=DJ Brazil Housing Rules May Breathe New Life Into Mortgages
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By Claudia Assis
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Mortgage loans have been the wallflower of Brazilian banks' loan portfolios, watching from the sidelines as the taming of inflation led to a boom in other types of consumer credit.
But Brazil's recent push for more home construction may breathe new life into the country's minute mortgage business, though the results may take some years to show through.
The Brazilian government announced this week measures aimed at increasing construction by eliminating or reducing taxes on 41 construction products, in hopes of kick-starting a house building and remodeling boom.
As part of President Luiz Inacio Lula da Silva's plan, private and public banks will have to increase their allocations to housing loans.
"Longer term, this will completely change the mortgage scenario in Brazil," said Jonathan Asante, an analyst with Edinburgh-based First State Investments, a firm managing $11 billion in emerging market equities, of which roughly 10% are allocated to Brazil.
The government's plan targets a 36% increase in mortgage loans through private and public banks this year. If that target is reached, government lending will total $8.6 billion, according to a Bear Stearns report published Friday.
In addition, the government has renewed a provision directing banks to put 65% of their savings deposits into mortgage lending or as loans for buying construction materials. Otherwise, they will have to deposit the funds at the Central Bank, earning 80% of the lending reference rate. In essence, the banks would lose money by not allocating it to housing.
Although the newly announced reforms are a step in the right direction, the biggest obstacle to a booming mortgage loan market continues to be the stratospheric interest rates, fund managers said.
The country has recently started cutting its base interest rate, the Selic, but it currently stands at 17.25% per year, putting long-term loans such as a mortgage out of the reach of most Brazilians.
Brazilian banks held $13.4 billion in housing loans at the end of December 2005, an increase of about 13% compared to the end of 2004, according to Rio de Janeiro-based analyst Bruno Pereira, with UBS Investment Research. Housing loans are still a tiny sliver of the banks' portfolios, and represent about 2% of Brazil's gross domestic product, he noted.
By comparison, Mexico's housing loan portfolio accounts for roughly 7% of the country's GDP, and Chile's housing loans represent about 13% of GDP, Pereira added.
There is considerable demand. Brazil's housing deficit is estimated to hover around seven million homes, in a country of 186 million people. Excluded from mortgages, many middle-class Brazilians save for years until they have enough to pay cash for a house.
While there is some government financing available for the lower middle class and the poor, primarily through state bank Caixa Economica Federal, the supply doesn't come near to quenching demand, and paying rent is a monthly reminder of housing woes for millions of Brazilians.
Instead, most Brazilian banks park their assets in government securities, taking advantage of the high interest rates.
Housing loans are perceived as very risky, and there's very little incentive to offer them, said Julian Thompson, a London-based fund manager with RiverSource Investments. Thompson's fund, the RiverSource Emerging Market Fund, has $4 billion in equities, $1.75 billion in Brazilian names.
Nonetheless, "there's quite a lot of excitement" about the new rules and prospects for Brazilian banks, Thompson said. "It does look like (the mortgage) market will become more available to banks. There's quite a lot of demand, but no supply," he said.
The boost to mortgage lending comes amid a broadly rosy outlook for Brazilian banks. London-based WestAM expects 20% growth for banks'overall loan portfolios this year, with the bulk of that growth coming from personal and car loans, WestAM's Bill Rudman said.
The debate now is not whether the loan growth will happen, but whether it will be sustainable, said Rudman, who helps manage $300 million in Latin American equities, with about 60% allocated to Brazil.
This time around, however, there's more optimism in the market due to the political and economic stability in Brazil, he added.
WestAM is overweight in Brazilian banks. It trimmed some of its holdings in early January because their performances in 2005 had been "so fantastic," but Brazilian banks are still one of the firm's largest holdings, Rudman said.
Brazilian banks enjoy "an extremely good infrastructure," RiverSouce's Thompson said.
While it takes about three days to clear a check in the U.K., it takes one day in Brazil, a legacy from the days of hyperinflation, when banks had to be nimble enough not to lose money overnight. They invested heavily in automation and technology, and as a result enjoy strong earnings, low asset deterioration and low costs, he said.
According to Thompson, shares of Brazilian banks have grown on average 30% so far this year. Shares of Brazil's largest private bank, Bradesco (BBD), appreciated a whopping 134% in 2005. Stock of the country's second-largest bank, Itau (ITU), grew 64% last year, while third-largest bank Unibanco (UBB) bank shares increased 100%.
-By Claudia Assis, Dow Jones Newswires; 201 938 4385; claudia.assis@dowjones.com
(END) Dow Jones Newswires |
