Brazil companies face shift to capital markets from banks

Brazilian companies will need to look to capital markets instead of traditional bank loans for a substantial portion of their funding by early next year, as stricter international capital rules pressure lenders to cut balance sheets, a study found.

Brazilian banks must comply by January 2019 with the new Basel III capital requirements, conceived after the 2008 financial crash to force banks worldwide to hold more capital.

The research paper, by the asset management unit of Brazil’s largest private lender Itaú Unibanco Holding SA, found that corporate borrowing through bonds and other debt securities will need to grow by between 2 and 4.8 times the current level by 2022 to meet companies’ financing needs as banks are compelled to cut outstanding loans.

As a result, Brazil’s corporate debt stock is likely to soar to between 343 billion reais ($87.67 billion) and 799 billion reais by 2022 from 165 billion reais in 2018, the study found.

“Under Basel III, banks will turn to loans that require less capital expenditure, such as mortgages and payroll-backed credit, leaving companies to seek more financing in the capital markets,”, said Gerson Konishi, the Itaú Asset Management portfolio specialist who was responsible for the study.

In addition to requiring banks to boost their core capital ratio to 7 percent from 4.5 percent, Brazil’s central bank is also obliying them to set aside more capital for corporate loans. A loan to a large company is almost 2.5 times costlier to banks in terms of capital than mortgages, for instance, according to the central bank rules.

The situation will challenge Brazilian companies to get financing as the country’s capital markets lag not just developed countries but many other emerging markets. International bond markets are often expensive for Brazilian companies, which generally need to hedge foreign currency debts.

Bonds and equities sold by private companies comprised just 2 percent of Brazil’s gross domestic product between 2013 and 2015, a McKinsey study found, lagging countries such as Chile (6 percent), China (8 percent) and the Philippines (4 percent).

If companies cannot borrow through the capital markets, the economy could slow, the Itaú study found. The Basel III requirements are also likely to drive corporate borrowing rates higher if demand exceeds supply, according to the study.

Exacerbating the challenges, government financing sources like state development bank BNDES have also scaled back lending due to tight budgets.


Brazilian banks, including state-controlled lenders like Banco do Brasil SA, have already started cutting corporate loan exposure in favor of retail. Banco do Brasil’s corporate loan book shrank 3 percent over the latest year to 133.8 billion reais.

In a glimmer of hope for Brazil’s capital markets, which have suffered mainly from competition with sovereign bonds with high interest rates, investment funds have boosted holdings in real-dominated corporate bonds, said capital markets industry association Anbima director José Eduardo Laloni.

Corporate bonds held by investment funds surged 18 percent to 137.5 billion reais. That is still just a fraction of the roughly 4 trillion reais in assets under domestic funds’ management, most of which remains in government bonds.

Laloni said growth in capital markets will depend on Brazil’s ability to keep benchmark interest rates and inflation low. ($1 = 3.9122 reais) (Reporting by Carolina Mandl; Editing by Christian Plumb and David Gregorio)


Source: Reuters

Brazilians Become More Optimistic about Their Own Financial Situations

According to a poll conducted by the Datafolha institute, the improvement in terms of expectations that Brazilians have regarding their own financial situations did not translate into a more optimistic take on the country’s economic growth.

The poll revealed that 46% of those interviewed believe their financial situations will improve – in the previous poll, which was released in November of 2017, 43% maintained this position. Additionally, the percentage of Brazilians who believe their financial situation will deteriorate went down to 13% versus 19% in the previous poll.

The improvement may be slight, but little by little, it is nearing the all time high that was registered back in July of 2016, two months after former president Dilma Rousseff (PT) had been removed from office and the administration of Michel Temer (MDB) had begun.

Optimism is highest among families whose household income is no greater than two minimum wages: 47% of them believe that their finances will improve.

However, this optimism concerning personal finances does not reflect a more positive view of the Brazilian economy: 41% of those interviewed believe the country’s economy will stay the same. The portion of Brazilians who believe the economy will improve barely changed since the last poll, while the number of Brazilians who believe the economy will deteriorate went down to 26%.

Source: Folha de S. de Paulo

Government wants to give power to BC to participate in leniency deals

The leniency agreement stipulated in Provisional Measure (MP) 784, which increased the punitive powers of the Central Bank (BC) and of the Securities and Exchange Commission of Brazil (CVM), exclusively reaches administrative infractions committed by agents of the financial system and of the capital markets. To encompass criminal conducts, such as money laundering and corruption, the government may submit a bill or an amendment to the provisional measure already being considered in Congress stipulating the joint action of the Federal Public Ministry (MPF, the public prosecutors’ office), the BC and the CVM. Only the MPF has the prerogative of criminal prosecution.

The prosecutor general of the Central Bank, Cristiano Cozer, explained: “The leniency agreement with the BC only covers administrative infractions, not crimes. It wouldn’t make sense an offender to sign agreement only with the BC, because it would need to confess and run the risk of responding to criminal charge filed by the Public Ministry. Much less in cases of facts prior to the issuance of MP 784, when the fine was [and continues being] of at most R$250,000.”

