--Banco BVA marks fifth time in two years central bank
intervenes in Brazil banks
--Problems at yet another small bank increase funding headaches
for small lenders
--Big banks have so far withstood tougher financing conditions
in Brazilian market
By Paulo Winterstein
SAO PAULO--Brazilian Central Bank intervention in yet another
bank, announced Friday, makes even tougher an already difficult
situation for the country's small- and mid-sized financial
institutions, which have seen funding opportunities dry up as
overseas and domestic investors become increasingly selective.
The central bank on Friday said it would take over operations at
Banco BVA SA, a small Rio de Janeiro-based bank with assets equal
to just 0.17% of the total within Brazil's financial system.
The intervention marks the fifth time in two years the central
bank has had to step into the fray, starting with its intervention
and sale of Banco PanAmericano late in 2010. Since then, the
central bank has intervened at Banco Morada, Banco Cruzeiro do Sul
and Banco Prosper. The central bank also investigated fraud
allegations at Banco Schahin, but did not announce a direct
intervention.
"The market was already a bit traumatized, so the fact that this
happened to a fifth bank makes very difficult the funding
possibilities for small and medium banks," said Paulo Petrassi,
chief economist at Leme Investimentos in Florianopolis, Brazil.
Mr. Petrassi said that, in recent weeks, there was market
chatter about BVA facing difficulties, so Friday's announcement
wasn't a total surprise. "But it's still very bad. Investors
weren't putting funds into small and medium banks before, and now
it'll be even less," he said.
Brazilian banks have seen rapid expansion in recent years as
falling interest rates and continuous growth led to a surge in
credit. Lending expanded 17% in the 12 months ended August, the
central bank said last month, bringing outstanding credit to 2.21
trillion Brazilian reais ($1.09 trillion), or 51% of Brazil's
GDP.
As household indebtedness climbed, however, defaults also rose,
and as of August stood at a record level of 5.9%. Banks responded
to rising defaults by pulling back on lending, weakening already
timid growth in Latin America's biggest economy. The government
reacted to slower growth by issuing more loans through state-run
banks Caixa Economica and Banco do Brasil, hoping to pressure
private banks to lend even more.
That growth in lending led to decreasing quality of credit,
Ricardo Kovacs, a senior analyst for Moody's Investors Service in
Brazil, said at a recent seminar in Sao Paulo.
But, because of the Brazilian banking system's size and relative
sophistication, it's "easier for the Brazilian system to digest bad
loans," Fitch Ratings Director for Latin American Financial
Institutions Franklin Santarelli said at a seminar this week.
Brazil's banking system is dominated by five major banks, with
about 90% of total loans in their portfolios. And those big banks
have so far managed to withstand the impact of tougher credit
conditions. Indeed, one of the banks liquidated by the central bank
was taken over by a bigger rival--investment bank BTG Pactual took
over PanAmericano in 2011.
Instead, it's been small and mid-sized banks--around 170
institutions, holding a total of about BRL220 billion in loans
--that have felt the brunt of the global economic slowdown.
Uncertainty about Europe and U.S. have closed off international
markets for most banks, and domestic investors are opting for
government debt instead of injecting cash into small banks,
especially after revelations of fraud and mismanagement at some of
the liquidated institutions.
"Funding is not their strong point," Mr. Santarelli said of the
smaller banks. "Especially in comparison with the larger
banks."
--Tom Murphy in Sao Paulo and Gerald Jeffris in Brasilia
contributed to this article
Write to Paulo Winterstein at paulo.winterstein@dowjones.com