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S&P: Caixa's plan to up mortgage lending supports Brazil's RMBS market

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S&P: Caixa's plan to up mortgage lending supports Brazil's RMBS market

Caixa Econômica Federal's plan to expand its mortgage loan portfolio would support the development of Brazil's residential mortgage-backed security, or RMBS, market, according to S&P Global Ratings.

Pedro Guimarães, Caixa's new CEO, said the state-owned development bank could raise 100 billion Brazilian reais in financing through the issuance of real estate credit receivables-backed securities, locally known as CRIs, as it looks to grow its mortgage lending in the next four years. The proposal is part of Caixa's new initiatives that align with the new Brazilian government's goal to reduce the role of state-owned companies in the expansion of the economy.

Caixa's proposed issuance would be a boon for Brazil's RMBS market, with the debt instrument possibly becoming a major funding alternative for domestic banks, especially small and medium-sized lenders, Ratings said. "The proposed volume is unprecedented in Latin America, given that structured finance issuances totaled only $9 billion in 2018," the agency added.

The bank is a major player in the local mortgage lending market, accounting for about 69% of total mortgages. The strategy will support the bank's goal to maintain its leadership in mortgage lending, Ratings said.

However, the issuance of CRIs faces possible risks, including foreign exchange risk for international investors, which are the main target of Caixa's planned sale. Interest rate risk could also arise given domestic investors' preference for floating-rate securities as opposed to mortgage portfolios' fixed interest rates.

Following Brazil's recession in 2014-2016, Caixa started to reduce its loan portfolio while renewing its focus on real estate loans. "Caixa went from being a purely mortgage bank to start doing other things," Ratings' Director Cynthia Cohen Freue said in an interview with S&P Global Market Intelligence. "Back in time, there were injections of capital via issuance of hybrids (from the Treasury) ... It makes sense (for public banks) to focus on the main role for which they were created," Freue added.

As part of its new strategy, Caixa also plans to repay 40 billion reais in debt owed to the government through hybrid capital instruments, which could be supported by selling a large chunk of the bank's assets. "Disposing investments strengthens levels of capitalization and in that way (Caixa) could return those hybrids that the government invested (in)," Freue said.

As of Jan. 15, US$1 was equivalent to 3.72 Brazilian reais.