DTAs launch Brazil’s banks into flight mode.

A recent rule change in Brazil will allow banks to use tax credits related to provision expenses sooner, which could have a significant impact on their capital and earnings. Currently, when Brazilian banks make provisions for delinquent loans, the tax authorities only recognize the tax shield from those losses after the bank ceases attempting to recover the loans. However, starting in April 2025, banks will be able to use these tax credits earlier, reducing the creation of deferred tax assets (DTAs). This change is expected to boost the tier-1 capital of banks such as Bradesco, Itaú, Santander Brasil, and Banco do Brasil. It is also expected to have a positive impact on earnings for these banks, with Bradesco’s earnings in 2028 projected to be 11.5% higher due to the change in DTA treatment.