(Recasts to add details from a second source in paragraphs 1-6)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, July 2 (Reuters) - State-run Caixa Econômica Federa l, Brazil’s largest mortgage lender, is considering options to get rid of bad loans and free up capital, including the sale of pools of distressed credit to investors, two sources said on Wednesday.
Up to 3.2 billion reais ($1.4 billion) worth of defaulted loans could be sold to funds that specialize in dealing with distressed assets, the sources said. Alternatives under study include the sale of securities backed by pools of bad loans, according to the first source, who declined to be identified because the matter has yet to be decided.
Such actions allow banks to take defaulted debt off their books, giving them room to fund more loans and comply with regulators’ capital requirements. Caixa consulted as many as four distressed debt funds about doing such a deal, the second source noted, adding that no time table for a deal has been set.
Brasilia-based Caixa wants to gain know-how on how to clear defaulted loans from its balance sheet, a common practice among lenders in Latin America’s largest economy, the source said. For lenders such as Caixa carrying distressed assets can increase operational costs and be a distraction because of the time and money needed to deal with them.
“From an asset standpoint, the deal makes sense for the parties involved,” the second source said. “Still, time tables were non-existing and there are discrepancies on various terms of the deal, including the price of those assets.”
Caixa declined to comment. Three funds that trade distressed debt in Brazil declined to confirm their participation in the process.
In May, state development bank BNDES unveiled a plan to sell 6 billion reais worth of loans in arrears.
Private-sector banks have far more experience. In December 2011, Banco Santander Brasil SA, the largest foreign lender in Brazil, auctioned off 16 billion reais of bad loans, so far the largest transaction of its kind in the country.
Caixa aggressively entered the consumer credit market several years back under the instruction of the federal government, the bank’s only shareholder. Caixa’s loan book was 520 billion reais at the end of March, almost three times the size of outstanding credit at the end of 2010.
At the end of the first quarter, the amount of problem loans on Caixa’s books, known in Brazil as E-H loans, totaled 25 billion reais, or the equivalent of 4.8 percent of the bank’s outstanding credit.
Caixa’s loans 90 days or more in arrears rose to the equivalent of 2.6 percent of outstanding loans in the first quarter from 2.3 percent a year earlier. That so-called default ratio is the industry’s most widely followed gauge for measuring loan delinquencies.
$1 = 2.22 Brazilian reais Reporting by Guillermo Parra-Bernal and Aluísio Alves; Editing by Peter Galloway and Steve Orlofsky