April 3, 2017 / 6:43 PM / in 2 years

UPDATE 2-Brazil sees banks ready to cope with problematic corporate loans

(Adds policymaker comments, background throughout)

By Guillermo Parra-Bernal and Alonso Soto

SAO PAULO/BRASILIA, April 3 (Reuters) - Brazil’s banks are prepared to cope with a potential rise in corporate loans in or at risk of default, the central bank said on Monday, a sign efforts by lenders to refinance looming debt maturities are slowly easing the country’s worst credit crunch in two decades.

In a semi-annual report on banking industry stability, central bank policymakers noted that banks have so-called problematic loans - credit in default or with a high risk of falling in arrears - under control, even if they rose marginally.

Nevertheless, the country’s banking system remains highly resilient to an adverse credit event, even under some extreme scenarios, the report said. A series of simulation exercises found that banks could absorb massive default-related losses, albeit at the cost of declining profitability, the report showed.

Brazil’s harshest recession on record has prompted banks to reclassify some 160 billion reais ($51 billion) in corporate loans as problematic over the past 18 months, eroding profits as banks struggle with all-time high bankruptcy protection filings.

“The main risks have already materialized,” said Anthero Meirelles, the central bank’s board member in charge of banking oversight. “Problematic loans may rise marginally, and their reduction will depend on the pace of the economic recovery.”

An index tracking shares of Brazil banking and financial firms trading on the São Paulo Stock Exchange gained for the first day in three on Monday, adding 1 percent.

The report also underpinned the view among policymakers that lenders have mitigated the risk of growing financial interdependence between engineering firms, suppliers and services companies involved in “Operation Car Wash,” Brazil’s sweeping corruption probe.

The probe, focusing on a graft ring in which builders won contracts with state firms through bribery, has caused a number of large firms to enter bankruptcy protection or restructure their liabilities in recent years.

Fallout from the scandal has made it harder for banks to predict trends in defaults amid an uncertain political and economic outlook. Loan defaults hit all-time highs in February, offsetting the benefit of prudent loan-loss provisioning among banks.

Likewise, central bank simulations under stressful scenarios showed that Brazil’s banks could absorb any losses stemming from further deterioration in the finances of states and municipalities, Meirelles said.

Currently, regional governments in Brazil are going through a steep cash crunch caused by years of fiscal largesse and a slump in revenues due to the recession.

$1 = 3.1168 reais Editing by Andrew Hay and Dan Grebler

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