January 22, 2015 / 4:41 PM / 5 years ago

Mortgage slack poses more headwinds for Brazilian banks

SAO PAULO (Reuters) - Already grappling with a sluggish economy, Brazil’s largest banks are likely to face additional headwinds as home buyers pull back and more borrowers fall behind on their mortgages.

Mortgage lending, which grew at an average of 37 percent a year between 2007 and 2014, is expected to lose steam over the next two years as rising interest rates and a stagnant economy weigh on the real estate market.

Disbursements for some home loans could rise 5 percent this year, a far cry from the huge gains of the past decade, industry group Abecip said.

While a cooler mortgage market does not appear to pose any systemic risk for banks, the ensuing drop in home loan applications is threatening banks’ efforts to spur faster growth in the segment. Banks also stand to suffer if mortgage loan repayments, especially from the most creditworthy borrowers, edge higher.

The situation adds to a list of problems facing Brazilian banks, including the implementation of restrictive economic policies that will hamper demand for financial services and hurt business confidence. Banks have doubled down on home loans in recent years, particularly because borrowers tend to default less on mortgages than on other types of loans.

Brazilian banks face “headwinds from weak loan book growth, limited margin expansion and higher credit costs that will limit earnings growth” this year and next, said Carlos Macedo, an analyst with Goldman Sachs Group Inc. “A weaker market for mortgages compounds this cautious approach.”

Excluding state-owned Caixa Economica Federal [CEF.UL], the exposure of Brazil’s banking industry to mortgages is still low. Outstanding home loans, which last year totaled about 500 billion reais ($194 billion), represent just 8.5 percent of gross domestic product, or the equivalent of 14 percent of outstanding bank credit, according to central bank data.

Mortgages account for just 6 percent of total loans and 2 percent of interest income at Brazil’s top four listed banks - Banco do Brasil SA (BBAS3.SA), Itaú Unibanco Holding SA (ITUB4.SA), Banco Bradesco SA (BBDC4.SA) and Banco Santander Brasil SA (SANB11.SA).

Home loans in arrears account for 2 percent of their outstanding mortgage loans, well below the average 3.2 percent default ratio of their consolidated loan books.

Still, any signs of weakness at Caixa, which originates three in every four home loans in Brazil, could weigh on local banking stocks - which are down a combined 6 percent this month.

“The market is going through a soft landing that will impact risk perception,” said a banking executive who spoke on condition of anonymity. “The system has a buffer, but if Caixa takes a bad hit the system will feel the pinch too.”


About 20 percent of Caixa’s annual net interest income comes from mortgage lending, compared with 2 percent for Itaú, 1.5 percent for Bradesco and 2.5 percent for Santander Brasil. Banco do Brasil’s mortgage lending revenue amounts to less than 2 percent of interest income.

Executives at Itaú and Bradesco, Brazil’s largest private-sector banks, remain committed to keep growing in the segment and do not foresee road blocks ahead, analysts who were recently briefed on their strategy told Reuters.

Brazil’s real estate market has huge growth potential and home prices are still rising, so it is no surprise banks are betting on the sector. Strict loan underwriting standards are helping banks keep mortgage defaults at levels significantly below those of most consumer loans.

Even so, potential defaults could increase in line with the end of years of strong job creation and resilient household income that bolstered the creditworthiness of homebuyers, bank executives have said. Analysts expect delinquencies to resume their climb, following a year of declines in 2014.

Mortgage lending expanded faster than other types of credit in recent years thanks to a strong job market, steady declines in borrowing costs and improved industry rules. Yet some of those factors are now showing signs of fatigue.

“We are witnessing a deterioration of several economic factors that provided the sector with solid support in the past,” said Octavio de Lazari Jr., Abecip’s president.

A look back at new residential project launches from a few years ago suggests that mortgage loan disbursements will continue to slow. Goldman’s Macedo recently calculated that mortgage lending growth is closely correlated to the performance of residential project launches, with a 3-1/2-year lag time.

Thus, a home purchase made in early 2010 was converted into a mortgage loan in mid-2013. Since new home sales slumped between 2011 and 2012, an abrupt slowdown in mortgage lending for the next two years should be expected, Macedo noted.

The amount of mortgage loans funded with resources from Brazil’s SBPE savings and loan system last year rose 3.4 percent, the lowest since at least 2003, Abecip said on Wednesday. The group had originally targeted a 15 percent rise for 2014, after a 32 percent jump in 2013.

Additional reporting by Marcela Ayres in São Paulo; Editing by Todd Benson and Leslie Adler

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