Brazil’s private sector banks are firmly in ‘risk-on’ mode

Brazil’s private sector banks are firmly in ‘risk-on’ mode, after the third-quarter reporting season.

The economy is expected to grow GDP a little under 1% this year, but the banks are anticipating stronger growth to come and are ramping-up their credit portfolios to retain – or even gain – market share. 

Amid many eye-catching statistics, one highlight was the fact that Itaú overtook state-controlled Banco do Brasil in terms of its credit portfolio: Itaú grew its total credit by 8.27% to R$688.9 billion, just ahead of Banco do Brasil’s R$686.7 billion. Analysts expect Itaú to extend this newly claimed leadership in the quarters ahead, as Banco do Brasil continues to focus on profitability. The bank increased its return on equity (ROE) to 18.0% in the third quarter by de-risking its loan book, which fell by 0.68% in the quarter.

Meanwhile, the other private sector banks were also aggressively extending loans. Bradesco – the second-largest bank in terms of assets and deposits – grew the most, with a double-digit increase in its credit portfolio (10.49%).

Bradesco outgrew Santander Brazil (which grew credit by 7.35%), but remains less profitable: with an ROE of 20.2% (up from 19.0% 3Q18), compared with Santander Brasil’s ROE of 21.1% (up from 19.5%). 

As well as becoming the largest bank, Itaú also continues to skew its portfolio to higher margin business – the fall in the country’s interest rate makes corporate loans less attractive to both the banks and the companies, with domestic capital markets issuance booming.

Itaú grew its loans to individuals and small and medium-sized enterprises (SMEs) by 17.3% year on year, which helped net interest income (NII) to expanded 9% year on year. This growth in the risker, unsecured segments of consumer banking is notable for Itaú.

In recent years, the bank has been the most conservative in the system – in some calls, analysts have been actively advocating for the bank to increase its risk appetite. Now it seems management is prepared to add that risk. 

Candido Bracher, CEO of Itaú, conceded on the analyst conference call that «we have been growing more in credit card loans and personal loans than in mortgage, vehicle or payroll loansThis, I think, is one of the reasons behind the mild increase in NPL 90 in individuals’ portfolio [NPLs in the individuals segment moved up 20 basis points to 4.7% in Brazil]».

Original Story: Euromoney | Rob Dawyer 
Photo: Santander Site
Edition: Prime Yield

Over 20,000 properties from NPL portfolios should flood the market

Over 20,000 properties of all types are expected to come on the market in the coming years, either through direct sales or auctions, with an obvious impact on prices.

This concerns properties that constitute collateral in nonperforming loan portfolios that have been or will be sold in the coming months to investment funds and groups such as Apollo Global Management, Bain Capital and Centerbridge Partners; some of them have already hit the market.

Bain Capital made its first sales in July and it has already collected €35 million through the sale of significant buildings. The US-based private investment firm acquired the Amoeba NPL portfolio for €430 million, including some 2,300 properties as collateral. At this stage Bain is proceeding with the second phase of property sales to institutional or private investors.

Apollo is also active in the market with its first sales after buying out the Jupiter portfolio for €337 million. This NPL package concerned requirements of €1 billion and is estimated to include over 1,700 properties from mortgages that add up to more than half a billion euros. A large share of those assets (about 40%) concerns residences; another part concerns commercial properties, while there are also dozens of hotel assets.

Sources say that for the time being the process of retrieving the obligations is ongoing, with the majority of borrowers choosing the path of auctions. In this context it is estimated that more than 1,000 properties will go under the hammer in the coming months. The process will likely begin in April or May, with several hundred property auctions scheduled for then.

The other option debtors are offered by the funds concerns sale by consent: In this case the borrower accepts the sale of their property in order to service their debt. A third alternative regards the repayment of the debt following some kind of write-off, which means the debtor retains the collateral – i.e. their home – in their ownership.

Meanwhile property market professionals note the start of the sale process for over 70 properties held by Alpha Bank, that were also transferred to Apollo as part of Project Jupiter. These are assets the bank itself had retrieved and included in the portfolio so that it was more attractive to the buying investor. These assets, with an estimated value of more than €50 million, have already been conceded for sale to major property service companies, and include residential properties, offices and a few hotels. This is not a mass sale, as each property is being sold individually, as was also the case with the assets sold by Bain Capital.

Bain, along with Apollo Global Management and Fortress are also looking to land Project Neptune, which concerns Alpha Bank NPLs with property collateral. This portfolio, with an accounting value of €1.8 billion (the loans belong to 1,10 small and medium-sized enterprises), includes 4,000 properties as collateral valued at approximately €1.1 billion. Some 30% of them are commercial assets (offices and stores), another 20% are industrial properties, while the package also contains hotels, plots of land and logistics facilities.

