Moody's says tax increase on international funding is bad news for banks

Monday, April 4, 2011

Last week's tax increase that the Brazilian government applied to banks' and other companies' international bonds and loans - in a bid to curb loan growth and rising inflation - is credit negative for local banks, ratings agency Moody's said in a report.

The measure not only increased the tax - known as IOF - to 6% from 5.38%, but also expanded its reach to international bonds and loans with tenors up to 360 days. Previously, only those with tenors up to 90 days were subject to the IOF.

"The new tax is credit negative for Brazilian banks because it will reduce arbitrage opportunities and increase their cost of funding, with negative implications for their profitability," Moody's analyst Maria Celina Vansetti Hutchins wrote.

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The new tax is also aimed at reducing the foreign currency exposure of banks and other companies and at preventing the real from appreciating.

"By closing banks' ability to tap short-term foreign liquidity, the authorities are raising the cost of any alternative financing to the domestic interest rates, which have been raising 100bps since early 2011," Vansetti Hutchins said.