SAO PAULO, July 05 (Fitch) The severe recession, corruption scandals and a difficult external economic environment have simultaneously challenged Brazilian bank credit quality and spurred a distressed debt market, according to Fitch Ratings.
“Brazilian banks have remained conservative, with limited risk appetite and restrained growth prospects. Even government owned banks, with outstanding loans that grew by 83 percent versus 22 percent for private bank peers between 2011 and 2014, decided to decelerate loan growth and reviewed their underwriting standards,” said Claudio Gallina, Senior Director. “However, the distressed loans market is gaining traction as in Portugal, Greece and other economies that have faced severe economic turbulence.” Domestically, the bulk of the impaired loans have already been written off from the banks’ balance sheets.
Fitch estimates that total outstanding distressed loans in Brazil are around BRL500 billion, including BRL122 billion of non-performing loans that are still registered on the banks’ balance sheet. Both local international banks are entering the Brazilian market. For the lenders, benefits include short-term cash flow generation, reduction of tenor mismatches between assets and liabilities, and favorable tax treatments. For buyers, pricing and loss recovery prospects are the determining factors and depend on the type of loans, tenors, interest rates and guarantees. Nevertheless, on average, distressed loans have been sold at around three to four percent of their face value. The average profitability of distressed debt investing is around 30 percent in Brazil, a solid return considering it involves a collection service fee and consumes very little capital. Foreign banks have been increasingly interested in Brazilian distressed loans, especially the ones originated in the retail / residential mortgage portfolios, given the strong potential for recovery due to the loan guarantees.
The acquisition of Brazilian bank non-operating assets is another growing market. The bulk of transactions are foreclosed real estate owned by banks following the recovery of the collateral backing residential mortgage loans. Banks normally aim to reduce their foreclosed assets, given their high capital consumption, as well as the relatively high administrative and maintenance costs. While local players are actively managing distressed loans, international players are encountering challenges specific to Brazil with both distressed loans and non-operating assets.
Complex contract structures, local characteristics of ownership and registration of guarantees, cumbersome notary procedures, and compliance issues are among the main difficulties. Executing partnerships with local players is a common, though still new, solution. Contact: Claudio Gallina Senior Director +55-11-4504-2216 Fitch Ratings Brasil Ltda. Alameda Santos, 700 – 7th floor, Sao Paulo, Brazil. Jean Lopes Director +55 – 21 – 4503-2617 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: email@example.com.
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