Banco do Brasil is much better placed to weather the economic storm caused by the global coronavirus pandemic than it was during the Brazilian recession of 2016, according to the bank’s CFO, Carlos Hamilton Vasconcelos Araújo.
“Our credit portfolio is more defensive than the banking industry average,” he says. “When compared to the system, we don’t expect the same impact in our portfolio.”
Hamilton says that it is still “too early to say how much NPLs [non-performing loans] could increase”, but he points out that Banco do Brasil has low corporate exposure to the worst hit industry sectors. Lending to airlines and tourism companies is 0.5% and 0.04% of the total respectively.
The bank has also been skewing its corporate book towards quality agribusiness credits in recent years – and that is a sector that is expected to emerge relatively unscathed once the threat from Covid-19 recedes.
“We have been closely monitoring the situation of the companies and we are ready to help in any way necessary,” says Hamilton. “We saw a reduction in concentration in specific segments and companies in the last two years due to the migration to capital markets. Today our portfolio is less concentrated than it was five years ago.”
He says the bank is ready to support clients’ need for liquidity while corporate financing conditions normalize in the country: “It’s hard to be precise when the capital market will be opened again, but it is important to continue supporting the companies with the traditional credit until the uncertainties reduce and the environment becomes more beneficial.”
Hamilton is also confident about the quality of the bank’s SME book.
“We have a good relationship with our SME clients,” he says. “More than 80% of them have more than five years of relationship with the bank… [and] they are companies with a better profile, since they have already survived the last crisis.”
Hamilton also points to the increased quality of its consumer portfolio as evidence for his forecast that the bank should suffer a lower-than-industry increase in delinquencies.
“Almost 90% of our individuals portfolio are civil servants, clients that have job stability… and one-third is payroll loans.”
According to BTG Pactual’s financial institution analyst Eduardo Rosman: “Only 5% [of Banco do Brasil’s consumer loan portfolio] is in higher risk personal credit” and he believes that the messaging coming out of the bank is “positive”.
However, despite the relative advantages Banco do Brasil had going into the crisis, Hamilton says it has been implementing the framework adopted by Febraban (Brazilian Federation of Banks) that gives small and medium-sized enterprises and individuals the option to extend installments falling due in the next 60 days.
“We have given SMEs the option to postpone working capital lines at this moment,” says Hamilton. “Customers can also adjust their financial commitments, through loans renegotiation, with a grace period for payment of the first installment between 60 and 180 days, depending on the loan line, and the payment term lengthening. This renegotiation process can also be contracted through digital channels.”
Hamilton believes these proactive measures will limit the bank’s increase in NPLs, though “it is a fact that there might be some increase.”
As with NPLs, Hamilton says it is “too early” to evaluate the need to increase provisions, but he is confident they will be lower than the bank suffered in the last crisis.
“We made a preventive reinforcement in provisions in the fourth quarter of 2019, mainly for the low-income mortgage segment, which should be one of the most affected in this scenario,” he says.
“In addition, the midpoint of our guidance 2020 indicates a reduction of about 20% in net provisions, so even if there is a need to reinforce the provision throughout the year, we have room to absorb a certain volume.
“The bank always adopted a forward vision perspective on risk management and has a very prudent view on provisions. Certainly, there will be impacts going forward, and there is space for making additional provisions if necessary.”
An environment of sharp decline in activity, collapsing corporate revenues, could lead to a massive increase in corporate defaults on bank loans and debt securities, triggering a new global financial crisis
– Carlos Hamilton Vasconcelos Araújo, Banco do Brasil
Hamilton notes that the country’s solid banking system is a positive during a crisis, but he sees some risk from importing financial stress from abroad: “Despite great efforts by governments and central banks to guarantee liquidity to the market, the magnitude of the economic shock has the potential to spill over into the financial system.
“Therefore, we list mainly the risk of a significant deterioration in the balance sheet of companies in the developed countries, which could fail to honour their debts. It should be noted that the high level of corporate leverage, in global terms, was already a relevant point of concern recently.”
He adds: “Therefore, an environment of sharp decline in activity, collapsing corporate revenues, could lead to a massive increase in corporate defaults on bank loans and debt securities, triggering a new global financial crisis.
“It’s important to mention that the Brazilian companies are much less leveraged than those from the developed countries and, in particular, US and European companies.”