Key insights
- The article discusses the potential bullish impact of falling interest rates on banks, particularly Itaú Unibanco in Brazil. It argues that while lower rates may compress net interest margins (a bearish first-order effect), they can also stimulate credit demand and loan growth (a bullish second-order effect), potentially driving earnings higher. The author suggests the market is underestimating the positive impact of volume acceleration, which could be relevant to US banks as well.
Most investors assume falling interest rates are bad for banks because they compress net interest margins.
But I think that view misses an important second-order effect**:** Credit demand elasticity.
In Brazil, Selic is currently around 15%, which is extremely restrictive. At these levels, discretionary credit (mortgages, auto loans, SME borrowing) is structurally suppressed. As rates move lower toward the 12–13% range, historical cycles show that loan growth tends to accelerate meaningfully, often offsetting margin compression.
I’ve been looking at Itaú Unibanco in this context.
Key datapoints:
- ~24% ROE in a developed-bank equivalent business model * ~11–12x earnings multiple * Large exposure to Brazilian credit cycle (R$1.4T+ loan book) * Management guiding mid-to-high single digit credit growth into 2026
The core debate in my view is simple: does falling rates compress bank earnings, or does it expand total credit volumes enough to drive earnings higher?
The market seems to be pricing the first-order effect (margin compression), but underweighting the second-order effect (volume acceleration).
I wrote a full deep dive on the setup, valuation gap, risks, and positioning here if anyone is interested: https://substack.com/home/post/p-194207454