Issued last week, the measure has been object of criticism by the MPF and of mistaken interpretations either in relation to its content or to the timing of its publication.

The BC attributes this noise to the climate of “animosity” now sweeping the country. This would be the reason to identify the publication of MP 784 with the expected plea bargain of ex-Finance Minister Antonio Palocci, involving players of the financial system, and with the investigations of insider trading that would have produced gains for JBS on the forex and interest markets.

Yet the measure has no guarantee of retroactive effect. In reality, there are two hypotheses. In the punitive law, new rules retroact only in benefit of the defendant. In the procedural law, the new legislation will be retroactive depending on the state in which the proceeding is. In that context, there will be a discretionary analysis of each case presented to the BC.

The provisional measure innovates by typifying the administrative infractions until then addressed only by resolutions of the National Monetary Council (CMN). For not being described in law, the Superior Court of Justice (STJ) was overturning administrative penalties imposed by the BC on the financial system. The MP describes 17 illegal actions that go from posing constraints to the BC supervision to providing incorrect information and data, acting as administrator of financial institution without prior BC approval, structuring transactions without economic grounds or misappropriating funds of third parties.

This description will not solve the stock of financial-system cases that is in the judiciary, but with it the STJ may consolidate a jurisprudence, public-sector lawyers reckon.

The provisional measure, in this sense, is structural. And the introduction of the leniency agreement is, in the view of the monetary authority, only an “appendix” to the new legislation.

The discussion on the terms of MP 784, which also updates the values of fines imposed on the financial system in case of infraction, is a recommendation of the G-20 and had beginning at the Central Bank in 2010, in the preparatory evaluation of the Financial Sector Assessment Program (FSAP) of the Basel Accord. The bill was sent to the Office of the Chief of Staff in the second term of Dilma Rousseff (Workers’ Party, PT). With the change of government, it returned to the BC and was taken as part of the “BC Plus” agenda at the end of 2016 by its president, Ilan Goldfajn.

In July there will be new FSAP evaluation, made by the IMF and World Bank, with impacts on the country’s rating and risk premium. Because of that, the BC opted for issuing a provisional measure, a faster initiative, abandoning the original idea of a bill.

The country was not appearing well on the picture of the international organisms, one government official says, for having a legislation of administrative proceedings dated of 1964, when law 4,595, which created the Central Bank, was enacted. The values of the fines imposed on the financial system were frozen since the 1990s at a maximum of R$250,000, value that MP 784 raised to as much as R$2 billion.

The terms of the provisional measure were inspired in the legislation of the Administrative Council of Economic Defense (Cade), even making use of its instruments, such as the leniency agreement, the terms of commitment and the cautionary measures. BC and CVM thus start to invest more in the intelligence activity, with more investigative capacity.

Administrative wrongdoing committed before the publication of MP 784 are likely to be punished with the fines existing until then, of R$250,000, charged by the BC, and of up to R$500,000, imposed by the CVM. Because of these small sums, there is no expectation that individuals or financial institutions will approach the BC and the CVM to make leniency agreements without crime. The most probable is that whoever committed crime will directly seek an agreement with the Public Ministry and, with that done, will go to the BC or the CVM to settle the accounts of potential administrative infractions committed.

On June 12, the BC released an official note in which rebuts sharp criticism made by prosecutors in stories and articles published in the press during the weekend. The note attests that the measure “in nothing alters or interferes in the capacity of investigation and substantiation of criminal wrongdoing of the Public Ministry. Nor does it alter the legal duty of the BC and of the CVM of communicating indications of crime to the MPF.” It is common for the Central Bank to act as an assistant of the accusation in proceedings it sends to MPF investigation and to lend analysts to help clarify the nature of infractions committed. It also says that the urgency of the provisional measure comes from the evaluation of Brazil in the FSAP, which begins next month.

The proposal of updating the legislation was widely announced and released in Agenda BC+ and, therefore, “the MP has no relation with rumors of plea deals that emerged later and whose content is unknown.”

Source: Valor Econômico

Brazil raises income limits for subsidized mortgage program

Brazil’s government said on February 6th it was raising income limits for a subsidized mortgage program in an effort to spur the country’s struggling construction industry and spark a long-awaited recovery from the worst economic recession on record.

The government’s MCMV mortgage program, which finances new home purchases at below-market interest rates, will now cover households with monthly incomes as high as 9,000 reais ($2,900), among the most affluent 5 percent of Brazilian families.

The program, first conceived as a stimulus for low-income home ownership, has been progressively expanded in recent years to cover families earning up to 6,500 reais per month last year.

A report from February 9th revealed details of the new policy aimed at shoring up the construction industry after homebuilders suffered a wave of canceled sales due to high unemployment and borrowing costs were.

Income limits for more modest MCMV segments are also being adjusted from 2016 levels to compensate for consumer inflation. Brazil aims to finance 610,000 new homes with the mortgage program this year, which stalled last year amid political turmoil and a severe budget crisis.

In a ceremony in Brasília, President Michel Temer said civil construction is a key sector to revive the Brazilian economy, which he said will return to growth in 2017.

($1 = 3.12 reais)

Source: Reuters Brazil