Analysts fret over Scotiabank's Brazilian exposure
US$772M at end of Q2
Keith Kalawsky, with files with Derek DeCloet
National Post
Thursday, June 13, 2002
Rising political and economic uncertainty is hammering Brazil's financial markets and raising concerns about Bank of Nova Scotia's exposure to the restive country.
Scotiabank's total exposure to Brazil stood at US$772-million in the second quarter ended April 30. And Bank of Montreal may be saddled with $370-million in Brazilian exposure, estimated analyst Jamie Keating of Merrill Lynch Canada Inc. in a research report.
However, Mr. Keating observed that neither Scotiabank nor BMO appear to hold significant direct exposure to Brazil. Instead, they likely possess low-risk debt, such as Brady Bonds, which are backed by U.S. Treasury bonds, and debt issued by multinational firms.
Unlike Chile and Argentina, Scotiabank does not own a retail banking subsidiary in Brazil. It has a representative office.
But recent turmoil in Brazil is prompting investors to scrutinize Scotiabank because it is the most active Canadian bank in Latin America, where it took a $707-million hit from the collapse of Argentina's financial system.
"If, indeed, the situation were to deteriorate [in Brazil] then we would have to question Scotiabank what's in this $772-million they've got there," said Jack Dzierwa, an analyst with Salomon Smith Barney Inc. "If later something happens, it's totally beyond their control."
Yesterday, Brazil's real sagged to its lowest level in nearly nine months against the U.S. dollar. Bond yields have soared more than 20% this month, reflecting the view of investors that buying Brazil's bonds looks increasingly risky. The Bovespa stock index is down 10% year to date and is 20% off last year's level. And the country's debt trades at less than 67¢ on the dollar.
As of April 30, Scotiabank's exposure consists of three elements: US$34-million in loans, US$415-million in trade financing and US$323-million in government and other securities.
A Scotiabank spokeswoman declined to elaborate on these three categories, but said, "We are comfortable with our exposure."
Trade financing, which involves letters of credit and short-term loans to companies to facilitate trade, tends to be less risky than typical corporate and commercial lending.
The primary concern for some investors and analysts is the third category of Scotiabank's cross-border exposure to Brazil, government and other securities.
Presidential frontrunner Luiz Inacio Lula da Silva, of the leftist Workers Party, has talked about the possibility of Brazil defaulting on its debt.
"Investors remain concerned that the country's terms on debt could be reorganized if a new administration steers the country in a leftist direction," analyst Keith Murray of Moody's Investors Service recently commented.
At the same time, Brazil's government has about 5.65-billion reals in debt maturing next week. Recent debt issues have been unpopular with the market because some doubt the government will be able refinance the full amount.
Meanwhile, Brazil's central bank recently surprised the market by forcing mutual funds to mark the value of assets on a daily basis. That move revealed steep bond losses, causing the furious sell-off of Brazilian assets.
To settle the market, the central bank swapped long-term bonds for short-term notes, which added about US$7-billion to the debt that matures shortly after the new government takes office in January.
Scotiabank also has US$209-million in exposure to Venezuela, which recently experienced a political coup. The Venezuelan bolivar has dipped more than 30% this year.
"It's difficult to say which one is going to break up first, [Brazil or Venezuela]," Mr. Dzierwa said. "I bet it's not an easy time for Rick Waugh [Scotiabank's head of international banking], let me tell you, given all the headaches he has internationally."
Still, Scotiabank has been conservative when dealing with problems in its loan book.
In the first quarter of 2001, long before other Canadian banks, it dramatically hiked credit-loss provisions as its U.S. portfolio soured. For Argentina, Scotiabank took a hefty provision in the first quarter of 2002, severing its exposure to the troubled country like a gangrenous limb.
There is scant information available on Scotiabank's exposure to Brazil and how it compares to other Big Six banks. But analysts are hoping Scotia will deal with any problems quickly and decisively.
"In the past, my experience has been that they are really, really cautious. If something is really brewing out there, they normally step up and raise a yellow flag," Mr. Dzierwa said.
At this point, however, some analysts predict Brazil will not end up like Argentina.
"We haven't viewed it as something we should be worried about," said Murray Leith Sr., chairman of Leith Wheeler Investment Counsel Ltd., which holds shares in most major Canadian banks, including Scotiabank.
nationalpost.com{DD413DAC-0B4B-4FD2-8F97-DC76FAFD9832} |
