April 27, 2016 / 12:12 PM / 2 years ago

UPDATE 2-Brazil banks brace for fresh wave of loan refinancing deals

(Adds comments, share performance throughout)
    By Guillermo Parra-Bernal
    SAO PAULO, April 27 (Reuters) - Brazil's largest listed
lenders are facing a deluge of requests from companies to
renegotiate at least 100 billion reais ($28 billion) in
problematic loans, posing headwinds for an industry struggling
with a harsh recession and soaring delinquencies. 
    Steelmaker Cia Siderúrgica Nacional SA and
engineering conglomerate Grupo Odebrecht SA are among dozens of
firms asking banks to ease the terms of loans amid Brazil's
worst economic quagmire in more than a century, sources familiar
with the situation said. Odebrecht and CSN, as the steelmaker is
known, declined to comment.
    With bankruptcy filings up 150 percent this year and the
economy poised to contract by about 4 percent for a second
straight year, lenders are cutting borrowing costs and extending
maturities for small and large corporate borrowers. Banks had
about 130 billion reais in refinanced and restructured loans on
their books last year, according to central bank data. 
    As Brazil's largest listed banks began reporting
first-quarter results on Wednesday, analysts remain wary of the
impact of loan renegotiations. According to Goldman Sachs Group
Inc analysts, the worsening market for Brazilian banks could
drag average return on equity down to a 15-year low in coming
    Renegotiations have become "the equivalent of 'kicking the
can' a short distance down the road," Carlos Macedo, a New
York-based analyst with Goldman Sachs, said in a recent client
    Brazil's central bank estimated in a report earlier this
month that a 30 percent jump in renegotiated loans and a 50
percent increase in restructured credit over the past year would
increase the banking system's average default ratio by a little
less than 1 percentage point. 
    If the pace of restructurings continues for another year,
earnings at the nation's largest listed banks could fall up to
17 percent, JPMorgan Securities analyst Domingos Falavina said
in a recent note.
    'CAR WASH'
    Banco Santander Brasil SA the country's largest
foreign-owned lender, beat first-quarter profit estimates on
Wednesday, as steps to renegotiate problematic credits helped
curb defaults and loan-loss provisions. Last quarter, provisions
hit a nine-month low and came in well below consensus estimates.
    "We are committed to a conservative risk management policy
that helped us limit a rise in defaults stemming from the
recession," Chief Financial Officer Ángel Santodomingo told
investors at a conference call to discuss quarterly results.
    Banco Bradesco SA unveils results on Thursday,
while Itaú Unibanco Holding SA and state-controlled
Banco do Brasil SA plan to do so on May 3 and May 13,
    According to two sources, Bradesco and Santander Brasil
recently resumed talks with CSN to refinance a combined 1.2
billion reais in loans, which could allow CSN to start
repayments two years later than scheduled.
    Meanwhile, some Odebrecht subsidiaries want the refinancing
of up to 35 billion reais in loans, as the engineering group's
involvement in a major corruption scandal at state firms
curtailed access to funding, another two sources said.
    Other borrowers seeking relief include phone carrier Oi SA,
which this week launched talks to restructure $14.3 billion of
bond debt. 
    Fallout from the corruption probe known as "Operation Car
Wash" is hampering many companies from honoring their debt and
would oblige lenders to step up refinancing deals, the central
bank report showed. 
    Companies' and creditors' need to sidestep Brazil's
ineffective bankruptcy protection legislation, which hampers
debtors' ability to quickly get back on their feet, was also
fueling banks' new-found enthusiasm for renegotiations, analysts
    "Credit quality should continue to deteriorate but at a
slower pace than thought by most market participants, as banks
increase renegotiations, portfolio sales and write-offs," said
Francisco Kops, an analyst with Safra Corretora.
    Units in Santander Brasil, a blend of the lender's voting
and non-voting shares, rose the most in five weeks on Wednesday
following the results. Banking stocks rose too, on expectations
of a more constructive outlook for loan book quality.
    Itaú, Banco do Brasil and Bradesco probably ramped up
loan-loss provisions last quarter by about 25 percent after
defaults climbed 0.6 percentage point to an average 3.5 percent
of  outstanding loans, according to analyst estimates compiled
by Thomson Reuters.
    That weighed on first-quarter profits, the data showed.
    Average ROE probably fell to 17.3 percent, the lowest in at
least two years. Recurring net income, or profit excluding
one-time items, sank an average 8.4 percent last quarter on an
annual basis, the first time banks saw profit decline in about
three years.
    Following is a table with average consensus estimates for
some key first-quarter earnings indicators for Brazilian banks.
The numbers are expressed in billions of reais unless specified.
                           Q1 2016    Q4 2015     Q1 2015
  Recurring net income    4.002 bln  4.328 bln   4.369 bln
                            reais      reais       reais
     Pct Change (%)                   -7.5 pct    -8.4 pct
      Recurring ROE       17.3 pct    18.3 pct    20.4 pct
  90-Day Default Ratio     3.5 pct    3.3 pct     2.9 pct
  Loan-Loss Provisions    5.824 bln  5.386 bln   4.678 bln
                            reais      reais       reais
     Pct Change (%)                   8.1 pct     24.5 pct
    ($1 = 3.5239 Brazilian reais)

 (Additional reporting by Tatiana Bautzer in São Paulo; Editing
by Tom Brown, Chizu Nomiyama and Alan Crosby)
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