| SAO PAULO
SAO PAULO Brazilian banks might be unable to lower loan-loss provisions as much as expected this year because of a potential wave of plea deals involving corporate borrowers as well as mounting political turmoil, JPMorgan Securities said on Tuesday.
Analyst Natalia Corfield wrote in a client note that a still sluggish economy and weaker prospects for a proposed pension reform could delay efforts to bolster loan book quality. Lenders have wrestled with record provisions since Brazil slumped into a deep recession almost three years ago.
Late last month, meatpacker JBS SA's (JBSS3.SA) controlling shareholder J&F Investimentos agreed to pay a record-setting 10.3 billion real ($3.2 billion) fine for its role in a corruption scandal that seemed to implicate Brazilian President Michel Temer.
Shares of Brazil's largest banks have dropped an average of 13 percent since mid-May, when allegations first surfaced that Temer had endorsed the payment of hush money to silence a potential witness and took bribes from JBS.
Temer has denied the allegations.
Lenders could suffer from their exposure to other companies facing hefty fines as part of a fresh wave of expected plea bargains and leniency deals, some investors fear.
"Despite the mitigating factors, we maintain our view that expected asset quality improvements have become less likely given the recent political crisis," New York-based Corfield said in the note.
Banking sector officials, by contrast, have argued that the events leading to the J&F plea deal are unlikely to pose any serious risk for the nation's banking system.
Some Brazilian banks have held preliminary consultations with prosecutors over how plea deals work, the online service of Valor Econômico newspaper reported on Tuesday.
The report did not disclose the names of the banks due to concerns about how investors would react to the news, ValorPRO said, citing a person familiar with the matter. A spokeswoman for the prosecutor-general's office declined to comment.
A presidential decree announced last week would allow Brazil's central bank to strike plea-bargain agreements with lenders that admit breaching the law in exchange for softer fines or more lenient prison terms for their executives.
An index grouping all financial shares .IFNC in Sao Paulo's B3 exchange rose 0.4 percent in midafternoon Tuesday trading, reversing earlier losses.
Preferred shares of Banco Bradesco SA (BBDC4.SA), the country's No. 3 listed bank, shed 0.3 percent, while those of Itaú Unibanco Holding SA (ITUB4.SA) - the country's biggest lender by assets - added 0.9 percent.
State-controlled Banco do Brasil SA (BBAS3.SA) rose 1.1 percent, while units of Banco Santander Brasil SA (SANB11.SA) dropped 0.1 percent.
The government may have to amend parts of the decree to include prosecutors in the structuring of plea deals along with the central bank and the securities industry watchdog, Valor said.
According to Corfield, one aspect of concern is the banking industry's exposure to meatpackers including JBS.
Overall, JBS and J&F appear to pose the largest risk to Brazil's banking system, the note said. Together they account for about two-thirds of estimated bank loans to the protein sector.
JPMorgan estimates J&F's total bank debt at 33.6 billion reais, of which 21.1 billion reais mature within the next 12 months. Most of that comes from JBS, the world's largest meatpacker, the note said.
"Despite this sizeable amount, an important mitigating factor is the composition of the JBS’s short-term debt, which is largely comprised of trade finance lines," Corfield wrote in the note.
J&F did not comment.
(Additional reporting by Bruno Federowski in São Paulo; Editing by Christian Plumb)