Defaults Should Brake Credit Growth Even With Lower Interest Rates, says Serasa

May 7, 2012 by

Translated from Valor Econômico
May 4, 2012

SAO PAULO – Defaults should curb consumer credit in the coming months even with the drop in interest rates, according to the prediction of Serasa Experian. The indicator that measures the company’s prediction for lending in the six months ahead declined 0.4% in March, reaching the 100.1 level.

Serasa reiterated that default leads to greater selectivity in lending between financial institutions. Moreover, the rise in household debt decreases the space in the budget for the consumer to take on new debt.

According to Serasa’s analysis, the new lending for consumer credit should evolve throughout 2012, but at a slower pace than in 2011.

“The recent interest rate cuts announced by several financial institutions should not produce a significant acceleration of loans to individuals,” the company said in a statement, which notes that the default level is still high.

In the city of São Paulo, for example, the percentage of families with delinquent accounts reached 21.8% in April, its highest since September 2007, when it marked 23.5%, according to a survey of the Federation of Trade in Goods, Services and Tourism of the State of São Paulo (FecomercioSP), also published today.

With regard to companies, the picture is a little better. The indicator that measures the Serasa credit outlook for this segment increased 0.1% in March 2012, to 98.4.

Since the indicator predicts the movement of lending to six months in advance, its elevation indicates that credit to businesses should react more intensely  to the economic stimulus during the second half of this year (Translators note: government stimulus should kick in full gear for businesses in the second half).

“The expansion of fiscal incentives, the prospects for gradual improvement in the international financial picture, and the further reduction of the Selic rate should boost business demand for credit, especially during the second half of 2012,” says Serasa.

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Defaults in São Paulo in April are highest since 2007, says FecomercioSP

May 7, 2012 by

Translated from Valor Econômico
May 4, 2012

SAO PAULO – Sao Paulo
The percentage of families with delinquent accounts reached 21.8% in April, its highest since September 2007, when it registered 23.5%, according to the Survey of Consumer Debt and Default, of the Federation of Trade Goods, Services and Tourism of the State of São Paulo (FecomercioSP).

In the same period last year, 14.3% of households had debt in arrears. In March, this share was 18.5%.

Among consumers with accounts in arrears in April, 46.2% have delayed for more than 90 days, 19.2% have arrears up to 30 days and 33.1% of families are in arrears between 30 and 90 days.

On the positive side, the FecomercioSP research also showed that the number of families who will not be able to afford all or part of its debt fell 4.8% in March to 3.9% in April, which represents 140,800 families.

Moreover, the total number of people indebted (with accounts in arrears and paying on time) fell from 52.2% to 50.6% between March and April, which is equivalent to 1.81 million families. According to the organization, this drop is due largely to the benefits acquired at Christmas (Translator Note: Brazilians that earn a salary get an automatic bonus equal to one month at the end of the year). The vehicle financing makes up 10.2% of household debt. According to the Central Bank (BC), the level of defaults in this segment is 5.52%, the highest since the beginning of the series in 2000.

Debt Profile

In April, 23.1% of São Paulo said they owed debts with payments scheduled for more than one year, 52.9% from three to twelve months and 20.6% for less than three months. The portion of families with monthly debt service between 11% and 50% of their income came in at 56.9%. Another 22.3% committed less than 10% of the family income and 17.2% committed more than 50%. (Translator’s note: 17.2% of families are paying more than 50% of their income to service debt – that is a big number!).

The principal means used to incur debt remains the credit card; 76.2% of São Paulo have some debt due to purchases paid in this form. The percent of debt incurred through payment booklets fell from 28.2% to 15.2%, behind the personal credit, the second most common form of debt, which stood at 19.6%.

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Mágica do Mantega: Oportunidade para os FIDCs

Apr 27, 2012 by

O Governo Federal do Brasil tem deixado muito claro, está pretendendo entrar numa era ousada para desenhar e manipular os mercados financeiros na visão dele.  Baseados nas afirmações da Presidente Dilma, os bancos públicos já embarcaram numa missão para baixar os spreads de crédito no Brasil e dirigir a economia para evitar uma recessão.  Este mandato dos bancos pode ter implicações de longo alcance.

