Payments in arrears surged in Brazil amid a widespread deterioration in income and rising inflation

08/26/2022

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Economists do not believe retailers are at risk and see the current situation as very different from that of the late 90s thanks to better internal controls and available cash — Foto: Ana Paula Paiva/Valor

Brazil’s large retailers increased projections of loss from defaults as payments in arrears surged amid a widespread deterioration in income and rising inflation.

The 10 largest public companies in the industry set aside R$7.79 billion in provisions for bad debts between January and June, up 22% from the end of 2021, and also 42.2% above the first half of 2021. The figure is as high as last year’s sales of Leroy Merlin and Riachuelo.

The weight of the provisions for bad loans in relation to the companies’ net revenue rose to 4.92% this year from 4% in the first half of 2021. In December, it was 3.9%, which means that the ratio was stable until this curve started to grow this year.

Economists do not believe retailers are at risk and see the current situation as very different from that of the late 90s thanks to better internal controls and available cash. They also see small and medium-sized retailers, those off the radar of the market, as companies more exposed to such an effect.

The provisions for bad loans work are deducted from an asset account because it affects the accounts receivables, and also has a direct effect on the cash flow and the net result of the retailer. This is because, in accounting, it is considered a commercial expense. When the retailer considers that it will not receive a certain amount, it provisions this loss, and follows its own criteria for this, but tries to collect the money. A debt that is more than 180 days delinquent enters the “default” stage and is already considered a loss.

Retailers also reported more new losses than loans in arrears being paid. This is a changing line in financial statements because of constant inflows and outflows of funds. From January to June, the 10 companies expanded provisions by R$1.59 billion, but R$1.1 billion left this pool in the same period.

According to a former chief financial officer of an electronics retailer, the increase in loss additions reflects the scenario of lower real income and difficulty in renegotiating with customers. “Many times, the retailer renegotiates the debt with the customer, and the agreed value is already accounted as 100% recovered. This eases the provision, but is a questionable practice since the retailer will still receive the payments in the future. Even this renegotiation, which helps in the recovery, may be difficult,” the source said.

Pressure from new losses is mounting as retailers need to increase credit granting to encourage sales because electronics sales are growing slowly and fashion retailers need to consolidate recovery. In order to curb the increase in payments in arrears, however, the companies have been reviewing their policies for buy now, pay later options, and store credit cards.

“They face a dilemma. Retailers are forced to offer more lines of credit, despite very high interest rates [up to 8% a month], as they have to set aside even more money for payments in arrears,” said Claudio Felisoni, a professor at the University of São Paulo (USP) and head of the institute of retail executives (Ibevar). “There is only one solution: betting on data, on profile analysis tools, to sell more to good payers,” he said.

Fashion retailer Marisa is among those that started to make some moves and has been more rigorous in granting credit since late 2021, while rival Renner has reduced limits for purchases by higher-risk customers and expanded debt collection offices since March. “The more challenging credit and default backdrop hit the industry across the board, and we reacted to that. We already have now better quality [in the portfolio],” Renner CEO Fabio Faccio said in a conference call weeks ago. The retailer reported R$821 million in credit losses up to June, 40% above December.

An analysis by Valor shows that retailers are calculating more losses linked to payments in arrears — Foto: Valor

The problem is also seen in food retail, a segment that typically faces fewer delays due to the client’s need to use credit lines for purchases of staples. Carrefour reported a rate of nonperforming loans – those 90 days in arrears – of 13.2% in the January-June period, compared with 8.1% a year earlier. The company has restricted credit granting since December. “We are working on it, and although this rate is still growing, we saw a lower expansion rate in the default rate since March,” Chief Financial Officer David Murciano told Valor in July.

Central Bank data show that the default rate in the credit portfolio for goods was at 3.42% in April 2021, then rose to 4% in December. Four months later, it was already at 4.71%, according to the latest data available.

Another interesting piece of data in the financial statements is the profile of payments in arrears. The percentage of debts less than 90 days in arrears grew. These are the new debtors, who had been paying on time until the first months of 2022 but stopped doing so from March on.

In December, this group represented on average 53.5% of total nonperforming loans and increased to 56.6% in June. Old debtors, with loans more than 90 days in arrears, accounted for the remaining percentage.

According to the former chief financial officer heard, this entry of new payments in arrears occurred because the companies “opened the tap for credit” last year to stimulate demand. “Now, they are closing it again, because they felt the delays, but that’s the way it is. It’s about continuously adjusting credit-granting policies. We are talking about large companies with better criteria and controls, so it is a temporary situation,” he said.

Since these are forecasts, each retailer can project in a more or less conservative way how much loss they expect. Therefore, retailers do not always change this at the same time, as is the case now. This time, the prevailing assessment is that the worsening of the macroeconomic scenario forced them to set aside more money for losses.

“Default rates are not growing because of uncontrolled spending or accelerated consumption. Instead, it reflects the resilience of inflation,” said Fabio Bentes, an economist at the national trade confederation (CNC). “We have even seen prices deflate recently, but inflation is still high. That’s why we believe that this increase in provisions is here to stay for a while, despite the increase in Auxílio Brasil, because we saw a deep deterioration in income and inflation will slow down gradually,” he added, citing Brazil’s main federal social program, which is now giving higher handouts for more people.

Analysts with banks like XP expect that this greater pressure will gradually ease next year. Marisa, Riachuelo, and Renner believe that default rates will improve in the third and fourth quarters, especially after September. The retailers also pointed out that, since there was a drop in provisions a year ago, the basis of comparison is low. According to the companies’ financial statements, companies focused on electronics – both through websites and brick-and-mortar stores – and fashion retailers increased their provisions the most as they are highly dependent on buy now, pay later options.

*By Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/