Situation may be comparable with other large court-supervised reorganizations and mean the largest hit for the financial industry since pandemic

01/26/2023

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Case is likely to be biggest hit to banking industry since coronavirus pandemic — Foto: Dado Galdieri/Bloomberg

The collapse of Americanas after the discovery of a R$20 billion “accounting inconsistency” earlier this month is likely to cause strong impacts on the quarterly results of Brazil’s largest banks. As there is no defined rule for the level of provisions, it is impossible to know the exact amount, but industry sources say the case may be comparable to other large court-supervised reorganizations, including those of phone carrier Oi and mining company Samarco. This is also likely to be the biggest hit to the banking industry since the extraordinary provisions made at the start of the coronavirus pandemic in early 2020.

The total exposure of Americanas’s 10 largest creditor banks is R$23.4 billion, according to the list of creditors released by the company on Wednesday. This means that if the banks were 50% provisioned, as is the market practice for court-supervised reorganization cases, the impact would total R$11.7 billion. Some lenders question figures in the list, as is the case of Deutsche Bank, BV, and BTG. These last two took money from Americanas’s accounts to pay the debt, but these funds were later blocked by the courts.

In a report released Wednesday, XP estimates that the provisions of the five publicly-traded banks could reach R$8 billion, if the level of 50% of the exposure informed in the list of creditors were considered. The most affected ones would be BTG, Santander, and Bradesco, which may see their quarterly profit reduced by 20% to 30%. Itaú and Banco do Brasil would face a smaller hit, of less than 10% of profit.

“Overall, we expect a greater impact of the Americanas case on BTG, followed by Santander and Bradesco, as these banks have the largest relative exposure to Americanas’s debt. The higher provisioning in the near term would not only marginally reduce their capital ratios, but also temporarily pressure their earnings and profitability,” analyst Renan Manda wrote in the report. “Additional provisions of the remaining amount may be set up in the following quarters if the company’s new payment schedule is delayed or if banks make additional downgrades in their risk rating [for Americanas].”

XP’s analysis considers a provision of 50%, which is likely to be the minimum banks will adopt. The R$20 billion hole in Americanas was announced on January 11, but it is still unclear whether the banks recorded the provisions in the fourth quarter (as a subsequent event in the financial statement) or in the first quarter of 2023. According to an executive from a medium-sized bank, the tendency in his case is that it will be on the fourth-quarter financial statement, at 50%. The representative of another large bank comments that if the negotiations of the creditors with Americanas advance well, the banks could include an explanatory note about the case in the fourth-quarter report, but leave the provisions for the first quarter of this year. “However, I don’t think that will be the case.”

Last week, Citi had also released a report assessing the potential impacts of Americanas on the large publicly-traded banks. If they have to provision 50% of their exposure, the most affected one would be Bradesco, with a need for R$2.35 billion. Next come Santander (R$1.85 billion), Itaú (R$1.7 billion), BTG (R$950 million), and Banco do Brasil (R$ 650 million). Valor found that Safra has already provisioned half of its exposure to Americanas, which is R$2.4 billion, and BV has also done the same.

Credit Suisse made a similar calculation this week before the list of creditors was released. The bank estimated a provision of 30% and foresees a tax benefit that would reduce the final effect on profit by 45%. In this case, the impact on Bradesco’s result would be R$700 million, while Itaú and Santander would suffer an effect of R$500 million each and BB would have to provision R$300 million.

In the case of BTG, the actual debt is likely to be lower than what is reported in the list of creditors. There is R$1.2 billion in Americanas’s assets that could be used to offset debts – which would reduce total exposure. In addition, the bank also has around R$400 million in reinsurance, which would bring the exposure down to R$1.9 billion.

As for BV, the exposure in the list of creditors is also “inflated” due to debt securities structured and distributed to the market by the bank last year. Despite being CCBs, these bonds, which have relatively short terms of one or two years, never passed through the bank’s balance sheet and were distributed to some assets. The real exposure would be R$206 million – the bank also tried to take this money from Americanas’s accounts, but the amount was later blocked by the courts.

Obviously, the impact on profits is one reason that has made banks adopt a very hard strategy toward Americanas. But the main one is the stance of the trio of primary shareholders – billionaires Jorge Paulo Lemann, Beto Sicupira, and Marcel Telles – who claim they were not aware of the problems at the retailer and would not be willing to put up all the money that the creditors think will be necessary to fix the company. The CEO of a large bank, convinced that there was fraud, blames the trio for the case. “They are people of notorious legal, business, financial, and accounting knowledge, and they are businessmen of great technical capacity. They can never allege ignorance and try to hold third parties, the banks or the audit firms responsible.”

A prevailing view in the market is that the provisioning in court-supervised reorganization cases must be, at least, 30%. In resolution 4,966, issued at the end of 2021, the Central Bank defines a non-performing asset as one that has “indications that the respective obligation will not be fully honored in the agreed conditions, without it being necessary to resort to guarantees or collateral.” One indication, according to the Central Bank, is court-supervised reorganization.

Brazil’s Central Bank also defines non-performing assets are those more than 90 days overdue. In resolution 2,682/1999, when it created a system to guide the provisioning levels, the Central Bank established that delays of more than 90 days should be classified as level E, with a provisioning of at least 30%.

An executive of a large bank says that in the case of large companies, which have debentures and bonds with high liquidity in the market, the discount on these instruments is a good indication of how much the banks should provision. In the last few days, Americanas’s bonds have been trading close to 20% of face value, which suggests that banks could have to provision 80%.

Despite the still tense atmosphere in the relationship between the banks and Americanas, some point out that there has been some easing in recent hours. The banks have been meeting daily to discuss strategies and have also had somewhat less frequent talks with Rothschild. The consultancy Alvarez & Marsal would not be so involved in these negotiations. In these talks, there are still no firm proposals on a possible haircut percentage on the debts.

O Valor contacted all creditor banks of Americanas. Most of them declined to comment, claiming they have to comply with banking secrecy and do not comment on cases sub judice. Banco do Nordeste said that the operations are backed by highly liquid collateral and were contracted for investments in the opening of dozens of stores in the Northeast region, “which generated many jobs and income for families in our area of operation.” Daycoval said it has been working with credit for more than 50 years and the exposure to risk in these operations is natural, as is the provisioning of funds to cover eventual cases of default. “In the Americanas case, 50% of the amount has already been provisioned in the 2022 balance sheet.”

An analyst who has been following the sector for many years believes that banks are likely to report quarterly results with and without the Americanas provision and that cases of this magnitude are quite rare. “I think the degree of dissatisfaction of the banks with Americanas comes from the implicit guarantee by the three shareholders, which simply has not been converted into reality. The quarterly results are going to be a bloodbath.”

*By Talita Moreira, Álvaro Campos — São Paulo

Source: Valor International

https://valorinternational.globo.com/