May 25, 2016 / 3:07 PM / 2 years ago

UPDATE 1-Brazil defaults hit record in April as lending tightens

(Adds details on early default ratios, loan-loss provisions, background, comments)

By Guillermo Parra-Bernal and Marcela Ayres

SAO PAULO/BRASILIA, May 25 (Reuters) - Bank loan defaults in Brazil hit an all-time high in April as the harshest recession in at least eight decades and rising borrowing costs are making it much harder for consumer and corporate borrowers to stay current on their debt.

Loans in arrears for at least 90 days, a benchmark for defaults, rose to 5.7 percent of outstanding, non-earmarked credit last month, the central bank said on Wednesday. This is the highest default ratio since the central bank began tracking it five years ago.

Commercial banks, particularly in the private sector, are paring back lending. Outstanding credit in Brazil fell in April for the fourth straight month, the longest streak of monthly declines in disbursements in a decade, central bank and Thomson Reuters data showed.

Defaults have been climbing for about 18 months, and the trend could continue into early 2017, making the current so-called credit cycle the longest in Brazil in two decades, analysts at Goldman Sachs Group Inc have said.

The numbers provide a glimpse into loan-book quality as the nation’s lenders struggle with the effects of the recession, rising unemployment and stubbornly high inflation. Early default ratios, a gauge for loans in arrears between 15 days and 90 days, fell slightly for consumers and companies, a sign banks are refinancing potentially problematic loans earlier than usual.

Last month, loan-loss provisions as a share of capital rose for the 12th straight month, indicating banks are setting aside more money to cushion their balance sheets against defaults. Private-sector banks kept provisions at their highest levels in more than four years, while state lenders raised them in April for the third month in four, the report showed.

The central bank estimates that a 30 percent rise in renegotiated loans and a 50 percent jump in restructured credit over the past year are helping offset what could be a much higher climb in defaults. Yet, at that pace, bank profits could sink by 17 percent this year, JPMorgan Securities recently said.

The default ratio has climbed more than a full percentage point in the past year. As a result, banks raised the cost of borrowing to an annual 52 percent on average in April, partly mitigating risks associated with delinquencies, the report showed. (Reporting by Marcela Ayres and Guillermo Parra-Bernal; Editing by Lisa Von Ahn)

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