Auto Loan `Bubble' Concerns Spurring Regulator Restrictions: Brazil Credit
Brazilian regulators are seeking to stem record loans for auto purchases to prevent what central bank President Alexandre Tombini said may turn into a credit bubble.
Tighter capital rules announced last month aim to reduce maturities on loans that have extended as long as 80 months for low-income Brazilians with little credit history, said Carlos Henrique de Almeida, an economist at Serasa Experian, the local unit of the Dublin-based credit risk group. Late payments on consumer loans including vehicle financing rose 6.3 percent last year, the most since the 2008 financial crisis, according to Experian. The average interest rate for car loans was 22.8 percent in November.
Vehicle financing surged 45 percent in Brazil last year compared with an 11 percent increase in the U.S., helping fuel the fastest economic growth in more than two decades. Tombini said Jan. 3 that the decision to raise reserve and capital requirements for local banks aims to prevent the formation of a credit bubble. Consumer loan growth may slow to 10 percent, he said, compared with 17 percent in 2010.
“The central bank decided to begin turning off the faucet,” said Jose Pereira da Silva, a credit specialist and finance professor at Getulio Vargas Foundation in Sao Paulo.
The extra yield investors demand to own Brazilian government bonds instead of U.S. Treasuries has declined 63 basis points over the past six months, or 0.63 percentage point, to 165 basis points, according to JPMorgan.
Yields on Brazilian interest-rate futures contracts due in January 2012 rose 1 basis point to 12.41 percent today.
The cost of protecting Brazilian bonds against default for five years increased one basis point yesterday to 107, according to CMA prices. 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 comply with debt agreements.
Tombini, in a speech after being sworn in Jan. 3, said credit “growth should be sustainable” to prevent the formation of bubbles and that policy makers are “always attentive to adopting prudential and macro prudential measures to create conditions for this process to occur safely.”
The average interest rate on vehicle loans the past year has fallen from 36.5 percent two years earlier, according to central bank data. Car loans carry lower rates and longer terms than other consumer loans because they’re less risky for creditors who use the vehicle as collateral, Silva said.
Defaults May Increase
Defaults may increase in the beginning of 2011 as car owners struggle to pay once-a-year vehicle taxes and other beginning-of-the-year bills, according to Experian’s Almeida.
“Shorter terms just means financing will be more expensive,” Silva said in a telephone interview. “You’ll need more money to buy a car.”
The 136 billion reais ($81 billion) in auto loans last year through November made up 25 percent of the 549 billion reais in outstanding consumer loans in Brazil, according to the central bank. In the U.S., the value of car sales financed last year increased to $429 billion from $388 billion in 2009, according to CNW Marketing Research, which is based in Bandon, Oregon.
The new rules announced Dec. 3 increased capital requirements for auto loans longer than 24 months that don’t meet the regulator’s down-payment criteria. The average length of vehicle loans rose to 564 days, or about 18 months, in November from 509 days in 2008, according to the central bank. About 29 percent of vehicle loans exceed 24 months.
“The terms got so long that people began to add more debt from other places while they still had to make payments on their car loan,” Almeida said. “It makes no sense to have a car loan for five years for a used car that may not even last that long.”
Lenders will now be required to increase deposits to 16.5 percent from 11 percent for car loans of between two and three years that have a down payment of less than 20 percent. The same rules apply for three- to four-year loans with down payments of less than 30 percent or four- to five-year loans with down payments of less than 40 percent.
“The government clearly was uncomfortable with auto loan growth,” said Gabriel Goulart, partner at Mercatto Gestao de Recursos, who helps manage the equivalent of $1.6 billion at the Rio de Janeiro-based asset management firm. “The automobile industry has always been an important indicator for economic activity and now it is even more.”
Brazilian carmakers produced a record 3.6 million vehicles last year, a 14 percent increase over 2009, according to Brazil’s automakers association. Production growth may slow to 1.1 percent this year, Cledorvino Belini, president of the group known as Anfavea and also head of Fiat SpA in the country told reporters Jan. 9.
Smaller Lenders Hurt
Either banks will provide less vehicle financing this year or larger lenders will gain market share because they have the extra capital to comply with the tighter requirements, said Alexandre Albuquerque, a Brazil banking analyst at Moody’s Investors Service in Sao Paulo.
Smaller banks will slow lending because they are facing higher funding costs amid the tighter liquidity requirements and a fraud probe of Banco Panamericano SA, Brazil’s biggest lender for used cars, said Albuquerque. Banks with under 2 billion reais in assets, such as Panamericano, don’t have the capital to maintain the current pace of lending under new rules, he said.
“It’s unclear whether credit will slow or the big banks will make up for the smaller ones,” Albuquerque said in a telephone interview.
The criminal probe into accounting irregularities at Panamericano has curbed investor demand for debt from Brazilian banks, whose record $17 billion of bond sales last year accounted for more than half the country’s corporate offerings.
The emergence in 2001 of Brazil’s asset-backed securities industry has also helped spur the expansion in vehicle loans. So-called FIDC funds, which are backed by future cash flow, grew in the past decade to 312 funds worth 59 billion reais, Claudio Maes, a manager supervising structured funds at Brazil’s securities regulator, said in a Jan. 7 interview.
Panamericano’s FIDC funds were mostly made up of repackaged vehicle loans, Maes said.
The yield on Banco Industrial e Comercial SA’s 8.5 percent debt due in 2020 has climbed 53 basis points, or 0.53 percentage point, since Nov. 9, according to data compiled by Bloomberg. Banco Daycoval SA’s 6.5 percent bond due in 2015 rose 61 basis points in that period. Both banks have less than 2 billion reais in assets.
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