November 28, 2019 / 2:09 PM / 17 days ago

UPDATE 2-Shares in Brazilian banks down after cap on overdraft interest rates

(Updates with statement from banks association)

By Carolina Mandl and Paula Laier

SAO PAULO, Nov 28 (Reuters) - Shares in Brazil’s biggest lenders were down nearly 1% in early Thursday trading after the country’s monetary policy committee imposed a cap on interest rates on overdraft credit, in a move likely to reduce their profits.

Banks will not be allowed to charge interest rates over 150% annually, or 8% monthly, the committee said, starting on Jan. 6. Currently the average annual interest rate is roughly 306%.

To offset lower interest rates, banks will be allowed to charge consumers a monthly fee of 0.25% for overdraft credit limits above 500 reais ($119) starting in June 2020, in order to reduce the burden on low income individuals.

The industry group representing Brazil’s banks Febraban said in a statement it was worried about the government setting price limits “of any sort.”

In notes to clients, analysts at Banco Bradesco SA said the central bank move could imply a cut between 1% and 5% in banks’ net income in 2020, while Credit Suisse saw profits falling up to 3%.

Units in Spanish bank Santander’s Brazil operation were down the most, falling 1.61%. Preferred shares in Banco Bradesco SA and Itau Unibanco Holding SA saw similar drops, down 1.43% and 1.12%, respectively. Brazil’s Bovespa stock index was flat.

“We believe that this news is negative for Brazilian banks, as overdraft lines have the largest spread charged by the banks,” analysts at Banco Safra wrote in a note to clients.

Brazilian central bank has taken a series of measures in an effort to reduce costs for consumers in the last two years. It has previously imposed a cap on debit card fees paid by merchants and adjusted rules on revolving credit lines.

“Equally or more important than the earnings impact, is the message,” Bradesco’s analysts said. “It signals that the central bank is really pushing a tough agenda for the leading banks.”

Still, Credit Suisse’s analysts said the cap on overdraft credit should be “the last big shoe to drop in terms of regulatory risks for banks.”

Balances outstanding on overdraft lines of credit totaled 26 billion reais ($6.20 billion) in October and capacity of the overdraft lines totaled 350 billion reais.

Banks and regulators had been discussing changes in overdraft lines for more than a year. Brazilian banks had supported a fee for overdraft limits as a way to reduce overall costs for individuals.

$1 = 4.1964 reais Reporting by Carolina Mandl and Paula Laier; Editing by Alistair Bell and Mark Potter

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