Banco do Brasil Falls to Six-Year Low After Brazil Downgrade

  • Brazil's federally owned bank leads other lenders lower
  • Credit-rating downgrade is likely to increase funding costs

Banco do Brasil SA’s bonds declined and its shares sank to a six-year low, leading a drop among Brazilian banks on concern a cut in the nation’s credit rating to junk will mean higher funding costs for lenders.

State-owned firms such as Brasilia-based Banco do Brasil will probably be hardest-hit by Standard & Poor’s decision to downgrade Brazil on Wednesday, said Max Bohm, an analyst at consulting firm Empiricus Research. The rating company reduced the country to BB+ with a negative outlook.

“It will be more expensive for banks to issue bonds abroad,” Bohm said in a telephone interview from Sao Paulo Thursday. “Banco do Brasil is suffering more than the other banks just because the government is its controlling shareholder.”

S&P said political challenges are hindering the government’s ability to submit a 2016 budget consistent with fiscal-reform plans to Congress. President Dilma Rousseff, already grappling with what’s predicted to be Brazil’s longest recession since the 1930s, has failed to raise taxes and cut costs to achieve fiscal targets. The rating company said there’s a greater than one-in-three chance of another downgrade.

Banks’ ratings are likely to be downgraded next, Bohm said.

Shares Drop

Banco do Brasil dropped 1.8 percent to 16.85 reais in Sao Paulo at 5:07 p.m., compared with a 0.3 percent decline for the Ibovespa benchmark index. The bank sank as much as 5.8 percent, reaching its lowest level since March 2009. Its perpetual bonds slid 3.1 percent to 74.81 cents.

Itau Unibanco Holding SA, Latin America’s biggest bank by market value, dropped 2 percent to 26.47 reais, after falling as much as 3.7 percent earlier Thursday.

Though the downgrade will increase banks’ cost of funding, they are well capitalized and don’t need to issue bonds abroad, since lending is expanding at a slow pace, said Gilberto Tonello, an analyst at Grupo Bursatil Mexicano.

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