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Inflation-linked mortgages credit positive for Brazil's Caixa, Moody's says

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Inflation-linked mortgages credit positive for Brazil's Caixa, Moody's says

Caixa Econômica Federal's recent announcement that it will start offering inflation-linked mortgages is credit positive for the bank and homebuilders because the below-market rate loans will likely increase demand for credit and housing, Moody's said in a report.

The new inflation-linked mortgages will offer a rate adjusted by Brazil's IPCA consumer price index. Caixa will offer fixed rates of between 2.95% and 4.95% per year plus the inflation IPCA rate. At current inflation levels, these adjusted rates would be below current mortgage loan rates of 8.75% to 9.75% plus the TR3 referential rate, which is currently 0%.

"Caixa, the leading mortgage lender in Brazil with a 69% market share, will be able to offer lower and more competitive interest rates that will enhance debt affordability, benefiting the bank's business volumes and recurring earnings generation," the rating agency said.

It added that the new product will lower homebuyers' monthly payments by up to 30% compared to current levels, likely helping to cut the household debt service ratio from the 20% system average as of June.

Mortgages represent just 9% of Brazil's GDP and 18% of system loans, which according to Moody's indicates sector's high growth potential. Mortgage originations in Latin America's largest economy grew 12% year over year in the 12 months through June.

However, the rating agency also pointed to certain risks associated with the new loans, saying that an inflation-sensitive portfolio "has the potential to expose banks to soaring delinquencies and balance-sheet mismatches."

Other large commercial banks including Banco do Brasil SA, Itaú Unibanco Holding SA, Banco Bradesco SA and Banco Santander (Brasil) SA are also evaluating whether to offer similar loans, but Moody's does not expect them to move aggressively into these indexed mortgages "given the lack of economic growth and persistent macro uncertainties."