing an excess of credit given by the market." The executive said that, at this moment, he would rather give up growth and market share than run the risk of dealing with default later.

Bradesco also promised caution. "We are not doing anything crazy. We are reducing personal credit and making it collateralized," President Marcelo Noronha told journalists this Thursday (6).

The executives' caution is reflected in the reserves for default losses that the country's three largest private banks - Itaú Unibanco, Bradesco and Santander - made in the second quarter, as shown in the balance sheets released in the last two weeks.

Combined, the three banks provisioned R$28.7 billion, an increase of 12.4% compared to the same period in 2025. The security cushion inflated more than loans. The credit portfolio rose just 9.4% in the period, reaching R$3.37 trillion.

"It's a difficult time for the banking sector. Inflation is eroding family income and high interest rates are reducing companies' financing capacity", says Daniel Utsch, manager at Nero Capital.

In May of this year, the financial system's general default rate reached the peak of the Central Bank's historical series, which began in 2011. In that month, 4.74% of all credit granted was overdue for more than 90 days. In June, after the start of Desenrola 2.0, this indicator dropped slightly to 4.68%, still well above the historical average of 3.29%.

According to Flávio Ataliba, a researcher at FGV IBRE, the percentage reflects not only the Selic at 14%, but the pricing of future interest rates that are still high, given the perception of fiscal risk in Brazil - the more fear of default, the more people are charged to lend money - which increases the cost of money as a whole.

Furthermore, at the beginning of the year, the market expected the Selic to fall to the 12% range. Now, just another 0.25 percentage point reduction in the rate is expected, taking it to 13.75%.

"Another point of attention is food inflation, which affects more than 23% of the budget of families earning up to the minimum wage", says Ataliba.

This year, the commitment to household income also reached the highest value in the BC series. Household debt with banks in relation to accumulated income over the last 12 months was 49.93% in January, the month in which Brazilians tend to get stuck with bills at the beginning of the year. The percentage is the peak of the series that began in 2005 and remained very close to this until May, the latest data available.

Despite unemployment being at a low, the outlook for the coming months is not one of improvement, as the market expects a slowdown in economic activity as a result of high interest rates.

"Selic transmission at the end is very slow. Looking at these signs, the tendency is for defaults to worsen or, at least, stabilize in the second half of the year", says Ataliba.

For Yihao Lin, economist at Genial Investimentos, the end of the war in the Middle East and a less intense El Niño could open space for further reductions in the Selic, which would benefit the credit market. "But, in order to discuss structurally lower interest rates and a sustainable acceleration of the cuts cycle, it is inevitable to talk about fiscal matters."

Banks say they see a fiscal adjustment in the next presidential term, regardless of the candidate elected.

"When you have higher interest rates, coupled with a very high default and income commitment, the risk for banks increases. This generates a higher cost of credit and a more careful stance on the part of these companies", says Yihao Lin.

For now, the greater cautious stance of financial institutions is manifested in the restriction of credit to low-income consumers and the preference for secured loans.

The offer is focused on CLT payroll loans, real estate and vehicle financing with collateral and lines guaranteed by the government via the FGI (Investment Guarantee Fund) and the FGO (Operations Guarantee Fund) for small and medium-sized companies.

Still, the country's three main private banks increased their protections against defaults in the second quarter. Itaú Unibanco and Bradesco stated that the provision against doubtful debts (PDD) followed the growth of the credit portfolio as a whole.

Santander cited the macroeconomic scenario. The Brazilian arm of the Spanish institution had the worst balance in the second quarter among its peers, analysts assess, with profits below expectations given the higher expenditure on PDD.