Bad Loans Are Bad Omen in Bond Market for Brazil Mortgage Lender

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The surge in delinquent loans at Brazil’s biggest mortgage provider is only just beginning.

State-controlled Caixa Economica Federal said last week it more than doubled the amount of money it set aside to cover bad loans to 5.02 billion reais ($1.6 billion). That’s not sitting well with bondholders. The bank’s $500 million of notes due 2024 are down 2.6 percent this month, three times the average loss for emerging-market financial bonds.

With Latin America’s biggest economy in the midst of the worst contraction in a quarter century and interest rates soaring, it’s only getting harder for clients to repay debt. That signals more delinquencies at Caixa, which will have to make even larger provisions, said Fitch Ratings. Since 2010, Caixa’s loan book has grown an average of 40 percent a year as the bank stepped up mortgage lending under a government program aimed at boosting homeownership among low-income Brazilians.

“The bank is clearly an instrument of public policies for the government,” Rodolfo Amstalden, an analyst at investment-consulting firm Empiricus Research, said by telephone from Sao Paulo. “They’re now paying the bill for exaggerated growth in the past few years.”

Caixa’s press office said in an e-mailed statement that its bonds are trading in line with other Brazilian issuers including Banco do Brasil SA, state-development bank BNDES and the Treasury. Caixa also said it doesn’t consider a higher yield to be a consequence of increased provisions or delinquencies.

‘Very Difficult’

“Brazil had a very difficult environment in the first months of this year,” Chief Financial Officer Marcio Percival said in a telephone interview June 3.

Unemployment climbed to 6.4 percent in April, the highest since May 2011, as Brazil’s economic slump deepened. Just last week, the central bank boosted its key interest rate to a six-year high of 13.75 percent to stem inflation, which is expected to exceed the upper limit of its 2.5 percent to 6.5 percent target range for the first time since 2003.

The economy will shrink 1.3 percent this year, according to analysts in a central bank survey, after a 0.1 percent advance in 2014.

Percival also said the Brasilia-based bank is considering scaling back projected loan growth for 2015 because of the sluggish economy. Caixa will determine by the end of the month whether to lower the forecast, currently targeted for as much as 18.5 percent growth, he said.

Riskier Clients

“We clearly see a scenario in which Caixa’s numbers deteriorate,” Esin Celasun, an analyst at Fitch, said by telephone from Rio de Janeiro. “The bank, while being used as a public-policy instrument, exposed itself to clients that are riskier. And that becomes more evident when there is a slowdown in the economy.”

Loans that are more than 90 days past due now equate to 2.9 percent of Caixa’s 624.4 billion-real loan portfolio, the Brasilia-based bank said June 3. That’s the highest rate in six years.

Yields on Caixa’s 2024 bonds have climbed 0.4 percentage point this month to 7.9 percent, data compiled by Bloomberg show. That compares with a 0.1 percentage point rise in similar notes with equal maturity issued by Santander Brasil.

The real advanced 0.1 percent to 3.0947 per dollar Wednesday as of 12:26 p.m. in New York, the strongest level on a closing basis since May 21.

“It is now evident that they grew too much, too fast,” Joao Augusto Frota Salles, an analyst at consultancy firm Lopes Filho Consultoria de Investimentos SA, said by telephone from Rio de Janeiro. ‘The macro scenario is hard, and they’ll have to adjust.’’

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