Higher rates and rising defaults expose Brazil's banking fragility at once.

Santander Brasil's weaker-than-expected results kicked off the second-quarter banking earnings season on a dissonant note that goes beyond the numbers of a single institution: they expose the growing tension between a financial system operating under elevated real interest rates and a delinquency rate that refuses to budge, at a moment when the country's very fiscal framework is beginning to be questioned internally.

Santander Brasil posted managerial net income of R$3 billion in the second quarter, down 17.6% from the same period in 2025 and roughly 12% below market consensus — which had already been revised downward after the bank signaled additional provisions. Even worse was operating profit of R$2.5 billion, 45% below the first quarter. Return on equity (ROE) tumbled to 12.5%, interrupting a recovery trajectory that had been underway since 2024 and making the 20% target set by the Spanish parent even more remote. SANB11 units fell more than 7% in the session, and JPMorgan downgraded its recommendation to neutral, cutting the price target from R$36 to R$30 per unit. For analysts at BTG Pactual, the result "underscores how distant the goal of reaching a 20% ROE in the coming years still appears." The bank dragged the Ibovespa lower in a session already pressured by multiple vectors.

The backdrop for the deterioration in bank credit becomes clearer when read alongside the government's signaling on El Niño. A report from XP Investimentos points out that the climate phenomenon, whose effects the federal government now formally acknowledges as a risk to rice and corn harvests, will pressure not only food inflation but also energy costs — with the anticipated activation of thermal power plants amid the likely drop in hydroelectric output — and retail. The government released R$1.33 billion to address the effects of El Niño, but the potential magnitude of the climate shock suggests this figure is merely a first move. Against this backdrop, July's IGP-M fell 1.16%, driven by declines in fuels stemming from the momentary easing of tensions in the Strait of Hormuz — but FGV Ibre economist Matheus Dias warned that "part of the petrochemical chain remains pressured by freight, exchange rates, and base oils." The relief is fragile: oil has surged again, reaching US$88 a barrel after the United States and Saudi Arabia resumed attacks on Iran, ending a four-day window without offensives that had briefly relieved commodity markets.

Agribusiness fragility — the backbone of Brazilian exports — extends beyond El Niño. Judicial recovery filings in the sector totaled 517 in the first quarter, up 33% from the same period in 2025, with consultancy Neot warning that 2026 could set a new historic record. Producer indebtedness is compounded by the combination of high interest rates, declining profitability of major crops, and now the prospect of more expensive and scarcer fertilizers: the industry is already projecting a drop of at least 10% in deliveries for the 2026/27 harvest, reflecting the logistical difficulties imposed by the Middle East conflict and the closure of the Strait of Hormuz. Copersucar, the world's largest sugar and ethanol trader, personally approached the government to complain about difficulties accessing the Brasil Soberano program, designed to aid exporters affected by the American tariff hike.

Trump's tariffs continue to produce unexpected distortions in the domestic economy. With the American market closed to Asian paper, sulfite paper from China and other countries on the continent is flooding Brazil at prices the domestic industry cannot match. It is trade diversion in real time: barriers erected by Washington redirect flows to markets that neither asked for nor prepared to receive them. The Trump administration's renewal of the state of emergency against Brazil — with no immediate practical effect, but keeping the IEEPA legal basis intact — fuels internal assessments at Palácio do Planalto about the risk of new trade sanctions, adding another layer of uncertainty in an election year.

It is precisely in this environment that the fiscal signaling from Finance Minister Dario Durigan takes on particular relevance. According to Folha de S.Paulo, Durigan is discussing with President Lula a tightening of the fiscal framework for a potential fourth term, with a reduction in the spending growth cap from 2.5% to 1.5% per year — a proposal that, if confirmed, would represent the most significant shift in fiscal posture by the PT government since the framework was created. The initiative contrasts with Lula's own statement about wanting to finance research and technology "outside the fiscal framework," creating a visible internal tension between the signal the Executive wants to send to the market and the political appetite for strategic spending in a campaign year. Meanwhile, federal public debt rose 2.61% in June, reaching R$9.268 trillion, with a cost increase that directly reflects the level of interest rates.

In the labor market, CAGED recorded only 145,000 new formal jobs in June, the worst result for the month since 2020 — a figure that contradicts the narrative of employment resilience the government had been sustaining and which will be tested tomorrow with the release of the PNAD Contínua. Industry confidence recorded its biggest drop in ten months in July, according to FGV, and the Services Confidence Index fell 3 points, to 87.8 points, hitting the lowest level of the current situation since July 2021.

Countering this gloomy scenario, two data points surprised positively. Real estate credit grew 23% in the first half, moving R$180.9 billion despite high interest rates — a performance that shields the construction sector from a sharper slowdown. And in-home food prices fell 1.14% in July in the IPCA-15, the largest drop for the month since 2010, following six consecutive months of increases. Inflation relief on food is welcome, but arrives at a moment when El Niño threatens to reverse precisely this trend as early as the next harvest.

On the corporate front, Ambev, whose shares trade on B3 under the ticker ABEV3 and on the NYSE as an ADR, delivered profit of R$3.47 billion in the second quarter — up 24.5% — with the unmistakable boost of the World Cup filling bars. The result, however, fell short of revenue and Ebitda projections from houses such as JPMorgan, Itaú BBA, and XP, confirming that the optimism embedded in estimates outpaced what the tournament actually