July 26, 2016 / 10:02 AM / 2 years ago

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
    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
    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. 
    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
    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. 
   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
    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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