Mid-Size Company Lenders Post Worst Returns: Corporate Brazil

Banks focused on loans to mid-size firms including Banco Industrial & Comercial SA and Banco Daycoval SA are posting the worst returns among Brazilian lenders as their customers’ bankruptcy filings rise.

Total return at Banco Industrial, known as BicBanco, slumped 24 percent this year, according to data compiled by Bloomberg, after first-quarter net income fell 4 percent. Daycoval’s total return dropped 8.7 percent, the third-worst of the group behind BicBanco and Banco Pine SA. The lenders, which have market values of about 2 billion reais ($931 million) and less, are shifting to bigger clients or increasing consumer lending as bad-loan provisions rise. Some are abandoning clients with less than about 500 million reais in annual revenue.

“The overall economy’s performance has a huge impact on mid-size-company lenders,” Maria Celina Vansetti-Hutchins, managing director at Moody’s Investors Service in New York, said in a telephone interview. “Weaker growth increases banks’ selectiveness in doing loans, which fuels the credit squeeze for smaller firms that already have to deal with decreasing revenues from sales and, like a snowball, ends up hitting the banks’ balance sheets.”

Companies are struggling to pay their debt on time as economic growth slows. The economy’s 0.9 percent expansion in 2012 was the slowest in three years, and the number of companies that filed for legal protection from creditors in the first five months of 2013 reached 384, up almost 14 percent from a year earlier, according to credit-data provider Serasa Experian.

Loan Provisions

“If growth doesn’t pick up this year, the banks could end up with less profit because they don’t generate enough revenue from loans, and they would also have to increase their bad-loan provisions,” Vansetti-Hutchins said, adding that she sees no funding problems for mid-size banks yet.

The decline in total return for smaller banks contrasts with the performance of Brazil’s larger financial companies, which have less of their revenue coming from loans to small corporations. Total return at Itau Unibanco Holding SA, Brazil’s biggest bank by market value, dropped 1.9 percent this year, and No. 2 Banco Bradesco SA’s fell 7.2 percent.

BicBanco became more conservative in lending after suffering “from a mix of higher-than-average leverage and worsening credit quality in the small and mid-size segment in 2011 and 2012,” said Carlos Firetti, Bruno Chemmer and Gustavo Lobo, analysts at Banco Bradesco BBI SA, in a report last month in which they cut their recommendation on the bank to the equivalent of hold from buy.

BicBanco declined to comment, said an official who asked not to be named in keeping with company policy.

‘Highly Conservative’

“A highly conservative approach toward credit quality is likely to prevent BicBanco from posting higher returns until at least the end of 2014,” the Bradesco analysts said in their report.

BicBanco shifted its focus to larger companies with annual revenue of at least 500 million reais and reduced its workforce by about 20 percent, “which should begin to show more obvious gains in the second half of this year,” the analysts said.

Even as total return slumps, Daycoval stands out as the best-capitalized bank in the group, according to Fitch Ratings Ltd., which cited a core capital ratio of around 17 percent in 2012, up from 16 percent in 2011.

“We had two shareholders’ equity increases of about 400 million reais since the end of last year and that was what made our return on equity smaller,” said Ricardo Gelbaum, director of investor relations at Daycoval.

Payroll Loans

Daycoval’s net income in the first quarter fell 31 percent to 65.7 million reais from a year earlier. Loans outstanding grew 2.5 percent to 8.56 billion reais as the bank reduced credit for mid-size companies by 7 percent, to 5.3 billion reais, and increased less risky payroll-deductible loans by 29 percent.

“We are a diversified bank and we can shift our portfolio to more safe types of loans without losing margin,” Gelbaum said.

Robert Stoll, a director at Fitch Ratings in New York who covers Latin American financial institutions, said he’s “very confident” mid-size banks in Brazil are safe in the long term.

“Stock investors always want to see short-term performance, want to see return on equity -- they’re looking for good profitability numbers,” Stoll said in an interview. To a bond investor who wants to know if a bank will default, “you have to also look at the capital quality, at the return on assets, at the lender’s credits margins,” Stoll said.

Growth Recovery

Fitch estimates that the Brazilian economy will grow 2.7 percent this year and help banks rebound, he said.

Banco Indusval SA, which also makes loans to mid-size companies, has been changing its focus since March 2011 to companies with capital higher than 400 million reais, according to Chief Executive Officer Jair Ribeiro.

“Our new portfolio of loans now represents more than 90 percent of our total lending book,” Ribeiro said in an interview on June 6. “The old portfolio’s delinquency rates were very high.”

That diversification strategy will help some of Brazil’s smaller lenders recover, according to Rodolfo Amstalden, an analyst at consulting firm Empiricus Research in Sao Paulo.

“The diversification of banks specialized in mid-size companies is the only possible way for them,” Amstalden said in a telephone interview.

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