Guido Mantega, o Ministro da Fazenda, tem a responsabilidade por executar este mandato.   Achamos que esta estratégia já está interferindo nos mercados de crédito no Brasil.  O comportamento do crédito nestes mercados tornou-se mais oculto ao passo que os bancos públicos continuam a emprestar dinheiro diante de uma economia lenta e uma inadimplência maior.  Sendo que o alvo público é baixar os spreads, o governo federal está usando os bancos públicos às margens para apoiar a economia e ajudar os bancos a limpar os balanços deles.

O nível de inadimplência nos bancos de dados do Banco Central está subindo para pessoa fisica ao passo que o nível está caindo para pessoa jurídica.  Os dados da agência Serasa Experian, por sua vez, mostram que o nível de inadimplência está subindo muito e já ultrapassou os níveis piores de 2008 e de 2009.  Todas as peças neste quebra-cabeça ainda não se juntaram, mas parece que os bancos públicos estejam absorvendo os créditos pobres dos bancos privados.

Vemos oportunidades para o mercado dos FIDCs neste cenário, especialmente para os FIDCs lastreados no crédito das micro e pequenas empresas.     Percebemos que os bancos públicos não têm os balanços para financiar o mercado inteiro, porém terão balanços suficientes para forçar os bancos privados a fugir do mercado das pequenas empresas.  Isso deixará este mercado sem financiamento e fornecer muitas oportunidades para os investidors nos FIDCs.

PIB e Produção Industrial são Fatores Chaves

O crescimento do PIB e Produção Industrial tem decepcionado os economistas por quase um ano.  (Gráfico 1).  Não houve nenhum sinal de que a economia brasileira já tenha caído completamente.  Isso é importante, pois não antevemos uma melhoria no desempenho do crédito antes de uma melhoria na economia.  Em todas as recessões nos últimos dez anos o nível de inadimplência piorou por mais seis meses.  (Gráfico 2)

Gráfico 1

 

 

Gráfico 2

 

Desempenho de Inadimplência

Como os dados da economia estão piorando e estão abaixo das previsões, nós teríamos expectativas baixas para os níveis da inadimplência e falência.  Contudo, os dados do Banco Central mostram que o nível de indimplência para pessoas físicas tem subido lentamente e o nível para pessoas jurídicas tem caído um pouco. (Gráfico 3)

Gráfico 3

Uma Economia Melhor no Futuro

Para ser justo, há muitos motivos para esperar uma melhoria no desempenho do crédito do Brasil em um futuro próximo.   Em uma entrevista no jornal Estado de São Paulo (18 de março de 2012), Murilo Portugal, presidente da Federação Brasileira de Bancos (Febraban) apontou que o Cupom tinha baixado a taxa Selic 2,75% desde agosto 2011 e o Cupom já diz que vai baixar a taxa até 9,0%.  Além disso, o governo aumentou o salário mínimo 14% e tem introduzido outras medidas macroprudenciais.  Apesar dessas medidas, ele está antevendo a melhoria no nível da inadimplência no final de 2012.

Nas manchetes da Serasa Experian de 15 de março de 2012, estava escrito “ Pior momento para inadimplência dos consumidores fica para trás.” A Serasa Experian também mencionou os fatores que Sr. Portugal discutiu e explicou.  O “Indicador  Serasa Experian de Perspectiva – Inadimplência do  Consumidor” caiu 1,3% em janeiro 2012 e atingiu 99,7 pontos. Baseado na metodologia usada para construção, o indicador tem a tendência de prever os movimentos cíclicos à frente. Isto quer dizer que a Serasa Experian também está esperando que os níveis de pagamentos atrasados caiam no segundo bimestre. Ao mesmo tempo, os dados próprios da Serasa Experian não colaboram completamente com o modelo.

Evidencias Indisputáveis

Uma prova inalterável sobre os empréstimos inadimplentes mostra que o problema com o crédito está historicamente em altos níveis. Este dado é o Indicador de Inadimplência do Consumidor da Serasa Experian. Por quê Os dados do Serasa Experian mostram o registro atual de empréstimos inadimplentes nos cartórios.  A outra fonte desses dados, o banco de dados do BCB mostra que as provisões contáveis que companhias financeiras têm que reservar para cumprir com os regulamentos do BCB. Os dados do BCB mostram provisões contáveis, a Serasa Experian mede a decisão genuína do credor de classificar um empréstimo como inadimplente e o começo do processo de falência, que é o registro de uma dívida no cartório.

