UPDATE 3-Bank lending in Brazil shows timid recovery in February

Tue Mar 26, 2013 2:08pm EDT

* Pace of non-subsidized lending grows at slower pace

* Defaults decline marginally, stay near record highs

* Numbers underscore flagging recovery in loan market

By Guillermo Parra-Bernal and Tiago Pariz

SAO PAULO/BRASILIA, March 26 (Reuters) - Bank lending in Brazil showed only slight growth in February as private-sector banks pulled back on new credit, while borrowing costs rose as expectations mounted over a potential central bank move to raise interest rates.

Outstanding bank loans in Brazil totaled a record 2.384 trillion reais ($1.19 trillion) last month, up 0.7 percent from the prior month, the central bank said in a report on Tuesday. Credit growth in Latin America's largest economy accelerated to 16.8 percent from a year earlier, the fastest annual pace for the indicator since last October.

Disbursements of so-called non-earmarked loans fell in February, as did the stock of loans for consumers and defaults. Lending rates for consumers rose for the second straight month after almost a year of uninterrupted declines, the report added.

The pace at which non-mandatory, non-subsidized lending is growing annually slipped to 12.8 percent in February, a further sign that private-sector banks are restricting loan origination as deleveraging in risky segments such as auto financing is taking longer than expected and defaults remain high.

The results, however, reflect a hiccup in President Dilma Rousseff's efforts to broaden access to credit and bring down the cost of loans toward international levels, analysts said. Rousseff set that as a goal in a country that only a year ago had borrowers paying some of the world's highest interest rates.

"In brief, some improvements in the credit market were seen in February, from which we highlight the decline in the default ratio ... the bad news was the generalized lack of traction in credit to individuals," said Denis Blum, an economist with Bradesco BBI.

Lenders including Itaú Unibanco Holding SA, the country's No. 1 non-government bank, are stepping away from risky loan segments, focusing on credit that puts aside more collateral, despite paying lower in interest, to stem the impact of high defaults.

Last year, Itaú and peers such as Banco Bradesco SA struggled with steep declines in interest rates, government pressure to step up lending and a second straight year of sub-par economic expansion.

SPREADS, MARKET SHARE

Earmarked lending, or loans aimed at encouraging investment for homebuilding purposes in accordance with government policies, continued to rise at a faster pace than non-earmarked lending. State-owned banks remained the engine of growth, as they did for most of 2012, contributing more than two-thirds to the month-on-month credit expansion.

In February, state lenders marginally increased their dominance of Brazil's bank lending after their market share rose to 57.6 percent of total lending from 57.5 percent the prior month. Private-sector lenders maintained their share at 35.6 percent from January, but that is down from almost 40 percent a year earlier.

The average lending rate in the banking system rose in February for a third month to 26.4 percent. The spread, or the difference between the rates banks charge for their loans and the ones they pay for deposits, narrowed to 18.2 percent from 18.4 percent the prior month.

In recent weeks, speculation mounted that the central bank might have to raise the benchmark Selic overnight rate to head off inflation now running at the fastest pace in about a year. The decline in the Selic to a record-low 7.25 percent last year drove an across-the-board drop in the cost of credit in Brazil.

Likewise, a recent decline in the cost of debt-servicing among households might not be enough to kick-start demand for consumer credit, underscoring the limited impact that a record-low Selic has on new credit, Morgan Stanley & Co analysts said this week.

FORWARD-LOOKING INDICATORS

The numbers might signal that a nascent economic recovery will take longer than previously expected to trigger demand for corporate and consumer lending. One positive outcome of more robust economic activity is the impact on loan delinquencies, which are gradually dropping after hitting all-time highs for most of last year.

"As we have argued the outlook for consumer loans is challenging," Morgan Stanley banking analyst Jorge Kuri wrote in a client note on Tuesday. "The debt service ratio is high, and further improvements need to come from slower credit growth."

Loans in arrears for 90 days or more, an industry benchmark for loan delinquencies, fell to 5.6 percent of outstanding loans last month, compared with a revised 5.7 percent in January, the bank said.

Defaults between 15 days and 90 days, a forward-looking gauge for the behavior of defaults, remained stable for corporate credit, but fell slightly for consumer loans. Bankers at private-sector lenders have remained at odds in interpreting the behavior of overdue credit, which seems inconsistent with robust job and household income indicators.

Rousseff is staking her presidency and a potential second term on achieving a long lasting decline in borrowing costs. The cost of credit remains prohibitive for millions of Brazilians and access is still restrictive.

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