Brazil Bank Stock Sale Signals Rousseff May Tap Wealth Fund

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Brazil’s sovereign wealth fund has started reducing its stake in Banco do Brasil SA as the government may tap the fund to help meet its fiscal target, said a person with direct knowledge of the matter. The shares plunged the most in six weeks.

The sovereign fund sold 1 million shares of Banco do Brasil last month, data compiled by Bloomberg show. While the initial share dump is small -- worth about 23 million reais ($7 million) -- it marks the beginning of what could be a bigger reduction of the fund’s 2.66 billion-real stake in the bank, according to the person, who asked not to be identified because the government’s plans aren’t public.

As President Dilma Rousseff seeks to avert a credit-ratings downgrade, she’s once again looking to the state-controlled bank for resources. In February, she tapped the bank’s long-time Chief Executive Officer Aldemir Bendine to lead a turnaround at Petrobras, the state-run oil company embroiled in Brazil’s worst-ever corruption scandal. In her first administration, Banco do Brasil led a surge in lending to help stimulate growth.

“The strategy to boost the portfolio’s liquidity was initiated as a prudent measure in light of the public sector’s fiscal-consolidation policy,” the Treasury said in an e-mailed response to questions. It said the fund initiated the “technical readjustement” on June 29.

Banco do Brasil shares fell 3.5 percent to 23.09 reais at 3:04 p.m. in Sao Paulo trading, the biggest drop on a closing basis since June 3. Banco do Brasil declined to comment.

‘Discounted’ Stock

“Banco do Brasil has always been very discounted in comparison with other banks because of the government interference,” said Joao Piccioni, an equity manager at Petra Asset Management, said in a phone interview from Sao Paulo. “This shows that the distrust has a good reason.”

Last year, then-Finance Minister Guido Mantega said Brazil could use its wealth fund to help meet its fiscal target. The government is aiming to post a budget surplus before interest payments, known as the primary surplus, equal to 1.1 percent of gross domestic product this year. In the 12 months through May, Brazil ran a primary deficit of 0.68 percent.

The administration sold Banco do Brasil shares to test the market and slowly diversify to minimize the impact on the company’s share price, said the person.

The shares sold represent less than 1 percent of the fund’s stake in the bank, as of June 30, regulatory filings show. The fund’s stake in Banco do Brasil represents about 80 percent of its total holdings.

It’s the first time the fund, called Fundo Fiscal de Investimentos & Estabilizacao, is unloading part of its stake since it started investing in Latin America’s largest lender by assets in July 2010, according to the fund’s website. The proceeds from the share sale were transferred to local government bonds, a July 8 regulatory filing shows

The nation’s sovereign fund was created in 2008 when Brazil was posting a primary budget surplus as the commodities boom was picking up. The government tapped 12.4 billion reais from the fund in 2012 to improve its fiscal results, a move that’s in accordance with budget rules.

With a 3.86 percent stake, the sovereign fund is the fifth-biggest shareholder of the bank’s common shares. The government controls Banco do Brasil with a 50.7 percent voting-share stake held through the Treasury.

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