March 29, 2016 / 3:15 PM / 3 years ago

UPDATE 1-Brazil lending falls as defaults stay at five-year high

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BRASILIA/SAO PAULO, March 29 (Reuters) - Commercial banks in Brazil pared back lending in February for a second straight month, a report showed on Tuesday, as private-sector lenders kept slowing disbursements to mitigate the impact of a deepening recession on loan delinquencies.

Outstanding loans in the country’s banking system totaled 3.184 trillion reais ($867 billion) at the end of February, down 0.5 percent from the prior month, the central bank said in the report. Private-sector and foreign banks cut disbursements for a second month, while state-controlled banks slightly hiked them.

Brazil’s longest and most intense recession since at least the 1930s, coupled with rising credit costs, kept straining the capacity of consumer and corporate borrowers to stay current on their debts, the report showed. On a trailing, twelve-month basis, bank lending expanded 4.5 percent in February - the slowest pace in at least 16 years.

The so-called 90-day default ratio, a benchmark for delinquencies, hit 5.5 percent of outstanding, non-earmarked loans last month, unchanged from January’s revised number, the report said. The indicator hit the highest in five years, when the central bank began to compile records of the default ratio.

The data provides a glimpse into loan-book quality and banking profitability as the nation’s biggest lenders prepare to report first-quarter results next month. Early default ratios, or loans in arrears between 15 days and 90 days, fell slightly individual borrowers but soared for companies, indicating that future delinquencies may be on the rise.

The default ratio has grown more than a full percentage point in the past year, as rising unemployment and stubbornly high inflation eroded the ability of companies and households to honor their debts. Banks have raised the cost of borrowing, which now hit an annual 50.6 percent on average, to mitigate risks associated to delinquencies, the report showed.

The ongoing credit cycle, the period time from trough to peak levels in defaults, has lasted a year already and may extend for at least another year, analysts at Goldman Sachs Group Inc said earlier in the year.

Last month, provisions as a share of capital rose at the fastest pace in three months, indicating banks are quickly setting aside more money to cushion their balance sheets against defaults. Private-sector banks kept provisions at their highest levels in almost four years, while state lenders raised them in February for the second month in three, the report showed.

$1 = 3.6737 Brazilian reais Reporting by Marcela Ayres and Guillermo Parra-Bernal; Additional reporting by Camila Moreira in São Paulo Editing by W Simon

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