Itau, Bradesco Bet $14 Billion on Brazil Mortgage Market

Brazil’s two biggest privately owned banks are betting $13.5 billion on housing, helping to push mortgage rates to the lowest in two years at a time when borrowing costs are rising for the rest of the economy.

Itau Unibanco Holding SA and Banco Bradesco SA increased their home-loan portfolios by 32 percent each in the second quarter from a year earlier to 32.4 billion reais ($13.6 billion). That’s more than double what they had forecast for growth of all types of credit this year. The two Sao Paulo-based banks did this while the average mortgage rate fell to 11.94 percent in June from 12.91 percent in January, according to Brazil’s central bank.

The lenders are increasing their mortgage business as weaker economic prospects make other types of loans riskier. The slowdown is no accident -- the central bank has pushed up its benchmark rate to fight inflation. Rather than let their home-loan business sag, banks responded by making terms more attractive, with costs dropping to 3.94 percentage points above the Selic benchmark from 5.66 percentage points in January.

“Even if the central bank keeps raising Selic, the competition will maintain the mortgage rates flat or just a little higher,” said Octavio de Lazari, president of the nation’s real-estate lenders association, Abecip.

Banks can suppress rates because yields on savings accounts are lower, said Lazari, who’s also a deputy director at Bradesco. Payments on savings are tied to Selic and limited by law, ensuring cheap funding for the banks, he said. What’s more, lenders are required by law to use 65 percent of such deposits for mortgages.

Savings Soar

Net savings deposits in Brazil reached a record 37.6 billion reais this year through July, a 58 percent increase from the same period last year, according to the central bank.

Bankers justify the discounts by pointing to the lower risks on residential mortgages.

“Home loans now have real guarantees and the lowest delinquency rates among all types of credit,” said Luiz Franca, mortgage director at Itau Unibanco. Banks always charge mortgage clients a life-insurance premium, adding to the security of the loans, Franca said.

Easier access to mortgages, lower unemployment and rising incomes are pushing up home sales, and driving up values. Brazilian home prices rose 12 percent, twice as fast as inflation, in the 12 months through July, according to an index compiled by economics research institute FIPE and real-estate website Zap Imoveis. Average home prices nationwide reached 6,900 reais per square meter ($268.03 per square foot), the data show.

Prices Gain

Prices in Rio de Janeiro’s Leblon, Brazil’s most expensive neighborhood, reached 22,234 reais per square meter ($863.68 per square foot) in July, making a two-bedroom apartment of about 60 square meters (640 square foot) to cost $557,592. The average sales price per foot in the New York borough of Manhattan was $1,149 in the second quarter. Prices in Rio are higher than in Sao Paulo, Brazil’s richest city, as it has limited construction space because it’s surrounded by hills and beaches.

Home sales in Sao Paulo, Brazil’s biggest real-estate market, rose 46 percent in January through June from a year earlier, while housing starts climbed 51 percent, according to Embraesp, a property research group, and Secovi, a real-estate agency association. The ratio between newly built home offerings and completed sale transactions rose to 65 percent in the 12 months through July, up from 56.7 percent in December, data show.

IMF Concerns

The International Monetary Fund urged Brazil to be “cautious” regarding the home-loan market in a report in June.

“This lending product is experiencing very strong growth rates and commercial banks see in this sector a niche to gain market share,” the IMF said, adding that mortgage growth “has been accompanied by an asset price appreciation, indicating there may be signs of overvaluation in this market.”

Fabio Nogueira, mortgage director at Banco Pan, said worsening prospects for economic growth in Brazil will keep a lid on the housing market.

“There is no risk of a bubble, no overvaluation in the Brazilian market,” Nogueira said. “For most Brazilians, to own their own house is still a dream.”

New home construction is already slowing amid concern the unemployment rate will rise more, helping to stabilize housing price increases, he said. The unemployment rate was at 6 percent in June, up from 5.9 percent a year earlier, according to Brazil’s statistic bureau IBGE.

Lending Growth

Mortgage lending is expanding at twice the pace of total credit in Brazil, which rose 16 percent in June from a year earlier, according to central bank data. Outstanding home loans reached 298.4 billion reais in June, up 35 percent from 220.3 billion reais a year earlier, central bank data show. New housing loans rose 45 percent to 36 billion reais in the first half of this year from the same period of 2012, according to Abecip.

“Brazilian banks have finally woken up to the opportunities the mortgage market brings as a type of long-term lending that creates fidelity from clients, allowing them to offer other profitable products,” Lazari said.

Mortgage rates are falling even as the central bank boosts borrowing costs to control inflation. The benchmark Selic has climbed 125 basis points since April to 8.5 percent last month. Economists expect another 75 basis-point increase through the end of the year, according to a central bank weekly survey.

Delinquency Focus

Itau and Bradesco are focusing on products with better guarantees, such as mortgages, to stem losses from defaulted loans. Last quarter, Itau reduced its default rate to 4.2 percent, the lowest since March 2011, as it cut auto loans and focused on real-estate and payroll lending, according to its earnings statement.

Brazil’s mortgage delinquencies dropped to 2 percent in June from 2.13 percent a year earlier, according to the central bank. That compares with a consumer-loan default rate of 7.57 percent rate in June, down from 8.73 percent in the same month of last year, the data show.

Banco Pan, owned by Grupo BTG Pactual and Caixa Economica Federal, a federal government-controlled bank, can offer mortgages with interest rates as low as 8.4 percent a year, while Itau can go as low as 8.6 percent.

Government Subsidies

Caixa’s share of the mortgage market is about 70 percent, with a mortgage loan book of 238.5 billion reais at the end of June, according to its earnings statement. The Brasilia-based lender’s housing portfolio includes credit lines with government subsidized funding, with interest rates as low as 6 percent on the low-income housing program Minha Casa, Minha Vida (My Home, My Life).

The potential for more lending remains, because mortgages represent just 7.4 percent of gross domestic product in Brazil, compared with 76.1 percent in the U.S., according to data compiled by Brazil’s central bank.

“Mortgages in Brazil will continue growing gradually with sound basis,” Abecip’s Lazari said, adding he expects real-estate loans will reach 10 percent of Brazil’s GDP by 2015, expanding at 15 percent rate per year.