In the coming weeks the market further expects to see the first few properties from the Symbol portfolio that National Bank recently sold to the consortium of Centerbridge Partners LLP and Elliott Advisors (UK) Limited for €250 million. This portfolio consists of 12,800 NPLs with 8,300 properties as collateral and will be managed by Cepal Hellas.

National will also decide in the coming weeks about the sale of the other loan portfolio with property collateral, Project Icon, which accounts for some 6,000 assets adding up to €1.1 billion. These are mainly commercial properties as well as hotel units and industrial plants. Just over a quarter (27%) are located in Athens and another 23% are in northern Greece.

That portfolio concerns delayed loans totaling €1.52 billion in capital terms, while the total requirements (including interest) of the bank come to €2.52 billion. The package to go up for sale includes 7,300 delayed loans taken out by very small to medium-sized enterprises.

Project Icon is split into two parts: The first concerns the loans of 137 SMEs that owe capital of €959 million, and the second comprises €564 million in loans taken out by small and very small enterprises. The non-binding offers were submitted on October 15, from which Apollo, Centerbridge, Fortress and the Elliott-Bain consortium have been short-listed. According to the timetable, the binding bids will be tabled by mid-December.

Original Story: Ekathimerini | Nikos Roussanglou
Photo: Kolokotronis
Edition: Prime Yield

Brazil is the second largest emerging banking market worldwide

In a table dominated by Chinese banks, and despite economic pressures, Brazil maintains second place in the Global Finance’s top-50 Biggest Emerging Markets Banks ranking, being now the only Latin American country represented in this classification.

In 2019, China is even more dominant in Global Finance’s list of the 50 Largest Emerging Markets Banks, accounting for nearly half: 23 institutions, up from 22 in 2018, with the entry of Guangzhou Rural Commercial Bank. 

The top 14 banks by assets are all Chinese entities, up from 13 last year. With the exception of Export-Import Bank of China, all appear in our Global 50 Biggest Banks list as well. These include state-owned and policy banks, while others are joint-stock commercial banks as well as institutions with rural and city bank classifications. 

The seven South Korean banks in this ranking experienced modest 2% growth from 2018, and their positions were largely unchanged. With the addition of Axis Bank, India now contributes four banks to the ranking. 

Six Brazilian banks make the cut; this group experienced a decline in assets of 10% on average, reflecting slow domestic growth of 1.1% in 2018 and an expected further deterioration of the outlook to 0.8% in 2019, according to the OECD. Contagion from the ongoing economic deterioration in Argentina and Venezuela will continue to put pressure on growth prospects for these institutions.

Brazil is now the only Latin American country represented among the 50 Biggest Emerging Markets Banks. Banesco Banco, a Venezuelan institution, dropped out this year after placing 37th in 2018. To be eligible for inclusion in Global Finance’s rankings, banks—including the largest—must have at least one agency rating.  Because the rating agencies have withdrawn their coverage of Banesco Banco, it was not eligible this year. 

Original Story: Global Finance |David Sanders
Photo: FreeImages / Bruno Neves
Edition: Prime Yield

Morgan Stanley foresees Greece’s NPEs to drop by €26 billion in 2020

The state’s asset protection plan, dubbed Hercules, will render securitizations a more attractive instrument for the reduction of nonperforming exposures (NPEs) of Greek banks, according to Morgan Stanley, while Germany’s Scope Ratings notes that securitization conditions in Greece are improving.

In a new report, Morgan Stanley estimates that Hercules will relieve banks of bad loans amounting to €22 billion next year, reducing their average NPE index to 23%, from 36% this year, while the banks themselves will shrink their NPEs by another €4 billion in 2020.

The report projects that Alpha will achieve an NPE index of 18% next year, from 40% in 2019, while Eurobank’s is seen dropping from 16 to 10%, and Piraeus’ from 48 to 42% next year.

According to Morgan Stanley, besides Hercules, there are also macroeconomic, political and legal factors that support the reduction of Greek lenders’ NPEs.

That support is anticipated to come from the government’s commitment to reforms and fiscal streamlining, the recovery of growth, real estate prices that are expected to climb 7-8% per year in the next three years, and new bank-friendly legislation. Consequently, Morgan Stanley projects a reduction of NPEs in the next quarters.

For its hand, Scope Ratings says in a report that the reduction of bad loans through securitizations will constitute a key factor in the support of the weak recovery of the Greek economy, along with strengthening the funding capacity of the credit sector and investments.

