Brazil Banks’ Lower Provisions Seen Masking Credit-Quality Woes

  • Second-quarter results will probably show drop in provisions
  • Delinquency rates seen rising until second half of 2017

Itau Unibanco Holding SA, Banco Bradesco SA and Brazil’s other major banks are expected to post their first quarter-over-quarter decline in bad-loan provisions in at least a year when they report results in coming days. The good news will probably be short-lived.

“The provision decrease doesn’t mean a credit-quality improvement,” Andre Riva, an analyst at GBM Grupo Bursatil Mexicano SA, said in a phone interview from Mexico City. “Delinquency rates will continue climbing until at least the first half of 2017 before starting to fall in the second half.”

Provisions jumped in the first quarter as banks took into account the looming failure of Sete Brasil Participacoes SA, the oil-rig supplier that filed for bankruptcy protection in April with 18 billion reais ($5.5 billion) in liabilities. Itau, Bradesco and Banco do Brasil SA missed analysts’ earnings estimates because of higher-than-expected set-asides.

The second quarter was mostly free of that kind of credit catastrophe for banks, but Brazil’s worst recession in more than a century continues to push unemployment and loan-delinquency rates higher. One key measure of late payments -- debt not earmarked for a specific purpose that’s more than 90 days overdue -- climbed to a record 5.9 percent in May, according to the central bank.

High Level

The lack of major corporate credit failures in the second quarter means provisions will drop when banks report results, Credit Suisse Group AG wrote in a note to clients. The decline won’t be substantial and the levels remain unusually high, Riva at Grupo Bursatil Mexicano said.

Officials at Itau, Bradesco, Banco do Brasil declined to comment on provisions. Bradesco will report second-quarter earnings on July 28, followed by Itau on Aug. 2 and Banco do Brasil on Aug. 11. Itau’s second-quarter report will for the first time consolidate results from Corpbanca SA, the Chilean bank acquisition it completed in April.

Bradesco booked an 836-million-real provision related to Sete Brasil in the first quarter, a person directly involved in the matter said at the time.

Itau’s provisions rose 31 percent to 7.23 billion reais for the period, an increase the bank attributed to “specific corporate cases” that it didn’t name. In May, Itau said the first-quarter increase was “anticipatory” and not related to one specific company. The oil-and-gas sector was one of the industries that required higher provisions, Marcelo Kopel, the bank’s investor-relations officer, said at the time, declining to comment on Sete Brasil.

Banco do Brasil, Sete Brasil’s second-biggest creditor, boosted provisions to 9.15 billion reais in the first quarter, up from 5.65 billion reais a year earlier. In the previous quarter, the Brasilia-based lender set aside funds to cover 70 percent of its approximately $1 billion exposure to the oil-rig supplier, up from 30 percent, according to three people familiar with the bank’s finances.

Oi Bankruptcy

Last month, telecommunication company Oi SA filed for bankruptcy protection from creditors with a record 65 billion reais in debt. Banco do Brasil “will probably make some provisions for Oi but the magnitude tends to be lower” than in the first quarter, Itau analysts wrote in a report to clients. GBM’s Riva also said Oi will require fewer provisions.

Banco do Brasil will book about 650 million reais in increased provisions for its 2.4 billion reais loans to Oi, one person familiar with the matter said last month. The lender has 4.3 billion reais of exposure to Oi debt, according to the phone company.

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