December 1, 2017 / 5:20 PM / a year ago

Fitch: Compensation Agreements Credit Positive for Brazil Banks

(The following statement was released by the rating agency) SAO PAULO/NEW YORK, December 01 (Fitch) A proposed compensation agreement that will see Brazilian banks pay BRL10bn to customers for losses caused by economic stabilization plans in the 1980s and 1990s will not pose any material credit risks for the banks and should mitigate future litigation risk on the issue, says Fitch Ratings. If approved, the agreement will be credit positive for the affected banks, with most having anticipated the costs associated with civil action with provisions in excess of the amount agreed. In our view, the benefits of extinguishing this risk and related uncertainties clearly outweigh the financial costs arising from the agreement. A final agreement between banks and savings account holders has been reached after years of discussion, though final details related to the total amount and payment schedule are pending. The expected BRL10 billion final amount ends a decades-old litigation risk and is considerably lower than the central bank's initial estimates of up to BRL342 billion. The discussions were a result of depositors' claims over financial losses resulting from the impact of six economic plans on savings accounts. The most affected institutions should be the largest retail banks that have historically attracted the bulk of Brazil's saving deposits. The top five banks hold 95% of the balance of saving accounts: Caixa Economica Federal (CEF) 48%; Banco do Brasil (BB) 22%; Itau Unibanco 16%; Bradesco 14%; Santander 5%. The expected costs account for only 0.5% of the combined equity bases of these five banks. According to public information from June financial statements, BB had BRL6.8 billion provisioned for civil cases, Bradesco BRL5 billion, Itau BRL4.9 billion and Santander BRL2.2. Fitch believes that the bulk of this provisioning is likely related to civil actions pertaining to the economic plans. These figures suggest that private banks have more than sufficient reserves and could even potentially lead to small provision reversals, which would be slightly positive for their results and could also reinforce loan loss provisions. CEF is in a less comfortable position as it has been less active in reinforcing provisions in general over the last few years and its share of expected costs is the largest among the five banks. In the footnotes of its June 2017 financial report, CEF disclosed that it has BRL1.5 billion reserved specifically for "Economic Plans," which could be insufficient considering its historical saving accounts market share of above 40%. Still, Fitch does not anticipate any material and immediate financial impact on CEF, as the cost should still be manageable for the bank. No rating implication is anticipated, since CEF's ratings are driven by the support of the Brazilian federal government. It remains unclear if depositors who currently do not hold claims against the banks will have the right to do so, potentially increasing the cost of the agreement. This risk is mitigated, however. Even if they do, they are unlikely to receive the same payment priority as current eligible depositors. Furthermore, these additional claims are unlikely to significantly affect the BRL10bn agreement size. Contact: Raphael Nascimento Associate Director, Financial Institutions +55 11 3957 3664 Fitch Ratings Brasil Ltda. Alameda Santos, 700 -7 andar, Cerqueira Cesar Sao Paulo Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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