Brazil Banks Struggle to Sell 4.2 Billion of Seized Collateral

Por Cristiane Lucchesi e Felipe Marques

Brazilian banks are wrestling with a growing pile of assets they’d rather not own: at least 13.8 billion reais ($4.2 billion) of cars, real estate, equipment and other collateral seized when borrowers defaulted on their loans.

The total surged 42 percent in the first quarter from a year earlier at eight of the nation’s biggest lenders as fallout from the worst recession in Brazil’s history continues to weigh on banks’ finances, according to the companies’ financial statements. The assets represent as much as 27 percent of shareholders’ equity in mid-size companies such as Banco Pine SA, squeezing profit because they don’t generate fee or interest income.

Regulators are trying to help. A provisional measure was enacted June 7 to kill requirements that banks sell seized assets within a maximum of three years. The changes were proposed by the central bank and the finance ministry, according to a legal filing.

“With more time, banks can now hold off on selling those assets until they manage to get a better price,” Eric Barreto, a professor at Sao Paulo business schools Insper and M2M Saber, said in an interview. “But in the event of a liquidity crisis like we had at the end of 2008, those banks with a lot of real estate assets may face troubles.”

Brazil’s ongoing political crisis is weighing on prospects for an economic rebound, making it harder for the real estate market to recover. Housing prices fell 0.16 percent in May from April, the biggest drop ever recorded on the FipeZap index, which was created in 2012. For the past 12 months, prices of residential properties rose 0.46 percent, well below the nation’s 3.77 percent inflation rate as measured by the IPCA-15 index.

“The fact that banks are asking for more collateral signifies a still-high risk environment and, given the weakness of the economic recovery, collateral valuations will draw increasing scrutiny,” Arjun Bowry, a Bloomberg Intelligence analyst, said in an interview.

Government-owned Caixa Economica Federal, the biggest mortgage lender in Brazil, has the largest chunk of seized assets, based on the company’s most recent financial statements. The total includes properties valued at 5.79 billion reais at the end of the first quarter, 90 percent more than in the same period a year earlier and 9 percent of total equity. Caixa didn’t reply to an email seeking comment.

At Banco Pine, such assets amount to 316.7 million reais, or 3.6 percent of total assets and 27 percent of shareholders’ equity of 1.1 billion reais. Seized assets increased 10 percent from last year. Banco Pine shares produced a total return of negative 21 percent this year, the worst performance among Brazilian lenders, according to data compiled by Bloomberg.

Banco Pine said in a emailed statement that seized collateral helps protect capital from loan losses. Most of the assets are real estate, the bank said, and have been submitted to valuation analysis from specialists outside the company, most recently in December. The firm usually works with an excess of collateral in relation to the value of the credit, Banco Pine said.

Cash Cushion

Claudio Gallina, an analyst at Fitch Ratings, said he doesn’t believe the assets pose a great risk for Brazilian banks, especially larger ones, because real estate prices “haven’t gone down that much.”

Brazilian banks also have high cash positions right now, which curbs liquidity risks associated with carrying such assets. He cited Caixa as an example: Even though the bank had 5.8 billion reais in unused real estate as of March, it also reported 140 billion reais in cash or high liquidity bonds.

At another mid-size lender, Sao Paulo-based Banco Pan, jointly owned by BTG Pactual and Caixa, seized assets rose 23 percent from last year to 339.8 million reais, or 10 percent of shareholders’ equity. In an emailed statement, Banco Pan said the increase should be expected given the current macroeconomic backdrop.

At the four biggest banks in Brazil by market value, the total of goods seized from delinquent borrowers also increased, though they represent a smaller portion of shareholders’ equity and total assets.

Bradesco, Itaú

Provisions for losses on seized collateral increased 39 percent at Banco Bradesco SA in first quarter, to 1.29 billion reais, while the total of real estate, cars and equipment seized rose 28 percent to 3 billion reais.

“As long as there isn’t any recovery in real estate prices, the volume of provisions for those assets should keep increasing,” Insper’s Barreto said.

Adding to the problem is the decision by many large banks to eliminate some branches. While the move lowers expenses, it can also add the now-unused real estate to the banks’ list of property on the balance sheets.

Figures from Banco Santander Brasil SA and Itau Unibanco Holding SA also show an increase. Santander has 2.788 billion reais in collateral seized from delinquent borrowers, 7 percent more than last year, while at Itau the total rose 65 percent to 994.1 million reais.

Banco do Brasil SA, also a government-owned bank, is best-positioned among Brazilian lenders, with total collateral seized increasing 8 percent to 296.2 million reais. That’s just 0.02 percent of total assets of 1.4 trillion reais and 0.33 percent of total equity of 89.8 billion reais.

Mid-size lender Banco Votorantim SA was the only bank to show a drop, with total collateral seized from delinquent borrowers down 3.5 percent at the end of the first quarter from the same period last year.