--Major banks will begin posting fourth-quarter earnings next
week
--Default rates are in decline because of lower base interest
rate
--But overall 2012 performance for banks should prove
mediocre
By Rogerio Jelmayer
SAO PAULO--A decline in default rates on loans, due to lower
interest rates and an improving economy, should help improve the
profit profile for Brazil's top banks, which are due to begin
reporting fourth-quarter earnings next week.
"The big banks are likely to present a slightly better
performance in the fourth quarter, given the improvement in default
rates amid a recovery in economic activity," said Pedro Galdi, a
banking analyst at Sao Paulo's SLW Brokerage.
According to Brazilian Central Bank data for November, the last
month available, the overall default rate on loans fell slightly to
5.8% from 5.9% in October.
Economists saw the figure as the beginning of a trend. One
reason is a decline in interest rates, making it less onerous for
customers to meet payments. Brazil's central bank has
systematically reduced its Selic base rate to the present 7.25%
from a 2011 peak of 12.5%.
Another reason is an improving economy. Brazilian economic
activity may have advanced by as much as 3.0%, on an annualized
basis, in the fourth quarter, up from just 1.0% in the previous
three quarters.
Lower default rates should translate into less provisioning by
the banks, improving fourth-quarter earnings, analysts said.
However, the fourth quarter rebound will not be enough to
salvage an otherwise disappointing year for Brazil's banks.
Problems for Brazilian banks last year included lower returns on
loans, because of the decline in interest rates, and pressure from
the government to slash customer fees.
"It's too soon to celebrate," said Roberto Troster, a banking
consultant. "Part of the default rate decline is based on the fact
that the banks actually loaned less money during the period in
order to stop their losses. We have to remember that all the
factors that pressured the banks last year, remain in place this
year."
Brazilian banks saw profit margins drop to their lowest levels
in a decade in the first three quarters of 2012. For years,
Brazil's biggest banks posted return-on-equity, or ROE, levels well
above 20%. In the third quarter of 2012, the big banks fell below
the 20% level. ROE is a key measure of profitability.
Falling interest rates brought tighter spreads, the difference
between what banks pay depositors and what they charge for loans,
squeezing profit margins.
But as rates plunged, the government also turned up the heat on
the issue of fees, the money banks charge customers for everything
from credit cards to overdrafts.
Brazil's Bradesco SA (BBD) is set to inaugurate the release of
fourth-quarter earnings Jan. 28, followed by Banco Santander Brasil
SA (BSBR, SANB11.BR, SANB3.BR, SANB4.BR), the Brazilian unit of
Spanish bank Banco Santander SA (SAN, SAN.MC), which will report
earnings Jan. 31, and Itau Unibanco SA (ITUB4.BR), which expects to
publish earnings Feb. 5.
Latin America's largest bank, state-run Banco do Brasil SA
(BBAS3.BR), hasn't set a date for release of its earnings.
Write to Rogerio Jelmayer at rogerio.jelmayer@dowjones.com
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