Brazil’s biggest lenders are enjoying an unusually comfortable moment: interest rates remain among the highest in the world, credit is still expanding and loan losses, while rising, have yet to overwhelm profits. Yet beneath the strong earnings lies a more consequential shift. Nubank and Pix are steadily eroding the advantages that once made Brazil’s largest banks almost impossible to dislodge.

It is a comfortable position bought at a price.

The Selic policy rate stands at 14.00%, following a fourth consecutive quarter-point cut on August 5, down from a 15 % peak but still punishing for borrowers and supportive of bank earnings. Bank executives have welcomed further easing, even as they acknowledge that elevated borrowing costs are weighing on households and economic activity.

For Itaú Unibanco, Latin America’s largest private lender, the numbers remain formidable. The lender booked a record recurring profit of BRL12.4bn ($2.39bn) in the second quarter, with return on equity of 24.3%. Its credit portfolio reached roughly BRL1.52 trillion ($294bn), up 2.7 % from the previous quarter, while its non-performing loan ratio remained at 1.9 %.

The result captures the paradox at the heart of Brazilian banking. High rates and strong pricing power continue to support the incumbents, even as a new generation of financial companies is attacking the parts of the business that once seemed most defensible.

The high-rate harvest

For traditional banks, high interest rates are a mixed blessing rather than a simple windfall. They raise the yield on loans and other interest-bearing assets, but also increase funding costs and eventually put pressure on borrowers. The strength of the current cycle is that, so far, banks have been able to preserve unusually high returns while credit losses remain manageable.

Itaú’s return on equity has stayed above 20%, while its peers are also reporting substantial profits. The bank’s chief executive, Milton Maluhy Filho, has argued that Brazil needs structural reforms if interest rates are ever to settle sustainably in single digits. Bank executives may benefit from high rates in the short term, but they are increasingly conscious that the same rates can damage future credit demand and asset quality.

The hierarchy among the large lenders remains striking. Itaú’s market capitalisation last year reached BRL385.8bn ($74.5bn), overtaking the combined value of Banco do Brasil, Bradesco and Santander Brasil. It also exceeded Nubank’s market value.

Bradesco is still working through a turnaround that has lifted its return on equity back towards the mid-teens. Santander Brasil is becoming more selective about credit, while Banco do Brasil is confronting rising risks in agricultural lending. Caixa Econômica Federal remains dominant in mortgages and government-directed lending. BTG Pactual has become a major force in corporate and investment banking, while Banco Safra remains an important private-sector lender.

Together, the largest institutions still command an enormous share of Brazil’s financial system. Outstanding credit reached BRL7.4 trillion ($1.43 trillion) in June, up 9.7 % from a year earlier.

But the rate tailwind is unlikely to last indefinitely.

The central bank’s easing cycle has already begun. The Focus survey has pointed to further easing in the Selic, while inflation expectations remain above the central bank’s target. Lower rates would eventually support economic activity and credit demand, but they could also reduce some of the earnings benefit currently enjoyed by banks. The more immediate question is credit quality.

The fintech that outgrew its challenger status

The most striking challenge to the incumbents is no longer simply that Nubank is growing. It is that the company has become enormous without losing the characteristics that made it disruptive in the first place.

Nu now serves 139mn customers globally, including almost 118mn in Brazil, more than 15mn in Mexico and more than 5mn in Colombia. Its second-quarter credit portfolio reached $39.4bn (about BRL204bn), up 37 % from a year earlier. Quarterly net income exceeded $1bn (about BRL5.5bn) for the first time, reaching $1.06bn, while return on equity was about 33 %.

That changes the competitive equation.

Nu is no longer a loss-making challenger trying to prise customers away from the banks. It is a profitable financial institution with a customer base equivalent to a substantial portion of Brazil’s adult population. The company says its Brazilian customer base represented roughly 62 % of adults at the end of 2025.

Its expansion is also moving beyond Brazil. In Mexico, Nu received final regulatory authorisation to begin operating as a bank in July 2026, rather than receiving its underlying banking licence for the first time that month. It had already reached break-even in the market and is now seeking to scale a business that had more than 15mn Mexican customers by the end of the second quarter.

That growth has not been without mishaps. In June, an erroneous message sent to some customers suggested that Nubank had been shut down, prompting Brazil’s central bank to publicly clarify that the institution had not been placed into liquidation. The episode was operationally embarrassing, but it also demonstrated how large the once-niche fintech has become.

Nubank’s growth is particularly significant because it has expanded into precisely the segments that traditional banks historically found expensive or inconvenient to serve. Digital distribution lowers the cost of acquiring and servicing customers, while a growing data set allows Nu to extend more credit to customers who previously had limited access to formal banking.

The company added more customers in 2025 than Brazil’s five largest traditional lenders combined, according to its finance chief — a claim that is best understood as management’s own comparison rather than an independently calculated industry statistic. Its average revenue per customer has also continued to rise as it expands beyond basic accounts and cards.

The incumbents therefore face a difficult combination: their existing customers remain profitable, but the economics of acquiring the next generation are changing.

Pix and open finance change the plumbing

The more profound disruption may be happening beneath the banking relationship itself.

