(Bloomberg) -- Brazil's biggest banks have so many highly-liquid assets they are becoming a burden -- and lenders are trying to get rid of them.
As loan growth in Latin America's largest nation takes longer than expected to pick up, firms are struggling to find avenues to invest client deposits, leading to much higher than necessary short-term cash. At the same time, a steep drop in interest rate has curbed the yield banks get from investing their liquid assets. It's a scenario that has some worried.
"The biggest concern with the excess in liquidity would be the potential impact on margins," Deutsche Bank AG analyst Tito Labarta said in a phone interview. "In the past, with higher interest rates, you'd just invest it in government securities and get a pretty decent return. But now that would be more difficult with the interest rates coming down."
Brazil's largest publicly traded lenders all hold much more than the minimum amount of short-term assets required by regulators, up to three times what's necessary. The central bank dictates that large financial institutions maintain liquid assets amounting to at least 80 percent of projected net cash outflows they would face in a crisis. That will increase to 90 percent in 2018 and 100 percent in 2019.
Obligations Covered
Banco do Brasil SA, the nation's largest lender by assets, has more than three times the current obligation at 260.2 percent. That's down from 443.5 percent last year, a drop due mainly to stricter central-bank demands for the stress scenarios.
Itau Unibanco Holding SA, Latin America's largest lender by market value, has a 200.7 percent ratio, while Banco Bradesco SA has 154.4 percent and Banco Santander Brasil SA, 133 percent.
Curbing some of that short-term liquidity would require credit growth, but that hasn't rebounded along with Brazil's economy. The total outstanding loan portfolio from banks fell 1.4 percent in the 12 months through October, to 3.05 trillion reais ($948 billion), according to central bank data.
“That is one of the reasons why banks are opening their platforms, allowing their clients to buy securities from other banks: They have too much short term liquidity," said Carlos Macedo, an analyst from Goldman Sachs Group Inc., adding that the demand for credit remains weak and banks are still conservative on lending.
Working Cash
To put their cash to work, banks are scooping up their own shares or other businesses, Macedo said. Itau has been buying around 1 billion reais of its own shares each quarter over the past two years, he said. The lender also said a little over a year ago it would buy Citigroup Inc.'s retail operation in Brazil, and in May announced the purchase of XP Investimentos. Bradesco got the green light from regulators to acquire HSBC Holdings Plc's Brazilian unit in the middle of last year.
Macedo expects credit to fully recover in 2019 after a modest increase next year. He said banks will need to keep cutting costs to maintain profitability at current levels, from closing brick-and-mortar branches to investing in technology for longer-term savings.
“With benchmark rates going down, tighter margins next year are pretty well telegraphed,” Macedo said. “It is a matter of how much they would come down."
To contact the reporters on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net, Felipe Marques in Sao Paulo at fmarques10@bloomberg.net.
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Larry DiTore, Steven Crabill
©2017 Bloomberg L.P.
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