Lower deposit reserve requirements will be only slightly positive for Brazil's banks

Bnamericas Published: Friday, December 28, 2012
Brazil's central bank has reduced reserve requirements on demand deposits, a move that will only have a minor positive impact for local lenders as these reserves are currently not remunerated. Up to 20% of reserve requirements on demand deposits can be deducted to the extent that they are lent to local companies and individuals for the financing of buses and trucks and their parts at defined rates. The change applies to banks with capital levels above 6bn reais (US$2.94bn), which means this is not a measure to ease liquidity conditions for small lenders, JP Morgan said in a research note. In a statement, the central bank said it estimates 15bn reais of liquidity could be freed up. Deductibility will only apply to loans using the subsidized rates announced in a resolution published on December 20. These loans carry subsidized rates of 2.5% until December 31, 3% from January 1, 2013 to June 30, 2013 and 4% from July 1, 2013 until the end of next year. While the impact is only slightly positive for local lenders, the rates at which the banks can lend these funds out at are low, JP Morgan said. "To us, the appetite for this product will depend on the perceived NPL (non-performing loan) + origination costs being smaller than the roughly 2.5-4% rates earned on these loans," the note reads. Assuming 15bn reais are in fact originated, the US investment bank estimates a positive annual earnings impact of less than 1% for the country's two largest private sector banks, Itau Unibanco (NYSE: ITUB) and Bradesco (NYSE: BBD), respectively. Despite that, it is difficult to calculate the exact impact that the measure could have in truck sales as loan origination will still depend on bank appetite, 2012 had 135,000 trucks sold with some 25bn-30bn reais in total loans provided. And while JP Morgan's Latin American capital goods analyst Cassio Lucin believes the central bank's measure could provide a slight boost to truck demand in 2013, he remains cautious on the Brazilian automotive industry as recent production figures have shown no signs of recovery. "The weaker expected macroeconomic scenario in 2013 could continue to drag down production, given the industry's high correlation to GDP growth," the note reads. In other words, such a measure may only drive additional loan demand for trucks and buses if Brazilian GDP starts to recover. Brazil's central bank recently reduced its GDP growth forecast for 2012 to 1% from its earlier estimate of 1.6% due to lower than expected growth so far this year.

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