Brazil State Banks' Bond Woes to Worsen After Years of LargessFilipe Pacheco, Chiara Vasarri and Ye Xie
Lenders' borrowing costs jump relative to Itau, Bradesco
Rousseff pushed state banks to boost lending to spur growth
After ratcheting up lending at the behest of President Dilma Rousseff, Brazil’s state-controlled banks may be in store for more pain.
Banco do Brasil SA, Caixa Economica Federal and development bank BNDES are seeing their borrowing costs in the bond market soar relative to those of their private-sector peers as Brazil’s longest recession in a century sparks a surge in delinquencies.
State banks are proving more vulnerable to Brazil’s woes after boosting lending by an annual average of 14.1 percent between 2012 and 2015 as Rousseff, who faces an impeachment vote in the Senate next month, unsuccessfully tries to revive growth in Latin America’s biggest economy. That compares with an increase of less than 1 percent by private counterparts including Itau Unibanco Holding SA and Banco Bradesco SA.
“The worst has yet to come” for Brazil’s state-owned banks, said Alejandro Garcia, head of Latin American financial institutions at Fitch Ratings.
Banco do Brasil and Caixa’s press office said the banks wouldn’t comment because they are in a quiet period. BNDES press office said in a statement that the bank has historically had low delinquency levels, below the average for peers. The bank implements strict credit risk analysis and expects delinquencies to remain at low levels, the note said.
During Rousseff’s five-year tenure, the banks supplanted their private-sector peers as the biggest lenders in Brazil mostly by providing subsidized funding for social programs. That included the "My House, My Life" mortgage-lending program popular among low-income Brazilians that was implemented primarily by Caixa.
Development bank BNDES -- whose $200 billion loan portfolio is bigger than the World Bank’s -- lends primarily at an interest rate that is 6.75 percentage points lower than the country’s benchmark rate, which now stands at 14.25 percent.
“The public banks have historically been encouraged by the government to lend at more favorable rates than some of the private banks,” said Arjun Bowry, an analyst at Bloomberg Intelligence. “The private banks have been proactive at cutting back risky credit lines.”
State banks are increasing provisions to cover so-called bad loans, which are at the highest level since May 2009 as the economy hemorrhages jobs amid the recession. In March, the country posted its 12th straight month of employment decline, the longest such streak since the government began tracking formal job creation in 2003.
Brazil’s economy will shrink 3.7 percent this year after contracting 3.8 percent in 2015, according to the median forecast of 40 analysts surveyed by Bloomberg. The real fell 1.7 percent on Monday to 3.4937 per dollar as of 1:53 p.m. in New York.
“Given their unprecedented credit exposure to the country’s retail and wholesale credit markets, the challenges they face for the next few years are much greater than in recessions of the 1980s and 1990s,” S&P Global Ratings analysts Edgard Dias and Sergio Garibian said in a report on April 26.