No primeiro semestre de 2010, o Indicador de Inadimplência do Consumidor da Serasa Experian  alcançou o pior nível visto na crise global de 2008/2009. O Indicador de Inadimplência das Empresas ultrapassou os piores níveis em 2009 no começo de 2011 e continua a crescer em 2012. O Indicador de  Inadimplência do Consumidor mostrou sinais de declínio do pico de 2011, mas o nível continua elevado em 2012.

Gráfico 4

 

 

Além disso, o atual número de Falências Requeridas e Falências Deferidas alcançou alto nível,  igual a 2008/2009. Há muitos sinais de problemas não resolvidos. Na edição de 23 de março de 2012 do Valor Econômico, Silvia Rosa escreveu que havia 595 pedidos de recuperação judicial para os 12 meses completados em fevereiro 2012. Isso foi 29% a mais que o período anterior. Com o crescimento de falências temos visto muitos fundos de abutres com operações no Brasil para reestruturar empresas. No final não vemos uma história de crédito saudável no sistema brasileiro.

A Presidente Dilma Rousseff publicou abertamente que ela quer usar os bancos públicos do Brasil para baixar os “spreads”.  No gráfico 6, podemos ver que os bancos públicos têm obedecido. O débito com bancos públicos, como uma porcentagem de PIB, tem crescido 17,7% desde janeiro 2010.  Ao passo que o débito com os bancos privados, como uma porcentagem de PIB, tem crescido somente 8,3% no mesmo período.

 

Gráfico 5

 

Gráfico 6

Os bancos privados estão preocupados e com razão.  Este crescimento está vindo de padrões frouxos na emissão de crédito. Nossa conclusão é a de que as ações do Brasil já começaram a interferir nos mercados de créditos. Na ediçao de 2 de marco de 2012 do DCI, a Tendências Consultoria observa que um total de crédito inadimplente mais do que 60 dias  significa R$139,2 bilhões, contudo, as operações de crédito que foram canceladas somam R$180 bilhões.

Em outras palavras, os bancos privados estão cancelando linhas de crédito e deixando as empresas sem financiamento.  Isso é o que acontece quando os spreads não estão aumentando e a inadimplência está no auge. No dia 23 de marco de 2012, o valor das ações do Banco do Brasil caíram 3,24% e os rumores do mercado atribuíram a queda às preocupações com os possíveis problemas na carteira de crédito.

Gráfico 7

 

O Valor Econômico também publicou uma história sobre as restrições que os empréstimos de débitos do consumidor têm sobre orçamentos familiares. (Arícia Martins, Aumento das dívidas deve retirar fôlego do consumidor, março de 23 de 2012.) A jornalista citou alguns economistas que estavam preocupados sobre o nível de débito do consumidor. Um caso de preocupação maior, sobre o qual nós escrevemos no terceiro trimestre do ano passado, na nossa edição de créditos, é que o débito continua a crescer para empréstimos já emitidos. Sergio Vale, economista na MB Associados discute esse problema no artigo do Martin. Ele concluiu que orçamentos familiares estão sendo pressionados  da mesma forma por pagamentos para o principal como para os juros. Isso indica que o serviço de débito não é suficiente para amortizar o principal e os pagamentos precisarão aumentar para haver reduções verdadeiras no débito do consumidor.

Considere outros fatos:

-       O Fundo de Garantia de Tempo de Serviço  do Brasil, FGTS, comprou 30% de todas as hipotecas securitizadas que foram emitidas no Brasil em 2011.

-       Há uma pressão do governo para forçar a carteira de investimento público a tirar os investimentos com retornos baseados no SELIC e aplicar nos investimentos vinculados à inflação.

Oportunidade para os FIDCs e outras finanças estruturadas no Brasil

O Brasil tem decidido todas as opções para amortecer a economia fraca e prevenir uma recessão. É muito difícil prever se o Brasil será bem sucedido com este esforço.  As probabilidades estão contra, mas o Brasil já confrontou este tipo de problema antes, algumas vezes fracassou completamente.

