Record bankruptcies pressure Brazil banks as recession bites
By Guillermo Parra-Bernal SAO PAULO, July 26 (Reuters) - Brazil's harshest recession in eight decades is prompting some of the nation's top banks to reclassify some 90 billion reais ($27 billion) in problematic corporate loans, eroding profits as banks struggle with a doubling in bankruptcy protection filings. Lenders face a deluge of requests to renegotiate existing loans and stretch out guarantees as the economic crisis deprives corporate borrowers of cash. Some companies, like rig leaser Sete Brasil Participações SA and phone carrier Oi SA, have been forced to seek court protection from creditors. In June, Oi filed for Brazil's largest in-court reorganization on 65 billion reais of obligations. That followed a bankruptcy filing by Sete Brasil as months of tussling with sole client Petróleo Brasileiro SA derailed plans to start repaying 18 billion reais owed to banks this year. As Brazil's largest listed banks start to report second-quarter results this week, bankruptcy filings - which rose 90 percent in the past year - could help trim annual profit for the top four lenders by 18 percent, Thomson Reuters consensus estimates showed. In addition, about one-third of outstanding corporate loans mature by March, highlighting challenges for companies struggling with fallout from a sweeping corruption probe, the recession and high borrowing costs, Goldman Sachs Group Inc analyst Carlos Macedo said. State-controlled Banco do Brasil SA and Itaú Unibanco Holding SA - which analysts say were hit the most by Oi's bankruptcy - are moving billions of reais in current, yet problematic, loans to riskier categories, limiting a jump in provisions last quarter, sources familiar told Reuters. Banco Bradesco SA and Banco Santander Brasil SA have been actively reworking loan terms for some creditors, even as both lenders say their provisions remain at satisfactory levels. Brazil's banks had a record 195 billion reais, or 6.8 percent of outstanding loans, parked on their balance sheets in the form of provisions as of May, central bank data showed. "Provisions should remain elevated but may improve for some banks, although issues at Oi and similar cases can lead to further pressures," said Tito Labarta, an analyst with Deutsche Bank Securities in New York. OI, ODEBRECHT Santander Brasil kicks off the banks' earnings season on Wednesday, followed by Bradesco on Thursday. Itaú is expected to report quarterly data on Aug. 2, and Banco do Brasil on Aug. 11. Shares on the four banks have soared 11 percent since late April as investors lauded their ability to cope with loan book quality issues and cheered a central bank decision to keep interest rates unchanged at a decade-high, said Eduardo Nishio, an analyst with Banco Brasil Plural. Provisions at the four banks probably fell for the first time in at least a year in the second quarter, consensus estimates showed. The average expected decline in loan-loss provisions amounted to 17 percent, the steepest in three years. Recurring net income probably climbed an average 4 percent for the four banks last quarter, the first time profit rose in three quarters, consensus data showed. Defaults, however, kept rising in the three months through June, the data showed. After having jumped to 40 percent since 2014, provisions could start falling next year, said Domingos Falavina of JPMorgan Securities. Resilient borrowing costs are helping banks counter "the negative impact of asset quality deterioration," he added. Still, Banco do Brasil and Itaú will undertake 30 percent and 20 percent writedowns, respectively, on their 4.5 billion-real and 1.5 billion-real loan exposure to Oi, analysts and sources said. Oi had bank debt of 17 billion reais at the time of the bankruptcy protection filing. Risky cases include that of Odebrecht SA, Latin America's largest engineering conglomerate, which is engulfed in Brazil's worst ever corruption scandal. Odebrecht is renegotiating 35 billion reais of loans, after fallout from the scandal shut down access to funding, sources told Reuters recently. Usinas Siderúrgicas de Minas Gerais SA, Brazil's largest listed producer of flat steel, last week won a 60-day extension of a standstill agreement on 4 billion reais of loans. Following is a table with average consensus estimates for some key first-quarter earnings indicators for Brazilian banks. SECOND-QUARTER POLL'S COMBINED AVERAGES BRAZIL BANKS Q2 2016 Q1 2016 Q2 2015 Recurring net 3.188 bln 3.055 bln 3.838 bln income reais reais reais Pct Change (%) 4.3 pct -16.9 pct Recurring ROE 14.6 pct 13.9 pct 18.4 pct 90-Day Default 3.7 pct 3.4 pct 3.0 pct Ratio Loan-Loss 5.147 bln 6.210 bln 4.297 bln Provisions reais reais reais Pct Change (%) -17.1 pct 19.8 pct ($1 = 3.2839 Brazilian reais) (Editing by Leslie Adler)
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