Brazil's Worsening Corporate Credit Crisis Hits Bank Profits

  • Bradesco said to book $240 million loss for Sete Brasil
  • Provision raises concern Itau, Banco do Brasil may be next

Brazil’s worsening corporate credit crisis is forcing the nation’s biggest banks to book losses they had been able to avoid until now.

Banco Bradesco SA, the country’s second-biggest bank by market value, set aside 836 million reais ($240 million) in the first quarter to cover bad loans tied to oil-rig venture Sete Brasil Participacoes SA, a person with direct knowledge of the matter said Thursday, asking not to be identified discussing non-public information. Earnings fell 3.7 percent.

Itau Unibanco Holding SA, the biggest Brazilian bank by market value, and Banco do Brasil SA, No. 1 by assets, may be next. Itau, which reports first-quarter results on Tuesday, tapped a guarantee fund in February after Sete Brasil was unable to pay back loans from the Sao Paulo-based bank. State-owned Banco do Brasil has 4 billion reais in exposure to Sete Brasil and hasn’t yet booked all the related losses, according to people familiar with the matter.

“Bradesco’s provisions increase expectations about what may come from Itau next week,” said Max Bohm, an analyst at Empiricus Independent Research in Sao Paulo. “The higher provisions raise concern about what we might see in upcoming quarters, especially if you look at the rate of debt overdue for 60 days.”

Late payments in Brazil have been increasing as borrowers grapple with the nation’s worst recession in a century. The country’s delinquency rate for loans more than 90 days overdue held at a three-year high of 3.5 percent in March, according to central bank data. Bradesco’s figure climbed to 4.2 percent in the first quarter from 3.6 percent a year earlier. The bank’s 60-day rate rose 0.8 percentage point to 5.3 percent.

Brazilian corporations are struggling to pay back their loans as a two-year economic downturn, high interest rates, falling commodity prices and a weaker currency combine to savage profit and revenue. A worsening political crisis in which President Dilma Rousseff is fighting off an impeachment effort has paralyzed reforms intended to jump-start the economy.

Sete Brasil has 18 billion reais in total debt, mostly with local banks. Its finances were torpedoed when state-owned oil producer Petroleo Brasileiro SA slashed a lease order for rigs to 10 from an original 28 after oil prices collapsed and Petrobras became entangled in a nationwide corruption scandal. Sete Brasil shareholders decided on April 20 to seek bankruptcy protection, a company official said at the time, without giving details on creditors or the expected timing.

Caixa Economica Federal, another government-owned bank, has a 1.7 billion reais exposure to Sete Brasil, and Bradesco’s total is about $450 million.

Risks Obscured

Rather than setting aside provisions, many Brazilian banks have been restructuring loans, which could mask rising asset risks, Moody’s Investors Service said in an April 11 report. Such restructurings rose 37 percent at the end of 2015 from a year earlier, which may be understating loan delinquencies and overstating reserve coverage, the rating company said.

Officials at Bradesco, Banco do Brasil, Caixa and Itau declined to comment on Sete Brasil.

Bradesco shares fell 1.4 percent at 12:37 p.m. in Sao Paulo, while Itau dropped 1.7 percent and Banco do Brasil rose 0.8 percent. The Ibovespa index of the most-traded stocks declined 0.6 percent.

Senior bonds issued by Brazilian state-controlled banks Caixa Economica Federal and Banco do Brasil paid at least 80 basis points more in premium than the average for comparable notes issued in emerging markets, according to data compiled by Bloomberg.

One of the nation’s highest-level bankers called the corporate credit crisis the worst in the nation’s history as bankruptcy filings almost doubled to a record this year. Companies seeking protection from their creditors surged to 155 in February after rising 55 percent last year, according to data provider Serasa Experian.

The government-owned pension funds for workers at Petrobras, Banco do Brasil and Caixa Economica own about 38 percent of Sete Brasil, and their losses would depend on previous provisions, one of the people said. Banco Santander Brasil SA is also a shareholder.

Government Help

The FGTS retirement fund invested 2.5 billion reais in Sete Brasil’s debt and capital, guaranteed by Caixa Economica. If that doesn’t get repaid, the government will have to inject funds into Caixa Economica to support the company, according to Mansueto Almeida, an economic consultant who specializes in public finance.

“If you take 100 market analysts, 99 are betting that a capital injection for Caixa Economica will be necessary,” Almeida said. “The only one who isn’t making that bet is on vacation.”

Provisions for souring loans at Bradesco surged to 5.44 billion reais from 3.58 billion reais a year earlier, the bank said in a statement Thursday, and more provisions may be needed, Executive Managing Director Luiz Carlos Angelotti said on a conference call.

Bradesco’s return on equity, a measure of profitability, dropped to 17.5 percent in the first quarter from 20.6 percent a year earlier. Adjusted net income, which excludes one-time items, declined to 4.11 billion reais from 4.27 billion reais. That compares with the 4.35 billion-real estimate of nine analysts surveyed by Bloomberg.

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