Brazil banks brace for fresh wave of loan refinancing deals

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Brazil's largest listed lenders are facing a deluge of requests from companies to renegotiate at least 100 billion reais ($28 billion) in problematic loans, posing headwinds for an industry struggling with a harsh recession and soaring delinquencies.

Steelmaker Cia Siderúrgica Nacional SA and engineering conglomerate Grupo Odebrecht SA are among dozens of firms asking banks to ease the terms of loans amid Brazil's worst economic quagmire in more than a century, sources familiar with the situation said. Odebrecht and CSN, as the steelmaker is known, declined to comment.

With bankruptcy filings up 150 percent this year and the economy poised to contract by about 4 percent for a second straight year, lenders are cutting borrowing costs and extending maturities for small and large corporate borrowers. Banks had about 130 billion reais in refinanced and restructured loans on their books last year, according to central bank data.

As Brazil's largest listed banks began reporting first-quarter results on Wednesday, analysts remain wary of the impact of loan renegotiations. According to Goldman Sachs Group Inc analysts, the worsening market for Brazilian banks could drag average return on equity down to a 15-year low in coming months.

Renegotiations have become "the equivalent of 'kicking the can' a short distance down the road," Carlos Macedo, a New York-based analyst with Goldman Sachs, said in a recent client note.

Brazil's central bank estimated in a report earlier this month that a 30 percent jump in renegotiated loans and a 50 percent increase in restructured credit over the past year would increase the banking system's average default ratio by a little less than 1 percentage point.

If the pace of restructurings continues for another year, earnings at the nation's largest listed banks could fall up to 17 percent, JPMorgan Securities analyst Domingos Falavina said in a recent note.

'CAR WASH'

Banco Santander Brasil SA the country's largest foreign-owned lender, beat first-quarter profit estimates on Wednesday, as steps to renegotiate problematic credits helped curb defaults and loan-loss provisions. Last quarter, provisions hit a nine-month low and came in well below consensus estimates.

"We are committed to a conservative risk management policy that helped us limit a rise in defaults stemming from the recession," Chief Financial Officer Ángel Santodomingo told investors at a conference call to discuss quarterly results.

Banco Bradesco SA unveils results on Thursday, while Itaú Unibanco Holding SA and state-controlled Banco do Brasil SA plan to do so on May 3 and May 13, respectively.

According to two sources, Bradesco and Santander Brasil recently resumed talks with CSN to refinance a combined 1.2 billion reais in loans, which could allow CSN to start repayments two years later than scheduled.

Meanwhile, some Odebrecht subsidiaries want the refinancing of up to 35 billion reais in loans, as the engineering group's involvement in a major corruption scandal at state firms curtailed access to funding, another two sources said.

Other borrowers seeking relief include phone carrier Oi SA, which this week launched talks to restructure $14.3 billion of bond debt.

Fallout from the corruption probe known as "Operation Car Wash" is hampering many companies from honoring their debt and would oblige lenders to step up refinancing deals, the central bank report showed.

Companies' and creditors' need to sidestep Brazil's ineffective bankruptcy protection legislation, which hampers debtors' ability to quickly get back on their feet, was also fueling banks' new-found enthusiasm for renegotiations, analysts said.

"Credit quality should continue to deteriorate but at a slower pace than thought by most market participants, as banks increase renegotiations, portfolio sales and write-offs," said Francisco Kops, an analyst with Safra Corretora.

RISING PROVISIONS

Units in Santander Brasil, a blend of the lender's voting and non-voting shares, rose the most in five weeks on Wednesday following the results. Banking stocks rose too, on expectations of a more constructive outlook for loan book quality.

Itaú, Banco do Brasil and Bradesco probably ramped up loan-loss provisions last quarter by about 25 percent after defaults climbed 0.6 percentage point to an average 3.5 percent of outstanding loans, according to analyst estimates compiled by Thomson Reuters.

That weighed on first-quarter profits, the data showed.

Average ROE probably fell to 17.3 percent, the lowest in at least two years. Recurring net income, or profit excluding one-time items, sank an average 8.4 percent last quarter on an annual basis, the first time banks saw profit decline in about three years.

Following is a table with average consensus estimates for some key first-quarter earnings indicators for Brazilian banks. The numbers are expressed in billions of reais unless specified.

FIRST-QUARTER COMBINED AVERAGES FOR BRAZIL TOP LISTED

BANKS (CONSENSUS DATA COMPILED BY THOMSON REUTERS)

Q1 2016 Q4 2015 Q1 2015

Recurring net income 4.002 bln 4.328 bln 4.369 bln

reais reais reais

Pct Change (%) -7.5 pct -8.4 pct

Recurring ROE 17.3 pct 18.3 pct 20.4 pct

90-Day Default Ratio 3.5 pct 3.3 pct 2.9 pct

Loan-Loss Provisions 5.824 bln 5.386 bln 4.678 bln

reais reais reais

Pct Change (%) 8.1 pct 24.5 pct

(Additional reporting by Tatiana Bautzer in São Paulo; Editing by Tom Brown, Chizu Nomiyama and Alan Crosby)

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