By Aluísio Alves and Guillermo Parra-Bernal
SAO PAULO Feb 26 Brazil's second-highest court
on Wednesday delayed ruling on a landmark case dating back two
decades that could significantly reduce the capital of the
country's biggest banks and further trip up a flagging economy.
The Supreme Court of Justice (STJ) pushed back to March 12 a
hearing on the scope and time frame of lawsuits claiming that
banks failed to pay fair interest on deposits between 1987 and
1992, when hyperinflation led the government to peg savings
rates to a number of consumer price indexes.
The court had been scheduled to discuss who qualifies for
compensation and for which time period the additional interest
should be calculated, two issues crucial to estimating potential
Banks could pay up to 341 billion reais ($145 billion) in
compensation if Brazil's highest court, the Supreme Federal
Court (STF), ultimately rules against them, banking industry
group Febraban said.
The case underpins the legal uncertainties that are abound
in Brazil, where tax and regulatory disputes with the government
can mean years of costly litigation for companies. STJ Justice
Sidnei Beneti said on Wednesday that the court needed more time
to analyze claims related to the case.
Discussions at the STJ precede hearings at STF, which in
November delayed a ruling on the constitutionality of the case.
The STF is tasked with assessing the constitutional issues and
determining whether banks will have to pay compensation.
"There is no consolidated legal jurisprudence in any of
these aspects, which raises uncertainty about the potential
outcome," Credit Suisse Securities analyst Marcelo Telles wrote
in a recent client note.
More than two-thirds of the losses potentially faced by
banks relate to two failed economic stabilization plans during
Fernando Collor de Mello's scandal-plagued presidency from
1990-1992. Other lawsuits stem from the so-called Bresser and
Verão plans during José Sarney's 1985-1989 administration, which
also failed to tame runaway inflation.
The failed policies pushed Brazil further into an economic
tailspin until the 1994 creation of a currency, the real,
A final ruling on the cases may not come for weeks. The
uncertainty has caused unease in the financial sector and
weighed on bank shares. Since November, when the STF delayed
hearing the case, an index of financial shares fell 14
"Banks will have to pay an amount in excess of the
provisions created for the cases so far," said Carlos
Gómez-López, an analyst with HSBC Securities USA Inc.
STATE BANKS MOST EXPOSED
A ruling in favor of depositors would hurt President Dilma
Rousseff's efforts to revive Brazil's sagging economy ahead of
his re-election bid in October. State-run lenders would suffer
the most and might be forced to turn to the government for
capital, according to Bank of America Merrill Lynch.
That could increase the likelihood of a downgrade to
Brazil's credit rating, analysts said.
Banks' capital positions also could be eroded. A reduction
in the supply of credit of about 1 trillion reais is the
worst-case scenario, according to a study by the nation's
central bank made public last year. Lenders and the government
are hoping the STJ will limit potential losses by shortening the
time period for which penalty interest must be paid.
Depositors and consumer-advocacy groups want the STF to
resume hearings quickly. Analysts believe depositors have a
better chance to winning in the high court.
State-run Caixa Econômica Federal is the most
vulnerable to a negative ruling, according to JPMorgan
Securities, with potential losses of up to 99 percent of equity.
Banco do Brasil SA, also controlled by the federal
government and the nation's biggest bank by assets, could see
losses equivalent to 29 percent of equity.
"Even a moderate impairment to book value could trigger
concerns that the federal government will need to capitalize
Caixa at a time when it has limited fiscal flexibility,"
JPMorgan analyst Domingos Falavina said in a research note.
Private-sector banks Itaú Unibanco Holding SA and
Banco Bradesco SA face potential losses of up to 15
percent of equity. The loss for Banco Santander Brasil SA
could be 9 percent of equity, JPMorgan said. HSBC
Holdings Plc estimates it could lose up to $600 million
in the case.
Brazil's central bank may have to help private-sector
lenders remain well capitalized, industry sources told Reuters.
One of those sources expects banks to seek compensation from the
government "since they followed orders from policymakers at the