Brazil’s Pix instant-payment system has transformed everyday payments. It has not killed cards entirely, as credit and debit cards remain a major part of the payments ecosystem, but it has displaced cash and taken substantial share in routine transactions. In the second half of 2025, Pix accounted for more than half of payment transactions by number, while cards still represented roughly 30%.

That distinction matters. Pix has not killed the card economy. It has done something more important: it has made instant account-to-account payments a normal part of everyday commerce.

The system is now so large that its success has attracted international attention. A dispute with the Trump administration over Pix and competition with US payment companies turned a piece of domestic financial infrastructure into an issue of international economic policy.

For Brazil’s banks, Pix changes the economics of payments because it weakens the value of traditional card-based payment flows. A payment can now move directly between bank accounts without requiring a conventional card transaction.

Open finance pushes in the same direction from another angle. By allowing customers to share financial information between institutions, the system is intended to reduce information asymmetries and make it easier for customers to move between providers. That does not automatically destroy the incumbents’ advantage, but it makes customer inertia less valuable.

In this respect, regulation is doing some of the work that venture capital normally would. The Banco Central do Brasil has created public infrastructure that makes it easier for new financial companies to compete with institutions that once controlled both the payment rails and much of the customer data.

The same logic extends to Brazil’s capital markets. B3 remains the dominant exchange and market-infrastructure provider, although describing it simply as a “near-monopoly on listed trading” overstates the regulatory finding. The company occupies dominant positions in several important financial-market infrastructure segments, while investment banks expect the Brazilian IPO market to revive as conditions improve.

The household is where the story gets harder

The danger for Brazil’s banks is that their strongest earnings are arriving just as household credit is becoming more fragile.

Household indebtedness stood at 49.8% of income in May, only slightly below April’s record 49.9%. At the same time, delinquency on non-earmarked credit reached a record 6.2%. Unsecured personal credit was particularly troubled, with delinquency of 14.2%.

The deterioration is not confined to one corner of the market.

Payroll lending to private-sector employees, a programme expanded under President Luiz Inácio Lula da Silva, has grown extraordinarily quickly. The outstanding balance reached BRL109.2bn ($21.1bn) in May, up 140.3% year on year. But the cost of this credit is far below that of unsecured personal loans: payroll lending carried an interest rate of about 54.1%, compared with 142.7% for unsecured personal credit.

That distinction is important. Payroll lending was introduced in part to replace more expensive forms of borrowing. Yet the speed of its expansion is now itself becoming a source of concern. The latest data put the balance at roughly BRL113bn ($21.8bn) in June, while delinquency on these loans has risen sharply.

Total credit is still expanding. Outstanding loans reached BRL7.4 trillion ($1.43 trillion) in June, up 9.7 % from a year earlier. But the composition of that growth matters increasingly more than the headline number.

That is why Brazil’s banks are becoming more selective. Major lenders including Itaú, Bradesco, Santander Brasil and Banco do Brasil have been reducing exposure to riskier unsecured lending and favouring secured loans and higher-income customers.

The irony is that this is precisely the territory where fintechs such as Nubank have built their advantage.

Desenrola offers limited relief

Government debt-relief programmes have helped some borrowers, but the scale of the problem has made it difficult to declare victory.

The original Desenrola Brasil programme, launched in 2023, renegotiated roughly BRL53.1bn ($10.2bn) of debt for more than 15mn people. It should not be confused with the newer 2026 phase of the programme, which uses government guarantees to facilitate further renegotiations.

The new initiative has helped reduce the burden for participating borrowers, but household indebtedness has barely moved. The broader problem is therefore less the absence of debt relief than the continued accumulation of expensive credit across parts of the household sector.

Economists at BTG Pactual have warned that the debt burden could weigh on growth for years, drawing comparisons with the build-up of household leverage before the 2011–16 recession. They argue that households today face higher indebtedness and debt-service burdens, while the composition of unsecured credit has deteriorated.

The comparison should not be taken as a prediction of another recession. It is, however, a useful warning about the lag between credit expansion and its consequences.

The next cycle will test the model

For now, Brazilian banks have something close to the best of both worlds: a highly restrictive monetary policy that supports lending yields, a resilient economy and enough credit demand to sustain growth.

But the same conditions contain the seeds of the next challenge.

As the Selic falls, some of the benefit of high rates will fade. As households become more indebted, banks will have to choose between defending loan growth and protecting asset quality. And as Pix, open finance and digital banks reduce the value of traditional distribution and payment franchises, the incumbents will have to compete harder for customers they once acquired almost by default.

Nubank is the clearest evidence that the old moat is narrowing. Pix is evidence that the infrastructure around that moat is changing too.

The large banks are not yet being displaced. Far from it. Their profits are at or near records, their customer bases remain enormous and their balance sheets are formidable.

But that may be precisely why the current moment deserves scrutiny.

The Brazilian banking system has spent years learning how to make exceptional returns in an economy with exceptionally high interest rates. The harder test is whether those returns can survive when rates fall, households pull back from borrowing and the digital competitors have finally acquired enough scale to challenge the incumbents on their own ground.