March 29, 2017 / 3:16 PM / a year ago

UPDATE 1-Brazil's banks keep record loan loss provisions despite default drop

(Recasts to add further details, share performance throughout)

By Guillermo Parra-Bernal and Marcela Ayres

SAO PAULO/BRASILIA, March 29 (Reuters) - Brazilian banks set aside a record amount of capital to cover bad loans in February, the central bank said on Wednesday, signaling caution as Latin America’s largest economy struggles to emerge from its worst recession on record.

Loan loss provisions averaged the equivalent of 6.9 percent of Brazil’s outstanding bank loans last month, above 6.8 percent in January and 6 percent in February 2016, the central bank said in a report.

State-controlled and private-sector banks remain reluctant to reduce their loan loss provisions despite recent declines in delinquencies, the data showed. Lenders surprisingly moved borrowing costs slightly higher last month, on concerns that an unexpectedly slow economic recovery could spur new defaults.

Loans in arrears for 90 days or more in Brazil fell to an eight-month low, totaling 5.6 percent of outstanding non-earmarked loans, in February from 5.7 percent in January. The drop may have reflected recent reductions in Brazil’s benchmark Selic overnight lending rate as well as steps by banks to refinance looming debt maturities, analysts said.

Delinquencies, however, rose at state banks, which account for 56 percent of lending. Corporate loan delinquencies remained under pressure in February, with 15-day to 90-day defaults rising in the category, the central bank said.

Executives at Brazil’s largest banks said in recent weeks that loan-loss provisions will only fall later in the year, once there are signs that Brazil has emerged from a deep three-year recession.

“Going forward, we expect credit conditions to remain somewhat exigent but to gradually ease at the margin, supported by the tentative signs of economic stabilization and the central bank’s front-loaded rate-cutting cycle,” said Alberto Ramos, chief Latin America economist with Goldman Sachs Group Inc.

Outstanding bank loans in Brazil reached 3.070 trillion reais ($982 billion) at the end of February, representing a 3.5 percent drop in the past 12 months. The central bank estimates 2 percent growth for outstanding bank loans this year.

$1 = 3.1251 reais Editing by Chizu Nomiyama and Paul Simao

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