Brazil State Banks Adopt Optimistic Outlook Amid Recovery Hopes, Reports Reuters

By Guillermo Parra-Bernal

SAO PAULO – Brazil’s state-controlled banks, which have experienced rising defaults and loan-loss provisions this year, are expressing more optimism than their private-sector counterparts about the recovery of Latin America’s largest economy from its severe recession.

Executives from Banco do Brasil SA, the country’s largest bank by assets, indicated on Friday that they believe loan-loss provisions likely peaked in the second quarter, anticipating a recovery in household and corporate financial health following a two-year crisis. Caixa Econômica Federal, the leading mortgage lender, expects a decline in defaults by year-end.

This positive outlook is in stark contrast to that of Brazil’s two largest private-sector banks, Itaú Unibanco Holding SA and Banco Bradesco SA, which do not foresee a drop in defaults until June of the following year. Both banks faced a surge of requests to renegotiate existing loans last quarter as many of their significant corporate clients struggled financially due to the economic downturn.

The ongoing recession is compelling both state and private banks to reclassify at least 90 billion reais (approximately $28 billion) in troubled corporate loans, with bankruptcy filings having doubled in the last year. Analysts estimate that over half of this amount is still on the balance sheets of state lenders.

"I can assure you that our management has been more conservative than many private-sector banks," stated Paulo Rogerio Caffarelli, who recently assumed the role of CEO at Banco do Brasil.

Caffarelli and Gilberto Occhi, CEO of Caixa Econômica, are receiving cautious optimism from investors. Shares of Banco do Brasil have risen 8.3 percent since last Thursday, marking the bank’s largest two-day increase in over a month.

Following the ousting of Workers Party leader Dilma Rousseff in May, Brazil’s interim President Michel Temer appointed Caffarelli and Occhi as part of a broader reorganization of leadership in state firms.

On Friday, Occhi noted that quicker loan renegotiations at Caixa had helped lower the default ratio in the previous quarter. In contrast, Caffarelli and his team at Banco do Brasil suggested that future unexpected cases of troubled borrowers are unlikely—a prediction their counterparts at Itaú and Bradesco have been reluctant to make.

"While asset quality remains a concern for the sector, results across the industry indicate that we are nearing the bottom," said Tito Labarta, an analyst, who added that Banco do Brasil is likely to benefit the most from a recovery.

Optimism

Banco do Brasil further fueled optimism by raising its annual interest income growth target to between 11 percent and 15 percent, up from the previous range of 7 percent to 11 percent set in February. Caffarelli highlighted the "ample room for loan repricing" that exists even if the bank reduces loan disbursements through the end of the year.

However, loans that are overdue by at least 90 days at Banco do Brasil saw their largest increase since 2009 in the second quarter, which caused recurring net income to fall short of analysts’ expectations.

Caffarelli emphasized that Banco do Brasil has more flexibility than Itaú or Bradesco to raise loan prices and predicted a rebound in credit demand in early 2017.

Caixa Econômica reported a remarkable 91 percent increase in quarterly profit despite having to double its loan-loss provisions.

"We believe we can reverse the negative cycle, particularly concerning defaults," Occhi stated during a press conference.

In recent weeks, modest growth in retail sales and industrial production has sparked optimism that Brazil is beginning to recover from its longest recession since the 1930s. The transition to a more business-friendly administration following Rousseff’s removal has contributed to significant gains in Brazil’s stock market, bonds, and currency since April.