Nós duvidamos que o governo tenha o balanço necessário para salvar a economia brasileira com a diminuição dos spreads bancários no mercado financeiro brasileiro. No entanto, temos certeza de que o governo tem o balanço necessário para esmagar o mercado e causar distorções no processo de alocação de crédito.

Os bancos não terão muito incentivo para servir pequenas e médias empresas se eles forem forçados a apertar os “spreads” sem nenhum melhoramento econômico sob perspectiva, e terão grandes probabilidades de perdas significantes. Se os bancos não puderem ampliar os “spreads” para receber compensação para os grandes riscos, eles pararão de fazer empréstimos para empresas menores e também para empresas de risco.

Pessoas Físicas e Pessoas Jurídicas têm usado constantemente estruturas financeiras para preencher esta lacuna. Estruturas financeiras, como os FIDCs, oferecem soluções flexíveis para ajudar o credor a gerenciar os riscos de crédito.  Alguns bancos já têm empréstimos estruturados  como FIDCs para reduzir o risco de inadimplência da “colateralização”. O risco de crédito continuará a crescer e piorará o ambiente econômico. Investidores com experiência para oferecer estruturas criativas deveriam receber um retorno gratificante neste mercado.

Vernon Budinger, Principal

Latin America Structured Finance Advisors, LLC

vbudinger@latamsfc.com

 

Jason Smith, Portfolio Manager

Latin America Structured Finance Advisors, LLC

jsmith@latamsfc.com

 

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Mantega Magic: Opportunities for Brazilian ABS

Apr 20, 2012 by

The Brazilian government has made it abundantly clear that it plans to enter into a bold new era of designing and engineering financial markets. Based on President Dilma’s publicly stated vision, the public banks have embarked on a state mission to lower credit spreads in Brazil and steer the economy away from a recession. This new mandate for the public banks could have far reaching implications for Brazil’s credit markets.

Finance Minister Guido Mantega has been charged with this initiative. We believe that this strategy is already mucking up Brazil’s credit markets. Credit behavior has become murky within Brazil’s financial markets as the public banks continue to increase their lending in the face of a slowing economy and raising defaults.  While the stated objective is the reduction of credit spreads, the Brazilian government is covertly using the public bank balance sheets to shore up the Brazilian economy and help the private banks maintain clean balance sheets.

The result is that the Banco Central do Brasil (BCB) data shows that percentage of bad loans in bank portfolios is declining slightly for businesses and increasing only slightly for consumers. On the other hand, the data from the credit agencies, such as Serasa Experian, shows that bad loans in the financial system have surpassed the levels seen in 2008 and 2009, and that the problem has only begun to get better. All the pieces of the puzzle are not entirely in place, but the public banks seem to be absorbing much of the bad credit from the private banks.

We see opportunities for FIDCs designed for small and micro-sized companies in Brazil amid this situation. We feel that Brazil’s public banks will not have the balance sheet to serve the entire market, but they will lower spreads enough to force the banks to focus on only the largest, most profitable companies. This will leave an entire sector of the economy without access to normal bank credit channels and opportunities for structured finance.

GDP and Industrial Production are Key Factors

Brazil’s GDP and Industrial Production have disappointed analysts now for about a year (See Exhibit 1). There has been no clear sign that the slowdown in Brazil’s economy has reached a final resting point. This is important because we do not see the outlook for credit improving until the economy bottoms out. Just the day before we released this report consumer inflation, as measured by IPCA-15, came in well below economist’s estimates and indicates the further reductions in economic growth. This bottom is important because every downturn in Industrial Production is followed by deteriorating credit conditions and that credit quality tends to worsen for six months after the bottom of the economic downturn. (See Exhibit 2)

 

Exhibit 1

 Exhibit 2

  

Questionable Loan Performance Data

With economic data declining and coming in much worse than expected, we would expect to see late payments and defaults increasing.  However, BCB data indicates that the credit markets are fairly stable. The BCB data shows that late payments on consumer credit has been increasing mildly over the last year and that business credit performance has not deteriorated at all. (See Exhibit 3)

 

Exhibit 3

 

Better Performance on the Horizon

To be fair, there are several reasons to expect credit performance to improve in the near future. In the March 18th Estadado de São Paulo interview, the president of the Federation of Brazilian Banks (Febraban), Murilo Portugal pointed out that the Cupom has lowered the SELIC rate 275 basis points since August 2011 and has stated that it plans to reduce the rate another 75 basis points to 9.0%. In addition, the government has increased the minimum salary and introduced other incentives to the consumer. However, Mr. Portugal felt that defaults would peak in the second half of 2012.

