Finance Ministry estimates collection of up to R$115bn, but federation of banks said liabilities add up to only R$12bn; most lenders are 100% provisioned
06/14/2023
The decision of the Supreme Federal Tribunal (STF) to charge social taxes PIS and Cofins on banks’ income between 1999 and 2014 is likely to have a limited impact on them, despite the noise, lenders and analysts say.
The Ministry of Finance expects to collect R$115 billion from this case, but the Brazilian Federation of Banks (Febraban) sees a much lower figure, of R$12 billion. Virtually all lenders have already built provisions for nearly 100% of this volume. The exception is Santander, which had set aside funds for this case before reversing the decision in the first quarter of the year.
The Supreme Court’s ruling was on the bank’s radar after the vote of the rapporteur of the case, Justice Ricardo Lewandowski, last year. He had voted in favor of the banks. On Tuesday night, the plenary of the court formed a majority in the opposite direction. According to Febraban, the estimate of R$12 billion is based on the financial statements (December 2022) of Bank of America, BNP Paribas, Bradesco, BTG Pactual, Daycoval, GMAC, Itaú, Mercantil do Brasil, and Santander.
On the other hand, Banco do Brasil, Banrisul, Caixa Econômica Federal, Citibank, Safra, and BV did not set aside any money either because they participated in an installment program for tax debts (Refis) created by Law 12,865/2013 or do not face litigation in this regard.
For analysts, the Supreme Court’s decision is likely to have a limited impact on the performance of banks, except for Santander. “We believe that most of the banks we cover have already made provisions for the matter,” Bradesco BBI said. “We believe that a potential negative ruling may require the bank [Santander] to rebuild those provisions. Meanwhile, we see a limited impact for the other banks,” Goldman Sachs said. “We see this decision as potentially negative for Santander, as it will have to return the R$4.2 billion in provision expenses, while we see a neutral impact for the other banks,” Safra said.
BTG points out that it is not yet clear whether Santander will have to recognize the full amount reduced from provisions or only a portion of it. “The bank is still evaluating internally whether it will indeed be necessary to reinstate this provision. It is important to mention that they will probably still wait for the completion of the entire vote process because theoretically there could be a request for a review or even a change in the vote.” For Goldman, if there is a reversal and the Supreme Court ends up ruling in favor of the banks, then other lenders would be affected, in this case positively, as they could reverse the provisions.
Febraban claims that the calculation of R$115 billion mentioned by the Attorney General’s Office of the National Treasury has different premises, but still “deserves to be analyzed in depth.” It points out that its calculation is based on the financial statements, Refis, and the payments already made during the period in question.
The Ministry of Finance’s calculation, on the other hand, takes into account the “total loss of income” over the past five years, which Febraban said will not happen because since 2015 lenders have been collecting PIS/Cofins on gross income, which includes financial income. The government’s account also takes into account the “totality of taxpayers,” meaning it does not take into account the banks that complied with Refis.
The Finance Ministry reiterated what the 2024 budget guidelines law says. “The estimates of the fiscal impact of these lawsuits are provided by the Secretariat of Federal Revenue and, in most cases, take into account the total annual collection loss and an estimated impact of the return, considering the last five years and the totality of taxpayers, so it represents the maximum impact on the Treasury, which may not materialize in its entirety.”
According to Febraban’s analysis, the most affected banks are Santander (R$4,23 billion); Bradesco (R$2,9 billion), which said the amount is fully provisioned; Mercantil (R$1,2 billion); BTG (R$1.1 billion), which said it is fully provisioned; Daycoval (R$851 million), which said it is fully provisioned; Itaú (R$672 million), which in this case has a court deposit of R$667 million; Banco GM (R$537 million), fully provisioned; BNP (R$451 million), fully provisioned; and BofA (R$133 million), fully provisioned.
In the first quarter, Santander surprised by unraveling the tax risk provision of R$4.2 billion related to the judicial discussion on Law 9,718/1998 regarding the PIS/Cofins collection. At the time, the bank was questioned by analysts about this move, when it decided to reverse the provision based on the favorable vote of only one Supreme Court justice. CEO Mário Leão argued then that it was the most important justice, and that the decision to reverse the provision was backed by PwC, the bank’s audit firm.
“There was a vote, well, from the main justice, and obviously the case must continue. We believe we can – obviously, we believe, and our auditors believe – unravel the provision,” Mr. Leão said.
The executive also claimed that the bank was being conservative as it could have allowed the reversal of the provision to inflate earnings, but preferred to offset that effect with a loan provision of the same amount, thus having zero impact on earnings. “This means that we are still being conservative. We believe that was the right decision,” he said at the time.
Now, in a material fact, the bank said the estimated value of the lawsuits is R$4.5 billion and that it “will wait for the publication of the ruling on the Supreme Court’s decision to discuss the measures and appeals still applicable, given that, in the company’s understanding, some points have not been examined in the specific case of the bank, since it is a general repercussion ruling,” which means they apply to all similar cases.
Febraban, on the other hand, said that once the decision is published, it will study the next steps, “including the possibility of appealing.”
In the case of Mercantil, the case does not appear on the financial statement because the risk of loss was considered very low. Sought for comment, the bank said it is supported by final and non-appealable judicial decisions with respect to the discussion regarding PIS and Cofins, having already obtained favorable decisions recognizing the res judicata. “Therefore, the Supreme Court’s decision on the matter does not affect the bank’s discussion, which has other grounds.”
*Por Álvaro Campos — São Paulo
Source: Valor International