Banco Cruzeiro do Sul SA, the Sao Paulo-based payroll-deductible lender, had its foreign-currency credit rating lowered one level by Moody’s Investors Service, which cited funding difficulties.
Moody’s cut the rating to Ba3, three steps below investment grade, from Ba2, and said “volatile earnings,” increased competition in the payroll loan industry and difficulty obtaining financing to match the maturity of longer-term assets led to the downgrade. The outlook on the rating is negative, Moody’s said.
“Increasing competition in the segment has led the bank to defend its market position by lengthening the tenor of its loans,” Moody’s said in the statement. “To finance this portfolio, the bank increased its reliance on higher-cost guaranteed deposits and on expensive foreign funding, which in turn pressured margins.’
The yield on Cruzeiro do Sul’s 8.25 percent bonds due 2016 surged 61 basis points, or 0.61 percentage point, to 14.96 percent at 3:08 p.m. in New York, heading for the biggest daily increase since Oct. 6, when yields on the bonds swelled 1.36 percentage points.
The bank’s profitability will also be hurt by higher charges for loan-loss provisions being taken as part of upcoming accounting changes, according to the statement.
Cruzeiro’s net income dropped 46 percent from a year ago to 24 million reais ($13.5 million) in the third quarter on higher funding costs related to the depreciation of real, it said in a Nov. 14 regulatory filing. The bank said it will book an additional 197 million reais in provisions for bad loans in the fourth quarter as it consolidates its total credit portfolio, including loans held inside its asset-backed receivables funds, known as FIDC’s.
KPMG Holding AG’s unit in Brazil, which reviewed Cruzeiro’s financial statement, said in a note that the provisions should have been accounted for in the third quarter.
The postponement increased Cruzeiro do Sul’s net income for the first nine months of 2011 by 118 million reais, KPMG said. KPMG also noted that because it performed a review and not an audit of the statement, it wasn’t certain it had all the relevant information that would be obtained through an audit.
Cruzeiro do Sul is transferring management of 50 percent of the assets in its asset-backed receivables fund to Banco Bradesco SA in an effort to raise more money in the domestic market by improving transparency for investors, Chief Executive Officer Luis Octavio Indio da Costa said on a conference call with investors yesterday.
A press official for Cruzeiro do Sul in Sao Paulo, who asked not to be identified citing company policy, said bank executives weren’t available to comment.