UPDATE 2-Brazil loan defaults resume rise in April
* Loan defaults rise slightly, hit 2-1/2 year high
* Consumers kept falling behind in payments in April
* Stock of credit rose 18.1 pct y/y, above estimate
* Borrowing costs, spreads fall to lowest in a year
By Guillermo Parra-Bernal and Tiago Pariz
SAO PAULO/BRASILIA, May 25 (Reuters) - Loan delinquencies at Brazilian banks rose for the third month in four in April, a sign that an abrupt economic slowdown is still offsetting the benefits of the nation's strongest job market in decades and a decline in borrowing costs.
Loans in arrears for 90 days or more, the most widely followed gauge of bank defaults, rose slightly to the equivalent of 5.8 percent of outstanding loans in April, compared with 5.7 percent the prior month, the central bank said in a report on Friday. Defaults had fallen in March.
The level is the highest for the indicator, known as the default ratio, since November 2009. Since last year, as consumers traded costly loans for cheaper ones, the pace of increase in delinquencies has lost steam, albeit slower than expected.
The data underscore Brazil's uneven expansion, in which buoyant retail sales and strong employment trends contrast with a deep recession in manufacturing and stubborn loan defaults. Analysts are at odds in interpreting the behavior of overdue credit, which is inconsistent with robust readings of job and household income indicators.
"Delinquency trends in the month were not favorable, leading us to believe they will continue to deteriorate in the coming months," Marcelo Telles, a senior banking industry analyst with Credit Suisse Group in São Paulo, said in a note.
Rising delinquencies came with a slump in borrowing costs - the highest among the world's 20 biggest economies. Government pressure on commercial banks to slash interest rates led the cost of overdraft loans to post the steepest drop in 14 years. The average lending rate fell to the lowest since December 2010.
Banks have become more selective when studying loan requests and disbursing new credit, said Tulio Maciel, the central bank's head of economic research. Disbursements in segments like auto loans rose too fast in 2010, and the impact of such rapid expansion was a spike in defaults.
Over the past month, Brazil President Dilma Rousseff called on private-sector banks to boost lending and cut rates to help revive a slowing economy. State banks are speeding up loan disbursements and cutting rates to force their rivals to follow suit.
The risk, analysts said, is that strategy could force private banks to assume a less prudent stance on lending at a time when defaults are creeping up and Brazil's economy is struggling to regain momentum.
On Monday, the government reduced taxes on some consumer loans and relaxed reserve requirements on deposits used to fund vehicle loans, in order to make credit more affordable for consumers. Yet, analysts said that plan could create some asset quality problems for banks.
"Everyone learned their lesson," Maciel told reporters in Brasilia, seeking to appease concerns that such a strategy could prompt irresponsible lending practices among banks to retain market share.
Shares of Banco do Brasil and Bradesco rose, as did Itaú Unibanco Holding in early Friday trading. Shares of Banco Santander Brasil fell, partly as a result of news its parent company is in talks to sell a stake to rivals.
The driver behind the increase in overall defaults was a jump in consumer loan delinquencies, which reached 7.6 percent last month. Defaults on corporate loans remained stable at 4.1 percent of the segment's loan book for a third month.
Outstanding loans in Brazil's banking system rose 1.2 percent in April from March, the report showed. The stock of credit rose to a record 2.10 trillion reais ($1.04 trillion), up 18.1 percent from the same period a year earlier.
At that pace, credit is rising above the central bank's estimate of 15 percent growth for this year. Last year, credit rose 19 percent.
Growth in corporate credit disbursements, excluding subsidized and directed lending, slowed to 1.3 percent in April from 2.2 percent in March. Personal loans rose 0.8 percent in April, slowing from 0.9 percent in March.
"We see scope for firming credit growth during the second half," Alberto Ramos, a senior Latin American economist with Goldman Sachs Group, wrote in a note to clients.
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