SAO PAULO (Reuters) - Brazil’s new cycle of interest-rate hikes promises a measure of relief for private-sector banks, but some investors doubt that tighter monetary policy will bring shares of lenders big windfalls.
Central bank policymakers raised the benchmark Selic overnight interest rate on Wednesday evening for the first time since July 2011 to curb inflation, in a move many economists labeled as timid. Monetary tightening cycles have often been seen as a boon for lenders, who can charge more for credit when the Selic rises, boosting profits.
Brazil’s banking industry has struggled over the past year in the face of government pressure to cut borrowing costs, flagging loan demand from indebted consumers and what looks likely to be a third straight year of sub-par economic growth.
The industry saw profits shrink in 2012 for the first time in 15 years due to weak loan growth, a focus on less-risky kinds of credit that charge lower interest and a quick narrowing of banking spreads - the difference between the interest rate charged on a bank loan and the lender’s cost of fundraising.
Wednesday’s central bank decision to hike the Selic by a quarter of a percentage point to 7.5 percent could provide banks with some relief, but it will not solve economic and structural problems or ease government interference in the industry. Higher rates are also coming at a time when bank profits are more dependent than before on economic activity and demand for loans - in prior years, the main element behind profit was spreads.
“The impact of a tightening cycle could only offer banks some margin relief; it is unlikely to bring about an inflection point in the industry,” said Andre Caminada, who manages 2.1 billion reais ($1.05 billion) in equities at Victoire Brasil Investimentos in São Paulo.
Expectations of a higher Selic have supported shares of Itaú Unibanco Holding SA (ITUB4.SA), Banco Bradesco SA (BBDC4.SA) and Banco Santander Brasil SA (SANB11.SA), Brazil's top-three private-sector banks. Their shares are flat this year and have outperformed a 13.5 percent drop in the benchmark Bovespa index .BVSP, but overall, benefits are likely to be more muted than the heady heights reached in some previous tightening cycles.
In the tightening cycle from September 2004 to early 2005, for example, financial shares outperformed the Bovespa threefold. But in the last monetary tightening cycle that began in January 2011 and ended in July of that year the effect was less exciting. Shares of the three banks rose about 4 percent, compared with the Bovespa’s 1 percent fall in the first three months after the rate increase.
Brazil’s central bank is facing the difficult balancing act of raising rates to rein in inflation without putting the brakes on an already sluggish economic recovery. Most analysts in the latest central bank weekly survey predict it could go to about 8.5 percent by year-end.
Since late last year, policymakers have been under pressure to raise the Selic, which stood at a record low since last October, after prices last month breached the official target ceiling of 6.5 percent.
Strategists such as Bank of America Merrill Lynch’s Felipe Hirai say a higher Selic gives banks a chance to restore some of revenue lost in the wake of President Dilma Rousseff’s pressure to compel banks to reduce spreads - a strategy that local media and politicians dubbed “the war on spreads.”
Wednesday’s rate increase could help put the brakes on a year-long decline in spreads, helping reverse falling interest income at Itaú, Bradesco and Santander, Hirai and other analysts argue. On average, interest income accounts for 58 percent of revenue at Brazil’s top-four banks, according to Thomson Reuters data.
In addition, an increase in the Selic could actually reverse some of the Bovespa’s declines by curbing inflation fears and restoring investor confidence. That expectation may seem counterintuitive considering stocks are usually expected to fall when borrowing costs rise.
“The obvious beneficiaries should be banks, but the market as a whole sees the hiking cycle as good and, most of all, necessary this time - raising the Selic with determination is a prerequisite to re-anchor inflation expectations,” said Pablo Spyer, a director with São Paulo-based brokerage Mirae Asset Securities.
But, in announcing its decision, the central bank said monetary policy will be “conducted with caution”. Such a stance, some analysts say, could signal that policy action may be too gradual to arrest inflationary pressures, hampering equities.
Marcelo Carvalho, a senior economist with BNP Paribas SA in São Paulo, reached into the world of science fiction to liken the central bank’s Wednesday decision as being a hesitant blow against inflation. In his opinion, the central bank’s goal is to keep inflation in check, not vanquish it.
“Star Trek fans know the scene well. Facing a dangerous alien, but unwilling to really kill it, Captain Kirk would turn to Spock and crew and give the orders: ‘set your phasers to stun.’ Making the alien dizzy is enough. The idea is to keep the enemy under control, not kill it,” he said.
Ivan Kraiser, who helps oversee 450 million reais in assets at São Paulo-based Legan Asset Management, agrees: investors might be overestimating the positive impact of the hiking cycle on the mood of equity investors.
“Causality in this case is not perfect,” Kraiser said. “Bank profits are likely to respond to a set of other variables, like growth, this time, because the moment now seems more complex than in past tightening cycles.”
For shares of Itaú, Bradesco and Santander Brasil to stage a rally, loan delinquencies will have to fall further from current levels, demand for new loans will have to rise significantly and state pressure on the industry must also subside, both Legan’s Kraiser and Victoire’s Caminada agreed.
Mirae’s Spyer said concerns related to the exposure of Brazil’s largest banks to Grupo EBX, the conglomerate of energy, mining and logistics company led by Brazilian billionaire Eike Batista, might also hamper the performance of their shares. Currently, some EBX units are grappling with rising debt costs, an uncertain outlook for business and a rout in their shares.
Competition risks could also limit potential gains in share prices triggered by the Selic rate hike, Kraiser added.
Rousseff has used state-controlled Banco do Brasil SA (BBAS3.SA) and Caixa Econômica Federal CEF.UL to cut credit costs in Brazil - which remain among the world’s highest - and to foster competition with private banks. Such efforts fueled rapid loan book growth at state-run lenders, which now control 48 percent of Brazil’s outstanding loans, without a significant deterioration in delinquencies.
Shares of Banco do Brasil, the nation’s largest lender by assets, have advanced 12 percent this year. Those gains have been less related to the upcoming expected series of interest rate increases but chiefly from Banco do Brasil’s plans to list its insurance and annuity business in an initial public offering valued at up to $6 billion.
Additional reporting by Asher Levine; Editing by Todd Benson, Paritosh Bansal, Edwina Gibbs and W Simon