September 4, 2017 / 4:02 PM / 3 months ago

Moody's sees new Brazil covered bond rules helping mortgage funding

SAO PAULO, Sept 4 (Reuters) - New rules creating a market for covered bonds in Brazil will help the country’s lenders find alternative ways to fund fast-growing mortgage credit for longer periods, Moody’s Investors Service analysts said on Monday.

Based on data from Brazil’s top-five lenders, the potential volume of covered bonds could reach as much as 600 billion reais ($191 billion) for the coming years, allowing lenders to almost double home loan disbursements, analysts led by Ceres Lisboa said. Loan volume should pick up after next year, they said.

Creating a framework for covered bonds - debt securities backed by cash flows from mortgages - underscores Finance Minister Henrique Meirelles’s efforts to foster securitization as interest rates fall in Latin America’s No. 1 economy. Mortgage lending accounts for about 10 percent of Brazil’s gross domestic product - well below the level of peer economies.

With inflation holding near 18-year lows and far below the bottom of the central bank’s target range, policymakers have ample room to keep stimulating consumer spending that has slumped in the back of Brazil’s longest and harshest recession ever.

“As Brazil pulls out of its recession, low inflation and single-digit policy interest rates will stimulate banks to increase lending activities, primarily focusing on less risky segments such as housing,” Lisboa and her team wrote in the report.

Central bank policymakers probably will maintain a fast pace of interest rate cuts on Wednesday, with all but one of 30 economists surveyed expecting the benchmark Selic rate to be cut by 100 basis points to 8.25 percent, according to a Reuters poll.

Under the new rules, banks could get higher ratings on their covered bonds as collateral will be ring-fenced within their balance sheets. Investors will be able to tap assets and the cover pool in the event of the issuer’s insolvency.

The notes, which will be known in Brazil as LIGs, are tax-exempted for domestic and foreign investors, ensuring solid demand, Lisboa said.

$1 = 3.1367 reais Reporting by Guillermo Parra-Bernal; Editing by Bill Trott

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