December 15, 2016 / 2:22 PM / 2 years ago

UPDATE 1-Cielo awaits Brazil tax, regulatory changes to gauge impact on profit

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By Aluísio Alves and Guillermo Parra-Bernal

SAO PAULO, Dec 15 (Reuters) - Cielo SA is analyzing how recent and potential changes in Brazilian tax and financial transaction rules could hurt profit in coming years, executives said on Thursday, signaling concern with a package of policy proposals aimed at reviving the recession-hit economy.

Chief Financial Officer Clovis Poggetti told investors at an annual meeting that net income could slightly suffer with a Senate decision to set a 2 percent floor for municipal tax ISS. The bill, which takes effect in early 2018, has yet to be signed by President Michel Temer.

Estimates pointing to a decline of 1 percent to 2 percent in annual profit for every 1 percentage-point increase in the ISS tax “make complete sense,” Poggetti and other executives said in the city of Barueri, where Cielo is based. Cielo is Brazil’s No. 1 payment processor.

Asked about speculation that the Temer administration wants to cut the timetable for Cielo and other card payment processors to settle receivable prepayments with retailers to only two days from 28 days currently, executives said they will wait until a formal proposal is made public. Cielo shares have fallen almost 9 percent this week on reports pointing to that change.

The situation underscores the threat that regulatory noise poses to financial companies which, like Cielo, process transactions for consumers and companies alike. Still, Cielo is putting profitability at the forefront as a way to defend from the impact of Brazil’s recession and mounting competition.

“That headline noise emerged this week, and we are waiting for the government to make a formal statement on it before gauging any potential impact,” Victor Schabbel, Cielo’s investor relations director, said at the same meeting.

Shares rose 0.1 percent to 26.05 reais on Thursday, bucking five straight daily declines. Cielo is down 5.3 percent this year, compared with a 36 percent jump in a broad index of financial stocks trading in São Paulo.

Cielo’s income from prepayment of receivables, a key source of revenue for real sector companies that accept payments with cards, has grown dramatically over the past couple of years. That has irked retailers, who claim card processors are withholding proceeds from their sales longer than they should.

Government officials believe reducing the timeframe for receivable prepayments would help companies mitigate the impact of Brazil’s harshest recession in eight decades. The segment has represented between 25 percent and 40 percent of Cielo’s profit in recent quarters.

Analysts at UBS Securities estimate that the reduction in receivable settlement periods would remove roughly 30 percent of prepayment revenues, bringing Cielo’s earnings per share down by 11 percent. (Editing by Meredith Mazzilli)

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