July 26, 2012 / 2:01 PM / 6 years ago

UPDATE 2-Brazil bank lending slows as caution takes center stage

* Lending rises at slowest pace since April 2010
    * Private sector banks put brakes on new lending
    * Default ratio stabilizes; trend looks unclear

    By Guillermo Parra-Bernal and Alonso Soto
    SAO PAULO/BRASILIA, July 26 (Reuters) - Lending in Brazil
grew at the slowest pace in four months in June as private
sector lenders put the brakes on credit disbursements to arrest
a surge in delinquencies.
    Outstanding loans rose 17.9 percent in June
from a year ago, down from 18.3 percent in May, the central bank
said on Thursday. June's expansion was the slowest since April
2010 on an annual basis, signaling credit growth is converging
toward the central bank's 15 percent target for 2012.
    Foreign and local private banks originated loans in June at
a much slower pace than their state-run rivals as torrid growth
in risky segments such as auto lending since 2009 sent defaults
soaring. State bank loans grew at seven times the pace of
private sector rivals in June.
    The numbers underscore growing caution among banks as Brazil
enters what could be a second year of slowing economic growth.
Itaú Unibanco Holding and Banco Bradesco,
the country's top two private sector lenders, cut their
forecasts for loan growth for this year, citing an economy that
is cooling not long after it had appeared to overheat.
    "Private banks see this as a problem of profitability and
they will remain cautious as conditions in the economy require
them to be," said Alberto Ramos, chief Latin American economist
with Goldman Sachs Group in New York. "So far, there are no
signs that growth is gaining significant momentum."
    This new-found caution is pitting private banks against the
government, which has used state lenders Banco do Brasil
 and Caixa Econômica Federal to bring down
the cost of credit to businesses and consumers, and boost access
to credit.
    Outstanding loans expanded 1.5 percent in June to 2.167
trillion reais ($1.07 trillion) from May, after an increase of
1.7 percent in the previous month, the central bank said. 
    State banks disbursed 2.6 percent more credit in June on a
sequential basis, compared with a 0.9 percent expansion for
credit at foreign lenders and 0.4 percent for local private
sector banks.
    Loans to small-sized companies led the way in the month with
a 3 percent sequential expansion, the central bank said.
Consumer lending rose 0.9 percent, lagging behind a 1.7 percent
expansion in payroll-deductible lending and a 2.8 percent in
    As consumers deleveraged, the balance of the costlier types
of credit fell. New overdraft loans contracted by 3.3 percent
from May, while credit card lending was flat in the month.
    "Eventually, private sector banks will join the bandwagon
but certainly not in the very short term," Ramos said in a
telephone interview.
    Itaú and Bradesco, as well as Banco Santander Brasil
, all of which released second-quarter earnings this
week, have kept a prudent tone over future trends for loan
delinquencies through year-end.
    Santander Brasil's profit slumped in the quarter after a
spike in loan delinquencies forced the nation's largest foreign
lender to raise bad loan provisions by 23 percent. An economic
recovery expected to gain traction should ease recent increases
in delinquencies and put a lid on provisions, Chief Executive
Marcial Portela Álvarez said. 
    Non-performing loans fell from an all-time high in June,
partly because banks fine-tuned their risk assessment models to
account for less creditworthy borrowers. Loans in arrears for 90
days or more, the most-widely used gauge for loan delinquencies
in Brazil, fell to the equivalent of 5.8 percent of outstanding
credit last month, from 5.9 percent in May, the central bank
    Forward-looking indicators for delinquencies showed modest
improvements, which made some analysts ponder whether default
ratios in Brazil are headed for declines in the short term.
    "While delinquency has declined from May, such decline is
lower than what should be expected by the favorable
seasonality," Credit Suisse Group analyst Marcelo Telles said in
a report. "This reinforces our view of rising delinquency until
the third quarter."
    Earlier this week, central bank President Alexandre Tombini,
like most banking industry executives, said that loan
delinquencies should stabilize in the middle of the year and
then fall.
    Yet, some executives worry that the strategy of using state
banks to stoke lending, advocated by Brazilian President Dilma
Rousseff, is poorly timed and may foment irresponsible lending
among some private sector banks wary of losing market share to
Banco do Brasil and other state lenders.
    Increased competition has delivered some good news for
borrowers since April, when Rousseff kicked off her campaign
against Brazil's sky-high rate spreads.
    Spreads, or the difference between the rate at which banks
lend and raise funds from depositors, fell in June to 23.2
percentage points. The average lending rate declined to 31.1
percent from 32.9 percent in May. 
    Yet prudence is forcing lenders to reverse some of the
spread declines of the prior months. In the month through July
16, the spread rose to 23.5 points, Tulio Maciel, the central
bank's head of economic research, said in a news conference on
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