As Brazil's major banks prepare to report theirsecond-quarter results, analysts and investors will be closely watching forfurther credit quality deterioration and weak lending amid the country'sprolonged recession.
According to S&P Capital IQ estimates, , and are allexpected to show lower second-quarter earnings compared to the year-ago period,with year-over-year declines ranging from 8% for Bradesco to 30% for Banco doBrasil.
Delinquency rates are "the main point" of concernfor the Brazilian banking sector heading into the quarterly reporting season,Pedro Galdi, a São Paulo-based investment analyst at Upside Investor, toldS&P Global Market Intelligence.
As such, the second quarter could prove to be an extensionof banks' first quarter results, which were marred by sharply higher creditcosts. During the first-quarter of the year, Banco do Brasil 9.15 billion Brazilian reais inloan loss allowance expenses during the quarter, up 30.8% from the priorquarter's provisions and 61.7% higher from the year-ago period. Similarly, ItaúUnibanco showed a31.1% jump in loan loss provisions year over year, while those of BancoBradesco soared 52.2%higher.
At least some of the increases during the first quarter wereblamed on Sete Brasil, the oil rig producer that for bankruptcy protection in Aprilafter failing to reach an agreement with its creditors earlier in the year; acourt accepted the bankruptcy filing in June. Reportedly, of Bradesco'sfirst-quarter provisions were related to Sete Brasil, while some 2 billionreais of Banco do Brasil's first-quarter provisions were to an oil and gas sector client —likely Sete Brasil.
For the second-quarter, banks will have to with two more massive Braziliancompanies who are in similarly precarious positions: Oi SA, thetelecommunications company, and Odebrecht SA, Brazil's largest constructionfirm. Oi filed for bankruptcy protection in June, with some 65.4 billion reaisof debt involved, making it Brazil's largest-ever bankruptcy filing. Odebrecht,meanwhile, spurred fears of a potential bankruptcy earlier in July as thecorruption-entangled group grapples with a 100 billion reais debt pile, thoughthe company rejected such rumors and insisted that discussions with banks andefforts to sell assets have been promising.
"Sete Brasil and Oi are the highlights for bankprovisions and for most of the worsening delinquency rates going forward,"Luis Gustavo Pereira, an analyst at Brazilian brokerage Guide Investimentos,said.
S&P Capital IQ estimates predict second-quarter resultsthat are little changed compared to the first quarter for both Banco Bradescoand Itaú Unibanco. Consensus estimates forecast Banco Bradesco's net incomehitting 4.16 billion reais, up slightly from 4.11 billion reais in the linkedquarter. For Itaú Unibanco, net profit should slip to 5.04 billion reais from5.24 billion reais in the first quarter.
Banco do Brasil, meanwhile, is forecast to recover from the57.5% profit drop in the first quarter, with net profit seen rising to 2.14billion reais from 1.29 billion reais. However, Upside Investor's Galdi warnedthat the state-run bank could still show a "negative surprise" givenits exposure to a growing number of companies facing liquidity and bankruptcyissues. This situation, he says, couldfurther worsen as more companies are implicated in "Lava Jato," thewidespread investigation into a money laundering scheme involving oil state-runcompany Petrobras.
However, corporate credit is only one piece of banks' creditquality issues. Indeed, consumer delinquencies are also expected to move higheras Brazil battles rising unemployment levels.
"Banks have already been provisioning, and delinquencyrates should stay on an upward trend for both corporates and consumers,"William Castro Alves an investment analyst at Vitória, Espírito Santo-basedValor Gestora de Recursos, said.
The expectation for further credit deterioration as Brazil'sunemployment and economy worsen, Alves noted, will likely also spur banks tocontinue being more restrictive in their lending practices, leading to stagnantcredit portfolios.
Evidence of that has already been seen in the first quarter,with Banco do Brasil, Banco Bradesco and Itaú Unibanco all showing smallercredit portfolios compared to year-end 2015.
Combined with increased provisions, the lack of lendinggrowth is likely to negatively impact banks' returns on equity, particularlyfor Itaú Unibanco, Pereira, the Guide Investimentos analyst, said.
"We might see Itaú, which has historically had thestrongest ROE within the banking sector, not recording a very strongreturn," Pereira said. The analyst noted that Itaú Unibanco'sfirst-quarter ROE was largely helped by its treasury operations, something hedoesn't believe will be repeated in the second quarter.
As of July 25, US$1was equivalent to 3.29 Brazilian reais.
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