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Banks Cut Bonds to Record to Lend at Higher Interest Rates: Brazil Credit
Brazil banks from Banco do Brasil SA to Itau Unibanco Holding SA are reducing government bonds to a record and increasing lending to consumers and companies.
Bonds dropped to 22.7 percent of assets at Brazil’s 15 biggest lenders in June from 33.7 percent five years ago, according to Austin Rating, a Sao Paulo-based research group specializing in financial data. Loans climbed to 36.3 percent of investments from 30 percent in 2005 as easing inflation spurred the central bank to cut its benchmark interest rate to the lowest ever and economic growth accelerated.
Banks are shifting away from bonds after the plunge in the benchmark rate to as low as 8.75 percent this year from 45 percent in 1999 cut into returns on the securities. The 11.33 percent yield on local government 10-year notes compares with the average 35.4 percent rate banks are charging companies and consumers for loans, according to central bank data.
“Years ago, having government bonds was better than anything else because of those higher rates,” said Andressa Tezine, the London-based vice president of emerging market fixed income at PineBridge Investments, which has about $90 billion under management. “Now banks realize that it’s better to lend because it’s more profitable.”
Brazilian outstanding bank loans rose for the 17th straight month in July, led by a 51 percent annual jump in mortgages, the central bank said in a statement in Brasilia on Aug. 24. Lending grew 1.2 percent to 1.55 trillion reais ($870 billion), or 45.9 percent of gross domestic product, from 42.8 percent a year earlier, the bank said.
U.S. Loans
In the U.S., commercial and industrial loans by banks have fallen by 24 percent to $1.25 trillion as of Aug. 11 from the peak of $1.65 trillion in 2008, according to the Federal Reserve. Instead of lending money, U.S. banks are investing in Treasury and agency securities to take advantage of the historically wide spread between their cost to borrow and the returns on the debt. Their holdings of such assets increased to $1.59 trillion, up 42 percent from $1.12 trillion in mid-2008, according to the Fed.
Banco do Brasil, Latin America’s largest lender by assets, cut the government debt it holds to 17.5 percent of assets as of June from 29.5 percent in 2005, while Itau, Brazil’s biggest bank by market value, reduced holdings to 19.8 percent from 24.3 percent three years ago, according to Austin Rating, a 25-year- old consultancy firm. Government debt held by the banks surveyed is down from about 50 percent during the 1990s, according to Erivelto Rodrigues, the director of Austin Rating.
Bank Earnings
Rising lending amid Brazil’s economic expansion is helping banks increase profit. Latin America’s biggest economy grew 9 percent in the first quarter, the fastest pace in 15 years. Banco do Brasil, based in Brasilia, and Itau of Sao Paulo boosted earnings by at least 35 percent in the second quarter. Osasco-based Banco Bradesco SA, the nation’s second-largest bank by market value, said second quarter adjusted net income increased 23 percent.
Messages left with press officials at Banco do Brasil and Banco Bradesco seeking comments weren’t immediately returned.
“This is a trend that will continue,” Rogerio Calderon, the investor relations director at Itau, said by telephone from Sao Paulo, referring to credit growth and the reduction in the share of government bonds. Itau expects its loan portfolio to grow as much as 23 percent in 2010, he said.
Average Yield
The yield on Brazil’s real-denominated bonds due in 2012 rose nine basis points to 11.42 percent by 5 p.m. New York time today. That’s down from a record high of 18.5 percent in October 2008. The average yield on Brazil’s dollar bonds dropped to an all-time low of 4.93 percent last week, according to JPMorgan Chase & Co.’s EMBI+ Index.
The real gained 0.1 percent to 1.7619 per U.S. dollar.
The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. securities widened 10 basis points, or 0.10 percentage point, to 2.22 percentage points, according to JPMorgan Chase & Co.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose three basis points to 128, according to data compiled by CMA DataVision. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Brazilian banks are targeting a middle class that grew to 53 percent of the population in 2009 from 42 percent in 2002 as soaring economic growth under President Luiz Inacio Lula da Silva, 64, lifted 19 million Brazilians out of poverty, according to figures from the Finance Ministry. The national statistics institute defines middle class as a monthly income of $608 to $2,623.
Middle Class
“Margins are now a lot higher in consumer loans than in Treasuries, so the banks are much happier to lend with a growing middle class that has a bigger bank account,” Nick Robinson, who helps manage $25 billion in emerging-market assets at Aberdeen Asset Management Inc., said in a telephone interview in Sao Paulo.
Central bank President Henrique Meirelles, 64, started raising interest rates after Brazil’s economy emerged from a recession last year. The central bank has boosted borrowing costs 200 basis points to 10.75 percent since April to cool growth. Annual inflation slowed to 4.6 percent in July from 12.5 percent in 2002.
Thirty-four percent of Brazil’s government debt is linked to the benchmark interest rate, known as the Selic, according to data from the Treasury department.
Default Risk
Yields on Brazil’s interest-rate futures contract due in January held rose 1 basis point to 10.69 percent, indicating traders expect the central bank will leave borrowing costs unchanged through year-end. Economists also expect policy makers to maintain borrowing costs at their current level, according to a central bank survey published Aug. 23.
Banks are taking a risk by lending to first-time borrowers with little credit history or experience repaying loans, Moody’s Investors Service said.
“There’s a risk of increase in default or delinquencies at banks in the medium term,” said Ceres Lisboa, a Brazilian bank analyst with Moody’s in Sao Paulo. “The banks are oversizing the credit market with new products.”
An improving jobs outlook is increasing the ability of consumers to repay loans, PineBridge’s Tezine said. Brazil’s unemployment rate fell to 7 percent in June, the Rio de Janeiro- based national statistics office said on July 22. Brazil has added jobs every month of this year, and the country’s minimum wage has more than doubled to an all-time high of 510 reais over the last seven years.
“As long as the minimum wage is rising and unemployment is down, there’s no reason why banks wouldn’t be lending,” Tezine said. “It’s better to lend in this kind of environment.”
To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net; Tatiana Bautzer in Sao Paulo at tbautzer@bloomberg.net; Iuri Dantas in Brasilia at idantas@bloomberg.net
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