FLORIANOPOLIS, Brazil, Sept 14 (Reuters) - The quality of capital regulatory standards for Brazilian banks lags behind that of other Latin American banking systems, partly because rules encourage an excessive use of tax credits as capital instruments, a senior analyst at Standard and Poor's said on Wednesday.
According to Santiago Carniado, who heads S&P's credit analysis for Latin American financial institutions, regulation in countries like Mexico, Colombia, Peru and Chile is evolving more rapidly through the adoption of capital practices with higher patterns of quality.
Banks in Brazil, the region's largest banking market, have about half of their minimum regulatory capital in the form of tax credits, while lenders in Colombia and Mexico, for instance, use just a fraction of them for their capital buffers.
If the Brazilian economy, which remains mired in a recession not seen since the 1930s, fails to recover rapidly, could lead that percentage to grow, triggering a warning sign for lenders, Carniado said.
"For example, credit at state banks, which have a less efficient capital allocation, represent alone 30 percent of gross domestic product - an amount similar to Mexico's credit-to-GDP ratio," he said.
His remarks underscore the concerns stemming from two years of recession in Latin America's largest economy that have driven loan delinquencies and loan-loss provisions to all-time highs in recent months. The more defaults a bank has, the more provisioning it has to undertake, subsequently generating a bigger amount of tax credits.
Although Brazilian banks remain well-capitalized, analysts have said slowing revenue growth and the burden of rising provisions will prevent them from accumulating capital. Smaller lenders are more pressured than their larger peers because they face challenges related to scale and the niche markets in which they operate, analysts at Fitch Ratings recently said.
In recent years, banks have been funneling one-time gains into provisions and generic loan reserves. In the 12 months ended in June, provisions at Brazil's top-three banks jumped 49 percent from the same period a year earlier, with loan book growth expanding 2 percent on average, according to Thomson Reuters calculations.
Capital levels have improved, however, in the wake of declining loan demand. The nation's banking system has total excess capital of at least 180 billion reais ($54 billion), according to several analysts. ($1 = 3.3231 Brazilian reais) (Additional reporting and writing by Guillermo Parra-Bernal; Editing by Alan Crosby)