The headlines in the March 15th Serasa Experian news release read “The Worst Moment for Late Payments from Consumers is Behind Us.” Serasa Experian also cited the factors that Mr. Portgual discussed and explained that its indicator “Perspective for Late Payments of the Consumer” fell 1.3% in January 2012, touching 99.7 points. Based on the methodology used for construction, the indicator has the tendency to predict the cyclical movements six months in forward. This means that Serasa Experian is also expecting the level of defaults to decline in the second half. However, Serasa Experian’s own data does not completely corroborate their model.

Indisputable Evidence

The one tamper-proof measure of nonperforming loans shows that problem loans are at historically high levels. This is the credit performance data from Serasa Experian in Brazil. Why?  Serasa Experian records the actual registration of nonperforming loans with private agencies called “cartórios”  that are licensed by the government. The other source of this data, the BCB database, measures accounting provisions that finance companies have set aside to comply with the BCB’s regulations. The BCB data shows accounting provisions, Serasa Experian measures the creditor’s genuine decision to classify a loan as nonperforming and initiates the default process, which is the registration of the debt with a “cartório.”

In early/mid 2010, Serasa/Experian’s index for nonperforming consumer loans passed the  worst levels seen in the 2008/2009 global credit crisis. The index for nonperforming business loans rose above 2008/2009 levels in early 2011 and continues to rise in early 2012. The consumer nonperforming loan index has shown signs of coming off the highs seen in 2011, but still remains at elevated levels in 2012. (Exhibit 4)

 

Exhibit 4

 

 

Furthermore, the number of actual number of bankruptcies resolved through court ordered recovery has also reached 2008/2009 levels. (Exhibit 5)  There are many signs of ongoing problems.   In the March 23rd edition of Valor Econômico, Silvia Rosa writes that there were 595 requests of judicial recovery (one form of bankruptcy) for the 12 months ending in February 2012.  That was 29% higher than the previous period. The growth in bankruptcies has seen a surge in vulture funds operating in Brazil to restructure companies.  Bottom line: we do not see a really healthy credit system in Brazil.


Exhibit 5

 

President Dilma Rousseff has publicly stated that she wants to use Brazil’s public banks to force interest rate spreads to tighten. Exhibit 6 shows that the public banks have been obeying; debt at public banks as a percent of GDP has grown 17.7% since January 2010, while debt as a percentage of GDP has only grown 8.3% for the private banks over the same period.

The private banks are concerned, and rightly so, that this growth is coming from lax underwriting standards. Our conclusion is that Brazil’s actions have already begun to jam up its credit markets.  In the March 2nd edition of DCI, Tendências Consultoria observes that the total of credit over 60 days past due equals R139.2 billion, however, credit operations that have been canceled sum to R1$80 billion. 

In otherwords, banks are canceling lines of credit and leaving firms without financing. This is what happens when preads are not increasing and defaults are rising. (Exhibit 7) On March 23rd, Banco do Brasil was down 3.23% and market rumors attributed the fall to concerns over future problems in its consumer loan portfolio.

Valor Econômico also released a story about constraints that consumer loan debt service  on household budgets. (Alicia Martins, Aumento das dívidas deve retirar fôlego do consumo, March 23rd )  The journalist quotes several economists who are concerned about the level of consumer debt.  One subject of deep concern, which we wrote about last year in our third quarter review of the Brazilian credit markets, is that the debt load continues to grow for outstanding loans.  Sérgio Vale, economist at MB Associates, discusses this problem in Martins’article.  He concludes that household budgets are being pressured as much by principal payments as by interest.  This indicates that the debt service is not sufficiently large enough to amortize the outstanding principal and that it will need to increase in order to see true reductions in consumer debt.

 

Exhibit 6

Exhibit 7

 

Consider some other facts:

  • Brazils social security fund, FGTS, bought 30% of all securitized mortgages that were issued in Brazil in 2011.
  • There is a push to force government investment portfolios to move out of investments with returns based on SELIC and into investments indexed to inflation.

