UBB info: OUCH! And I'm long 5000 shares of TNE@10.623. (after averaging down too soon)
=DJ Brazil's Banking Stks Slide Amid Political, Econ Worries
06/21/2002
Dow Jones News Services
(Copyright © 2002 Dow Jones & Company, Inc.)
By Anthony Dovkants
Of DOW JONES NEWSWIRES
SAO PAULO (Dow Jones)--Brazil's biggest banks have lost their safe haven status as the national debt and political outlook
darkens.
Concern about their exposure to government debt and the state of their own bonds was underscored Thursday by Moody's
Investors Service downgrading the sector's outlook to negative from stable.
It comes as investors bail out of the nation's top four listed banks amid worry about rising defaults and declining loan growth as
balance sheets appear less robust in an economy marked by high interest rates and weak consumer confidence.
What's more, they fear the banks could end up losing their independent status if the opposition's Workers' Party manages to
win October's presidential elections and defeat the government.
"I am not changing my recommendations on any of the Brazilian banks but I am telling my clients to invest in Mexican banks
instead, since they are safer right now," said Bear Stearns Latin America banking analyst Jason Mollin.
Investors are worried about the sustainability of Brazil's 630-billion real ($1=BRR2.77) debt burden - highlighted Thursday by
Moody's outlook shift on the nation's debt and Fitch's downgrade on the same - and how that will impact the banks.
Brazil's biggest banks appear well positioned to pay off their external debts this year, but some 30% of their assets are exposed
to government bonds and analysts fear that this could work against them in the lead up to a feared credit crunch.
"If you believe the government will honor its obligations, then these banks have nothing to worry about. But the opposite
scenario is also true," said Mollin.
While the Workers' Party no longer calls for a moratorium on debt payments as it once did, investors remain wary.
Over the last month, preferred shares in the country's largest locally-owned financial institutions Banco do Brasil SA (E.BDB),
Banco Bradesco SA (BBD), Banco Itau SA (ITU) and Unibanco-Uniao de Bancos Brasileiros SA (UBB) have respectively
shed 29%, 15%, 14% and 12%.
On Thursday, following the outlook adjustment by Moody's, Banco do Brasil, Bradesco, Itau and Unibanco respectively
finished 6.2%, 3.9%, 1.3% and 6.7% lower. The main Sao Paulo index meanwhile has shed 14% over the last month and
5.1% Thursday. The Fitch rating change came after the market close.
"Investors are trying to free themselves of banking shares because they're worried the economy will implode, but I don't think
that will happen," said Horacio Piedras Jr. of BES Securities in Rio de Janeiro.
Piedras also said the market was worried that the Workers' Party, if it came to power, would force the banks by decree to
engage in activities that would go against their interests.
"The party may oblige the banks to invest and lend money into sectors that they don't want to touch like agriculture," he added.
Meanwhile, analysts continue to say that the banks' balance sheets remain robust. The big banks aren't, however, expected to
improve on 2001 earnings.
Plus asset quality is deteriorating in an economy where interest rates are at 18.5%, unemployment is running at around 8%, and
12-month inflation is at 7.8%.
After first-quarter results, Unibanco and Bradesco said they expect credit growth of 15% in 2002, down from hopes of 20% at
the start of the year. This may be revised again after second-quarter results, said one analyst, if the economy doesn't pick up
and interest rates don't fall.
Meanwhile, Itau - known as the nation's most profitable bank - maintained its forecast of between 15% to 20%.
At the end of the first quarter, provisions for bad loans at Unibanco, Bradesco and Itau, respectively, were up 9.2%, 53% and
84% on a year-on-year basis.
-By Anthony Dovkants and Paula Lace; Dow Jones Newswires; anthony.dovkants@dowjones.com
(Rogerio Jelmayer contributed to this report)
(END) DOW JONES NEWS 06-21-02
09:31 AM
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