BCB head's opening salvo in currency war to have marginal impact on profits - Fitch

Thursday, January 6, 2011

In the Brazilian central bank's first major move since the passing of power to new BCB head Alexandre Tombini, the country's banks will now face a reserve requirement on short positions on the US dollar, but Fitch Brasil managing director Rafael Guedes told BNamericas that the impact should be light on their profitability.

In the rule - Circular 3,520 - published Thursday morning, banks will have to keep the equivalent of 60% of such positions in non-interest bearing reserve accounts, applicable only to the total of these positions above either US$3bn or their reference equity - whichever is less. The rules go into effect April 4.

Aldo Mendes, the monetary policy head at BCB since December 2009, said in a statement that the moves should help reduce the net short positions of banks from the current level of US$16.8bn to around US$10bn, emphasizing the prudential character of the measure.

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This shift in assets for banks will be quite small, as seen in the context of total assets, which as of end-September stood at 4.26tn reais (US$2.54tn) for the entire Brazilian financial system, according to BCB data.

"The question at the end of the day is on profitability," said Fitch's Guedes. "Will the banks be upset about it? Certainly. Will that impact their credit profile or profitability? Certainly not their credit profile, and only marginally on their profitability."

Markets, for their part, proved to be upset, dropping share prices in major banks 1-3% in late afternoon trading on the Bovespa exchange from their close on Wednesday (Jan 5).

Banks that have been more active in treasury operations could see relatively more impact, but for the big three - Banco do Brasil (BB), Itau Unibanco (NYSE: ITUB) andBradesco (NYSE: BBD) - this should prove insignificant, Guedes said, adding that "it's not their business to go [dabbling] in US dollar exposure."

Asked for comment, a spokesperson for banking federation Febraban said the group was studying the measures, but had no official statement at this time.

To read the full rules in Portuguese, go to this link