May 15, 2018 / 2:57 PM / a year ago

Brazil's banks sound alert on anemic corporate loan growth

SAO PAULO, May 15 (Reuters) - Brazilian banks are seeing waning corporate loan demand, the latest sign that Latin America’s largest economy is struggling to bounce back from its deepest recession in decades.

Brazil’s top four listed banks - Itaú Unibanco Holding SA , Banco Santander Brasil SA, Banco do Brasil and Banco Bradesco SA - reported a 6.6 percent overall first-quarter year-over-year drop in large corporate lending to 602.8 billion reais ($164 billion).

Most of those banks’ top executives expect the decline to persist to the end of the year or into 2019 even as looser monetary policies send interest rates close to all-time lows.

The numbers underline how ample spare factory capacity after the recession, plus a lukewarm recovery and concern that upcoming elections could be a setback for needed reforms in pensions and other areas is keeping companies’ investments to a minimum.

“We do not really expect much improvement in corporate demand this year, especially given that it’s an election year,” Itaú Chief Executive Candido Bracher said this month. “Companies will wait for a clearer scenario before deciding on their investment plans and borrowings.”

Brazilians elect a new president in two rounds of voting that will begin in October. Concern over whether a market-friendly candidate will win has spooked investors and some company executives.

Although Brazil’s interest rates hit an all-time low this year, making it cheaper for companies to raise funds, most of its industrial companies still have plenty of room to boost output before considering new investments after the recession.

“Companies have no urgent need to borrow money for capital expenditures because their capacity utilization is low, and Brazil’s economic recovery has proven to be very gradual,” said Alberto Ramos, head of Latin America Economic Research at Goldman Sachs.

Brazilian companies’ plants were using just 76 percent of their installed capacity by the end of March. That is 3 percentage points higher than a year earlier, but still far from the 83 percent rate reached in December 2013, before the economy plunged into recession, according to Bradesco data.

For example, the last time Votorantim SA, one of Brazil’s largest industrial groups, approved a new expansion program was in April 2015, Chief Financial Officer Sérgio Malacrida said in a recent interview.

Votorantim’s first-quarter capital expenditures slid 39 percent from a year ago to 345 million reais. “Votorantim hasn’t approved significant investments due to all the uncertainties about the Brazilian economy,” Malacrida said.

Without clarity about Brazil’s economic recovery, the São Paulo-based group has focused on debt reduction, as have many other big Brazilian companies.

State-controlled oil company Petroleo Brasileiro, for example, slashed first-quarter capital spending by 14 percent to 9.9 billion reais. Quarterly capex at Vale SA , the world’s largest iron ore producer, fell to $890 million, the lowest since 2005. Both companies are also trying to cut borrowing.

Overall companies’ health has improved as interest rates fell, reducing debt servicing costs. By December 2017 businesses on average had enough cash on hand to cover nearly three times their short-term debt, Moody’s said in a note to clients in May, from 2.1 times at the end of 2016.

Part of the drop in bank loan demand can be explained by a shift to selling bonds or other capital markets options to raise debt. Still, the quarterly increase in bond issuance - by some 10 billion reais to 61 billion, was dwarfed by the 43 billion real drop in lending over the same period.

Even as corporate loans decreased, Brazil’s top four listed banks eked out a 0.63 percent rise in total outstanding loans to 2.1 trillion reais as higher consumer confidence helped fuel more personal borrowing.

But it remains unclear how sustainable that is without companies getting into the act. “A continuous growth in consumer loans depends largely on Brazil’s economic performance,” Ramos said. ($1 = 3.6780 reais) (Reporting by Carolina Mandl; Editing by Christian Plumb and Susan Thomas)

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