Oct. 23 (Bloomberg) -- Brazilian stocks fell, sending the Bovespa index to its first weekly decline in a month, after Goldman Sachs Group Inc. downgraded the nation’s biggest banks and analysts said the foreign investment tax may slow inflows.

Banco do Brasil SA led a retreat for banks after Goldman Sachs recommended selling the shares on valuations. Redecard SA, the Brazilian processor of Mastercard Inc. payments, dropped 3.1 percent after reporting a profit that trailed analyst estimates. BM&FBovespa SA, Latin America’s biggest exchange, extended its losses to 11 percent this week on a report the government won’t drop a tax on stocks and fixed-income securities purchases.

The Bovespa stock index fell 1.6 percent to 65,058.84, for a loss of 1.7 percent this week. The BM&FBovespa Small Cap index lost 0.9 percent today. Mexico’s Bolsa declined 0.5 percent and the MSCI Emerging Markets Index rose 0.5 percent. The real rose 0.1 percent to 1.7173 per dollar today, narrowing a decline of 0.4 percent this week, the first five-day loss since August.

The Bovespa index “is far from cheap, and that’s the principal point both here and abroad,” said Carlos Camacho, who helps manage about 3 billion reais ($1.8 billion) at GAP Asset Management in Rio de Janeiro. The index, after a 74 percent gain this year, is trading at 16 times estimated earnings, above the historical average, he said.

BM&FBovespa fell 3.9 percent to 12.25 reais. Its weekly decline of 11 percent was the second most after Cyrela Brazil Realty SA Empreendimentos e Participacoes’ 12 percent plunge.

The Brazilian government won’t drop a tax on foreign inflows imposed this week on stocks and fixed-income securities purchases, O Globo reported today, citing an interview with Finance Minister Guido Mantega. Adjustments can be made, but the so-called IOF will remain, Mantega told the Rio de Janeiro-based newspaper.

‘Stop and Think’

“The IOF made people stop and think and gave them an excuse to sell,” Camacho said in a phone interview, referring to the government’s 2 percent tax on the purchase of equity and fixed-income investments by foreigners.

Foreign direct investment in Latin America’s biggest economy fell to $1.8 billion in September from $1.9 billion in August, the central bank said. Economists expected $2.5 billion in foreign investment, according to the median forecast of three analysts surveyed by Bloomberg.

Banco do Brasil, the biggest lender in Latin America, fell 2.1 percent to 30.40 reais after Goldman Sachs downgraded the shares to “sell” from “neutral.”

“Shares for Brazilian banks have risen steadily over the last few months, and now Brazilian banks trade close to 10-year highs on 12-month forward consensus” valuations relative to earnings, Goldman Sachs analysts Jason Mollin, Carlos Macedo and Bianca Cassarino said in a report today. “We believe much of the upside has been priced in.”

Redecard slid 89 centavos to 28.20 reais after it said net income climbed to 333 million reais ($193.8 million) in the third quarter. That trailed analysts’ profit estimate of 347 million reais.

Oi Gains

Tele Norte Leste Participacoes SA, Brazil’s biggest phone company, rose the most in six weeks on speculation profit will improve as it benefits from the purchase of Brasil Telecom Participacoes SA.

The company, which operates under the Oi brand, said yesterday its third-quarter profit fell 71 percent to 64 million reais ($37.2 million) on costs related to the Brasil Telecom takeover. Operational results before non- recurring expenses were “good,” said Alex Pardellas, an analyst for Banif Corretora.

The stock gained 3.7 percent to 34.85 reais.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

Last Updated: October 23, 2009 16:44 EDT