Opportunity for FIDCs and other Structured Finance in Brazil

Brazil has decided to pull out all stops to cushion the economic slow down and prevent a recession. It is difficult to predict if Brazil will succeed in this effort. The odds are against it, but Brazil has pulled off this kind of feat before. It has also failed spectacularly.

We doubt that the Brazilian government has the balance sheet to save the Brazilian economy by forcing the credit spreads lower in Brazlian financial markets . It does, however, have the balance sheet to muck up the markets and cause distortions in the credit allocation process.

Banks will not have much incentive to serve the small and medium-sized companies if they are forced to tighten spreads significantly with no improvement in the economic outlook and significant probability of higher losses. If banks cannot widen their spread to receive compensation for greater risk, they will just stop making loans to smaller and riskier companies.

Businesses and financing companies have used structured finance to fill this gap before. Structured finance, such as FIDCs, offers flexible solutions to help creditors manage credit risks. Some banks have already structured loans as FIDCs to reduce the default risk through overcollateralization. Credit risk will continue to increase with the worsening economic environment. Investors with the background to offer creative structures should be able to earn significant returns in this market.

 

Vernon Budinger, Principal

Latin America Structured Finance Advisors, LLC

vbudinger@latamsfc.com

 

Jason Smith, Portfolio Manager

Latin America Structured Finance Advisors, LLC

jsmith@latamsfc.com

 

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COPOM Meets Today and Tomorrow: Expect Lower Rates

Oct 19, 2011 by

The COPOM began the second-to-last meeting of the year today and the market is expecting a 50 basis point interest rate cut. We continue to believe that the COPOM and the Banco Central do Brasil (BCB) see growing problems in the non-bank financial sector and worry that these problems will weaken Brazil’s entire financial system. In our opinion Brazil continues to protect the financial system with lower interest rates in the face of inflation that is above the BCB’s own target. The financial markets seem to have the same view but few people are discussing this problem openly.

In the graph below we show that the Brazilian swap market (DI curve) is roughly in line with analysts’ expectations. The swap curve estimates are slightly higher in the beginning because they are being anchored by the current DI rate/SELIC rate at 11.87% and 11.90%, respectively. The swap market currently expects the COPOM to gradually reduce SELIC to about 10.00 in April 2012. Economists on average are looking for 10.25% in June 2012.

The next graph shows that the markets were far more pessimistic in the first week of October. The October 3rd DI curve implied that the COPOM would lower rates to 9.67% in June 2012. Since then, the market has backed off this pessimistic view and now sees a low of 10.12% in April 2012. It then sees rates raising again at the end of 2012 as the Brazilian economy responds to the stimulus and the European crisis is resolved.

Economists take a slightly different view. The graph below shows the evolution of the economist survey for SELIC forecasts put together by the BCB. Each point on the x axis represents the date that the forecast was made for SELIC in June 2012. Economists, on average, have been steadily lowering their SELIC forecasts since the end of August 2011.

 

The Brazilian journal Valor published an excellent survey on Friday, October 14th, that shows that economists’ estimates for SELIC vary wildly. The table below was published in an article written by Angela Bittencourt and Lucinda Pinto which was titled Markets See a Gradualist Copom and Already Project a One Digit SELIC.

Analyzing the table further, most banks see a 50 basis point cut from this meeting and rates eventually drifting to 10.5% or 10.0%. Nomura is forecasting a 100 basis point cut from this October meeting and higher rates in 2012. Banco Itaú Unibanco is expecting a 75 basis point cut from this meeting and rates falling to 9% in 2012.

The article goes on to point out that an one digit SELIC forecast was unthinkable before the COPOM’s August 31st meeting. These forecasts demonstrate a dramatic change in the economic outlook in Brazil over the last month and a half. In reality, the economic scenario is deteriorating rapidly in Brazil. Part of the deterioration is due to the international economic scene. However, Brazil has its own demons to deal with.

