Brazil Banks Don't Expect Bad-Loan Surge But Provision Billions

  • Bradesco, Itau squirrel away $17 billion as recession deepens
  • Both banks say bad-loan rates won't return to 2009 peak

As top executives at Banco Bradesco SA and Itau Unibanco Holding SA say Brazil’s crisis won’t lead to skyrocketing delinquencies, they’re squirreling away billions of dollars in provisions for bad loans just in case.

Brazil’s two biggest banks by market value boosted allowances for loan losses, which include extraordinary provisions, by 30 percent to 62.9 billion reais ($17 billion) at the end of the third quarter, setting aside enough money to cover a doubling of bad loans, financial statements show. Banco do Brasil SA, the biggest bank by assets, will release results this week.

On conference calls in the past two weeks, executives from both banks told investors and reporters the quality of their loans means delinquencies won’t rise significantly, even as Brazil heads for its longest recession since the Great Depression and unemployment climbs. Bradesco’s executive managing director, Luiz Carlos Angelotti, said bad loans will rise only “slightly” and said he doesn’t expect to have to tap the rainy-day funds. Itau’s investment-relations director, Marcelo Kopel, said overdue debt will increase “toward the end of 2016 and beginning of 2017,” but stay well below the peak seen in the 2009 global financial crisis.

“I wouldn’t call it super conservative -- Bradesco and Itau are being prudent,” Samuel Torres, an analyst at Fator Corretora in Sao Paulo, said in a phone interview Tuesday. “Delinquencies will continue climbing, and the banks will probably end up having to use the additional provisions.”

Bradesco and Itau declined to comment for this article.

While analysts are positive on the companies’ shares, investors have dumped Itau and Bradesco as a sweeping corruption scandal in Brazil, a worsening recession and plunging commodities prices cause a surge in defaults and send unemployment to the highest this decade. Itau has fallen 13 percent this year and Bradesco is down 27 percent, outstripping the 8 percent decline for the Ibovespa index.

In recent years, Itau and Bradesco have been boosting their exposure to safer credit lines such as payroll lending and mortgages, while dumping consumer lending, especially vehicle loans.

“Our portfolio now is much less risky than it was at any time in the past,” Carlos Firetti, Bradesco’s investor-relations officer, said on an Oct. 30 conference call.

Itau said in its third-quarter earnings release it increased its coverage ratio to 214 percent of its portfolio of loans at least 90 days overdue, up from 181 percent a year earlier. Bradesco lifted the ratio to 206 percent from 187 percent. Delinquencies reached 3.3 percent of Itau’s 477.2 billion-real loan portfolio and 3.8 percent of Bradesco’s 366.1 billion-real portfolio. That’s down from a 2009 peak of 5.9 percent and 5 percent, respectively.

“Unemployment is rising, some companies aren’t honoring their debts,” said Joao Pedro Brugger, a money manager at Leme Investimentos, which oversees about 500 million reais in assets. “Cautiousness is the most correct attitude at the moment.”

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