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Moody's: Restructured loans in Brazil conceal growing asset risk

Moody's saidApril 11 that the rising volume of restructured loans in Brazil could be "understatingloan delinquencies" among the country's banks while "overstating reservecoverage."

The defines restructuredloans as those undertaken with borrowers in financial difficulty who are alreadyin arrears. Loans of this kind held by Brazilian banks increased 37% year over yearat the end of 2015, Moody's said in a new report.

Moreover, Brazil'sbanks have been using loan restructurings to avoid recognizing nonperforming loans,or NPLs, Moody's noted.

"AlthoughBrazilian banks' asset risks may appear manageable based on published NPL ratios,the outlook is more complicated when considering the high amount of restructuredloans," Moody's analyst Farooq Khan said. "Rising restructurings can obscurerising loan delinquencies and also point to a decline in reserve coverage."

Moody's estimatesthe rise in restructured loans to have led to a 180-basis-point jump in the 90-dayNPL ratio and a 60-basis-point fall in existing loan-loss reserve coverageas of December 2015.

The rating agencyexpects that corporate and consumer repayment capacity in Brazil will remain pressuredby the stagnating economy, which will further lead to a rise in NPLs. "While asset quality is expected to deteriorate,the ratings agency noted that, the extent to which this will translate into rising90 day NPL ratios will depend in large measure on whether banks continue to renegotiateloans with troubled borrowers, and on how many potential NPLs are written off,"Moody's said.