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The Brazilian government's decision to extend until December a 2008 stimulus measure allowing large banks to use part of their reserve requirements to provide liquidity to small banks is credit positive for large retail banks, but credit negative for midsize lenders, ratings agency Moody's said in a research note.
The measure was first introduced at end-2008, amid the global financial crisis, giving banks the option of investing up to 36% of the reserve requirements levied on time deposits in acquiring other banks' loans or making interbank deposits.
The measure was designed to "temporarily alleviate liquidity pressures banks face, and it is targeted to help banks with equity of up to 7bn reais (US$4.5bn)," analyst Ceres Lisboa wrote.
Regarding large cap banks, the extension is credit positive "because they can invest in higher yielding loans instead of placing reserves at central bank [BCB] yielding the benchmark interest rate (Selic)." Lisboa added that loan purchases under this measure have become important in expanding large banks' consumer finance activities.
Moody's noted that large banks in Brazil hold 75.6% of the industry's total deposit base, and 67.2% of total time deposits, therefore accounting for more than 84% of total reserve requirements deposited at BCB. The country's biggest banks are federally controlled Banco do Brasil andCaixa Econômica Federal, and private sector banks Itaú Unibanco (NYSE: ITUB), Bradesco (NYSE: BBD) and Santander Brasil (NYSE: BSBR).
As for midsize banks, "the credit implication is clearly negative because a second extension of this stimulus measure indicates that the segment's liquidity conditions continue to be volatile and affected by risk aversion," as well as banks' continued reliance on a temporary funding alternative.
Lisboa said loan sales have been the funding alternative of choice for midsize banks to boost their franchises, especially for those operating in the high growth payroll lending segment, including Banco BMG, Paraná Banco, Banco Cruzeiro do Sul and Banco Bonsuccesso.
"After the announcement of macroprudential measures that required additional capital allocation for long-term consumer loans, investors' risk appetite has diminished, resulting in substantially less demand for loans, except for loan purchases made under the benefit of the central bank reserve incentive. As a result, the cost of funds has increased for small banks originating and selling loans," the analyst noted.