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Moody’s marks eroding capital position of two of Brazil’s main state-run banks

Friday, March 22nd 2013 - 07:09 UTC
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The two banks were ordered by President Dilma Rousseff to boost credit access for individuals and companies  The two banks were ordered by President Dilma Rousseff to boost credit access for individuals and companies

Moody's Investors Service lowered this week the long-term issuer ratings of Brazilian state banks BNDES and Caixa Econômica Federal, citing their eroding capital position after years of rapid credit expansion, but spared the also government controlled Banco do Brasil.

Ratings on Brazil’s development bank BNDES and on Caixa, the country's largest mortgage lender were cut to “Baa2” from “A3,” according to a statement presented by Alexander Albuquerque, Moody’s Assistant Vice-president for Analysis.

Both rankings, which are within investment-grade ratings, bear a positive outlook, meaning that an upgrade would be likely to happen within 12 to 18 months.

Likewise, the foreign currency senior unsecured debt ratings of both lenders were downgraded to “Baa2” from “Baa1,” with a positive outlook, “in line with the positive outlook on Brazil's government bond rating,” Albuquerque said in a statement.

The unexpected decision reflects the growing concern among investors and analysts over Brazil's increased use of state lenders to revive growth regardless of the strategy's fiscal consequences.

The Brazilian government has used state controlled banks to try and boost poor economic performance in 2012, via an increase in loans aimed at accelerating investment and consumption. But the strategy has not proved so effective since Brazil’s economic expansion was 0.9% in 2012.

However despite the performances of BNDES and Caixa, the also government controlled Banco do Brasil rating remained unchanged at A3.

“There is no reason to change BB rating at the present time. The bank’s policy of building its capital base is different from that of its state-run peers”, said Albuquerque.

Moody's said the decision followed a deterioration of core capital indicators at BNDES and Caixa that only worsened in recent months.

BNDES and Caixa, which are fully controlled by the federal government, were ordered by President Dilma Rousseff to boost credit access for individuals and companies while aggressively reducing borrowing costs.

At the same time, BNDES and Caixa increased dividend payouts to the government, which has in turn replenished their capital with Treasury debt instead of cash.

“This practice has resulted in relatively low core capital levels, which limits the banks' ability to absorb losses in situations of stress, thus weakening their standalone credit strength,” Albuquerque said in the statement.

By the end of last year, BNDES' core Tier 1 capital ratio reached 8.4%, while Caixa's dropped to 6.6%, which is well below the banking system's 12.4% average.

Caixa's loan book has risen by an annual average of 40% since 2009, while that of BNDES - which is almost three times as big as the World Bank's - has more than quadrupled since 2005. BNDES is considered as Brazil's main source of long-term corporate credit.

BNDES president Luciano Coutinho said the downgrade won’t impact the funding costs of the institution. He pointed out that the BNDES was now aligned with Brazil’s sovereign rating at Baa2.

“Moody’s has followed other rating agencies by aligning Brazilian state banks with sovereign ratings which are Baa2 for Moody’s and BBB for Fitch and Standard & Poor’s”.

 

Categories: Economy, Brazil.

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