This past Sunday, October 16th, Fernando Nakagawa wrote an article in the journal O Estado de São Paulo (see link below, we will discuss further in another blog) that observed that the private banks in Brazil set aside more than R$1 billion in provisions for bad loans during August alone. Clearly the private banks continue to see their credit portfolios deteriorate as a result of the bubble in consumer lending in Brazil and the contagion effects from high levels of problem loans in the non-bank finance sectors.

http://www.estadao.com.br/noticias/impresso,bancos-publicos-ignoram-efeitos-da–crise-e-reduzem-reservas-contra-calote-,785997,0.htm

LatAm Structured Finance is pessimistic about the short-term economic outlook in Brazil. We are alarmed at the continuing deterioration in consumer credit portfolios and a domino-effect scenario for the business and real estate credit markets. The BCB has openly stated that it believes that consumer spending will carry the Brazilian economy through the current global economic difficulties.

LatAm Structured Finance believes that the BCB’s expectations for consumer spending are naïve and that the economy will continue to slow more than expected as a result. We currently project almost a no growth scenario for GDP in Brazil in the final quarter of 2011 and into 2012. Finally we continue to see higher losses on credit portfolios through the end of the year with some improvement coming in spring 2012.

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At What Height Does A Bank Seawall Protect From a Credit Tsunami?

Aug 27, 2011 by

Brazilian banks continue to prepare for deteriorating credit conditions as they seek to assure the public that the country’s financial system is secure. The Brazilian press has been trotting out one analyst after another over the last two or three months to discount the possibility of a credit crisis in Brazil. However, nobody denies that Brazil is experiencing a serious consumer credit bubble.

Foreign newspapers, especially the Financial Times, have been calling attention to the growing imbalances in the Brazilian economy and raising the possibility of an economic crisis. The growth of consumer credit in Brazil is one of the indicators that they cite frequently. The response from the Brazilian press has been to deflect or diminish these arguments by pointing out that the Central Bank of Brazil demands that Brazilian Banks hold a minimum of 11% in reserves versus 8% for the rest of the world.

On August 17th, the Brazilian Federation of Banks (Febraban) reported that banks, on average, are provisioning for 170% of late the paying credits on their books. These provisions are higher than in 2008. The Brazilian newspapers focused on the extreme level of provisions held by the largest banks; Banco Santander provisioned 143%, Bradesco 189%, Banco do Brasil 226% and Caixa Econômica Federal 310%.

In addition, banks are maintaining Basil Indices well above the mandatory targets. Of the large Brazilian banks, Santander is maintaining the highest Basil Index, 21.4%. Itaú Unibanco upped its index to 16.1%, Bradesco to 14.7%, Caixa Econômica Federal to 14.6%, and Banco do Brasil to 14.4%.

Building bank reserves is a little like building sea walls to protect from tsunamis. They are expensive because they reduce profitable lending opportunities in Brazil’s high interest rate markets and generally need to be built higher than expected to protect against credit tsunamis that come every 100 years.

Taking such extraordinary precautions is admirable, but people build high walls when they expect big waves. Outstanding balances for consumer credit in Brazil have grown at very high rates over the past year. Analysts estimate that the average Brazilian is now paying 25% of income to service his debt compared to 16% in the United States (Financial Times).

The percentage of non-performing consumer loans is growing quickly. The current statistics cited in the press for Non-Performing Loans (NPLs) is low because they use averages calculated by the Central Bank of Brazil. However, the Central Bank’s data shows that NPLs for Credit Cards and Debt for Acquisition of Goods are near their highs for past ten years when measured as a percentage of the bank’s portfolio. The most recent reports from Serasa/Experian, the Brazilian credit bureau, show that the index of late paying loans at non-bank finance companies continues to worsen and is 50% higher than its worst number ever in 2008. The Serasa/Experian index for NPLs in bank portfolios is not too pretty either; it is 27% above the highs seen in 2008/2009.

If the wall holds, then the land stays dry with maybe some minor damage. However, if the tsunami breaches the wall, the wave destroys everything. If the public has confidence in the banking system then high levels of reserves will protect the banking system from a “normal” credit crisis. If the crisis deteriorates to the point that the public loses confidence, then no realistic reserve level protects a fractional banking system from a crisis and the economy comes apart at the seams.

As we have written before in the other blogs and papers, the key is confidence. Can a small segment of the finance sector experience levels of default so high that it erodes confidence in the entire banking system? The 2008 credit crisis in the United States provides grounds for responding with a resounding YES to this question. We hope not.



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