Caixa Econômica Federal wants to renegotiate its relationship with its sole shareholder – the Brazilian Treasury – to ensure that it has enough capital to back the carrying out of public policies, reversing the course taken by the administrations of former presidents Luiz Inácio Lula da Silva and Dilma Rousseff, who weakened the bank’s Basel III index through the generous distribution of dividends and counter-cyclical credit policies.
From now on, to execute government projects, the bank will not only request funding to lend out, but also a guaranteed capital structure. Caixa is also taking certain steps such as cutting administrative costs, selling an infrastructure project portfolio worth R$5 billion to the market, possibly raising funds abroad, and restructuring its insurance area.
The government, meanwhile, is looking for alternatives – the one that has progressed the furthest is a R$10 billion operation involving the Workers’ Severance Fund (FGTS) that would expand by R$200 billion Caixa’s margins for housing loans – but it also wants to redefine the bank’s role, shrinking it and focusing it more on housing loans for low-income Brazilians.
Caixa has argued for expanding its operations, however, to include farm credit and corporate loans, seeking out profitable niches to offset the tight margins involved in public policy projects. The diagnosis is that the federal bank, which today has R$711 billion in credit operations, would become unsustainable if its portfolio dropped below R$670 billion.
“We won’t violate Basel III rules,” says one bank executive. “And in order to not violate them, we need to stop providing credit unless there is a solution for the bank’s capital.” FGTS has directed R$85.5 billion towards Caixa for loans in 2018, which would require R$5 billion in capital reserves to back these operations in accordance with Basel III rules. There are no capital restrictions for home loans in 2017.
The possibility of lending coming to a standstill is seen less as a threat and more as a legal imperative. “Nobody would attach their CPF [tax number] to a credit expansion like this,” the executive says, referring to the legal risk that directors face should they not comply with banking system prudential rules. That’s why, in the view of this executive, it’s the government, rather than the bank, that has a capital problem to resolve.
The starting point for these discussions is the fact that between 2007 and 2014 Caixa paid out R$29.4 billion in dividends to the Treasury (an average of 73% of profits) when banks the world over were reining in dividend payouts to comply with Basel III rules. The Treasury, meanwhile, injected R$13 billion of capital into Caixa, and another R$17 billion in hybrid capital instruments and debt from bond issues. “We pay interest on those operations,” the executive explains. Caixa also received Petrobras and Eletrobras shares, which have lost value as a result of the economic crisis.
In June, Caixa had a tier 1 capital ratio equal to 9% of risk-weighted assets. The bank’s prudential mechanisms require that capital levels be at least 1.5 percentage point higher than the minimum Basel III level, which will require a capital index of 9.5% on January 1, 2019. Therefore, Caixa needs to bring its tier 1 capital ratio to 11%.
The Basel index represents a ratio of bank capital to asset volumes – especially credit – weighted by the risk that the institution is exposed to in these operations. To improve its Basel index, the bank can increase its capital, reduce assets, or mitigate risks.
Caixa’s view is that with drastic adjustments it would be able to comply with Basel rules without any capital injection from the Treasury and the FGTS fund, but it would have to rein in lending. The first measure that it worked out with the Treasury was the reduction of the minimum dividend payout, of 25% of profits. In talks with the Central Bank, reducing dividends to zero is seen only as an extreme measure, should compliance with Basel III be at risk. “We are working day and night to pay dividends,” the executive says. “Cutting dividends would be an extreme measure, and before we do that we would already have halted credit.”
Next month, Caixa is expected to conclude two operations to reduce its assets. One of them is the sale of an infrastructure loan portfolio worth as much as R$5 billion. “We have already spoken with some investment banks, and there is interest,” the executive says. Another operation involves the sale of a fund including repossessed real estate, as Valor previously reported. The estimated sales volume would reach R$1.6 billion, more than the R$1 billion originally considered.
Major corporations are also paying back their debts to Caixa – a total of R$10 billion. Petrobras alone paid back R$3 billion, and JBS paid another R$5 billion. There was no restrictions on this credit, but rather a decision by the clients. “The companies had money and thought that it worthwhile to liquidate their debt,” the executive says. Caixa even discussed transferring a R$10 billion loan portfolio to the BNDES, but gave up because “the deal didn’t go the way we were hoping.” The idea was for Caixa to transfer a portfolio consisting of on-lending credit received from the development bank, freeing up R$1 billion in capital.
The bank also carried out a road show to sell $1 billion in overseas bonds, which was authorized by the bank’s board of directors. “There is great demand,” the executive says. But the costs are high, and the bank is looking for less expensive options. It is thinking about a smaller bond sale, closer to $500 million, to mark its presence in overseas markets and obtain a seal of quality.
Another way of strengthening its capital is by restructuring its insurance area. An agreement with CNP Assurances will generate a premium on the extension for 20 years, starting in 2018, of access to Caixa’s life, pension, and lending businesses. And it will also raise “a few billion” via a competitive process to select partners for the housing, auto, and asset insurance areas, as well as consortia.
For now, the possible opening of Caixa capital to the public is not on the table. The board considered the first step, which would involve changing the bank’s bylaws to transform it into a joint-stock corporation, but legal issues forced the matter to be removed from the agenda twice. Decree no. 759 specifies that Caixa is a government owned company, and for it to become a joint-stock corporation this rule would have to be changed.
Some argue that the bank should be whittled down, but the executive says that this would create an imbalance in the bank’s business. With a R$711 billion loan portfolio, Caixa is a market leader. But of this amount, R$420 billion are housing loans, of which R$220 billion belong to the FGTS. “If they take FGTS housing away, Caixa would be the same size as Santander,” he says. Higher returns from commercial operations, the executive says, would compensate the lower returns on housing loans, providing return on capital and allowing the bank to continue its operations without any capital injections.
The Caixa executive defends the banks’ continued presence in various niches it has entered recently. Such as farm credit, which is the only way to get out of the Central Bank’s punitive reserve requirements for banks that don’t provide demand accounts. Making huge loans to companies, the source says, also represents a profitable business for the bank.
Caixa also wants to continue financing home loans with funding from savings funds because it creates a relationship with middle-class clients. But it is pulling back on advance exchange contract operations. Although this is a profitable market, it carries a high risk that weighs on capital ratio calculations, and therefore eats up huge volumes of capital.
Caixa deems that it needs to grow its insurance area, where the bank has seen its market share grow to 8.1% from 5.6% this year, according to the executive. For this executive, it’s “unacceptable” for Caixa to have 23% of the credit market but only 5% of the insurance market. “It’s a cultural question, thinking that Caixa is a public company,” he says. “Caixa is a bank. It has to be efficient and generate profit.”
Source: Valor Econômico