Weak Earnings Expected From Brazil's Banks

By Rogerio Jelmayer 

SÃO PAULO -- Brazil's biggest banks this year are facing declining earnings due to weak demand for credit and a rise in bad loans amid a deepening recession.

Investors will get their first peek later this week at how banks in Latin America's largest economy are faring as growing numbers of consumers and businesses have difficulty paying their bills.

The Brazilian unit of Spain's Banco Santander SA reports on Wednesday, and Banco Bradesco SA is scheduled to release earnings on Thursday. Itau Unibanco Holding SA, Brazil's biggest private-sector bank by assets, reports on May 3.

A rising number of delinquent loans will force banks to boost their loan-loss provisions, eating into profits, analysts say.

"Delinquent loans and provisions will set the tone for bank profit this year," said Luis Santacreu, an analyst at rating agency Austin Rating in São Paulo. "Credit will drop in the rest of the year, which will keep putting pressure on bank results."

The number of Brazilians in arrears on utility bills or loans rose to 60 million in the first quarter, according to credit bureau Serasa Experian, the highest proportion in the country of 200 million people since at least 2012, when the company started compiling the figures.

If Brazil's economy in 2016 contracts at the same pace as last year's 3.8%, as economists predict, the two-year recession would be worse than the one suffered by Brazil during the Great Depression of the 1930s.

The country's banks have started to take a more conservative approach to dealing with the weak economy. State-run lender Banco do Brasil SA and private-sector peers Itau and Bradesco started increasing provisions for bad loans last year. The three banks set aside nearly 59 billion reais ($17 billion) in 2015, an increase of more than 30% from 2014, and have said they plan to set aside even more this year.

Return on equity, or ROE, will decline across the sector, according to Tito Labarta, a bank analyst at Deutsche Bank.

Mr. Labarta forecasts that the return on equity this year at Bradesco and Itau will fall below 20% for the first time in at least two years but remain in the high teens. At best, ROE at Banco do Brasil and Santander Brasil will be in the low teens, he said.

Brazil's banks, for now, remain profitable, in contrast with businesses in other sectors. Competition is limited because just a few banks dominate, which allows for high fees and commissions. These banks also garner relatively healthy returns from government-debt holdings.

Write to Rogerio Jelmayer at [e-mail]

(END) Dow Jones Newswires

April 26, 2016 13:15 ET (17:15 GMT)

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