«Legal reforms are in place to champion the creation of a domestic nonperforming loan secondary market and reduce the large crisis-induced stock of nonperforming exposures. This, together with a more conducive market environment, has led to better conditions for NPL securitizations, especially those backed by residential mortgages,» stated Jakob Suwalski, associate director of Scope’s public finance team and co-author of the report.

Original Story: Ekathimerini | Eleftheria Kourtal
Photo: Bank of Greece
Edition: Prime Yield

Direct lenders keen to increase its presence in Spain

Direct lenders are increasingly looking for opportunities in Spain, following private equity firms into the region as they look beyond a crowded Western European mid-market in search of new deals and yield, bankers said.

Ares Management, Bain Capital Credit, BlueBay, CVC Credit Partners and Pemberton are some of the most active direct lenders in Spain, stepping up their efforts significantly in 2019 to find opportunities as private equity firms including Advent, EQT, Portobello and investment firm Investindustrial seek investments in the region.

Although the Spanish market is still dominated by bank lending, with around 80% of deals involving traditional lenders, the number of transactions led by debt funds has increased steadily in the last three years, according to Deloitte’s latest Alternative Lenders Deal Tracker report, quoted by Reuters.

«Spain has always felt like a market which has been less integrated into Europe and in terms of banking has always been more balkanized with strong regional champions trying to protect their turf. But with more international sponsors hunting around, direct lenders and international banks have followed suit,» a capital markets head said.

With eight private debt transactions registered in the first three quarters of this year, the market has already hit 2018’s total deal level, according to Investment bank GCA Altium’s third quarter MidCapMonitor report.

While Spain was a no-go area for investment in the wake of the financial crisis, its economy is now one of the fastest growing in Europe, steadily exceeding the euro zone’s average growth rate over the past few years. In the third quarter of 2019, its unemployment rate decreased to 13.9%, the lowest rate for 11 years.

Despite recent concerns over unrest in Spain’s wealthiest region of Catalonia and political uncertainty, with Spain’s Government fourth election in as many years, the strengthening economy has caught the attention of European private equity sponsors and consequently, international lenders.

Private debt funds have found increasing opportunities to partner with European private equity sponsors — particularly those from the UK — that are looking to back their portfolio companies’ growth strategies in Spain.

While local sponsors have had a preference to utilise their relationships with more conservative Spanish lenders, they are also catching on to the higher leverage on offer from direct lenders.

«There is a trend towards more term loan B and unitranche providers are more noticeable,» a senior banker said.

Unitranche facilities are attractive for borrowers as it means they can raise their leverage to a higher level to pursue their growth strategy.

Direct lenders are willing to offer leverage of 5.5-6.0 times in Spain, compared to the 2.5-3.0 times offered by the more conservative Spanish lenders.

«Generally, local sponsors have not tended to leverage up their portfolio companies. That raises interest from UK sponsors which act more aggressively with higher leverage and would look at alternative debt structures to finance expansion and growth strategies,» the senior banker told to Reuters.

Quality is the key

Most private debt transactions in Spain involve borrowers that are backed by well-established private equity firms.

«People look at the quality of the borrower and the sponsor. If the sponsor is a household name, it will attract established direct lenders,» Norbert Schmitz, managing director at GCA Altium said.

Direct lender Pemberton, the asset manager backed by Legal & General, hit a milestone in Spain, completing over €600m of deals across four transactions in 2019, it announced in October. The deals included financing Advent International’s acquisition of dental clinics Grupo Vitaldent, and InvestIndustrial’s public tender offer for the delisting of chocolate product manufacturer Natra.

Prior to 2019, Pemberton completed its first deal in Spain in 2016 and completed another one in 2018.

In addition to deal flow, Spain is also attractive to direct lenders as financings can often come with a pricing premium compared to Western European deals.

On average, direct lenders can demand a 50bp-100bp premium on transactions in the Spanish market compared with the rest of Western Europe, according to a senior private debt fund manager.

But many are still cautious

Private debt funds are still cautious when lending to Spanish companies as local laws tip the balance towards borrowers and away from lenders and investors.

“We still feel that we need some form of pricing premium to invest there,” a senior private debt manager said.

Despite the pricing premium, it’s not enough to tempt all direct lenders to the region, on a risk-reward basis, the senior private debt manager said.

The economy has largely been immune to Spain’s political woes but its expansion has slowed of late.

Original Story: Reuters | Kerstin Kubanek
Photo: Photo by Victor Iglesias from FreeImages
Edition: Prime Yield

State can be called to inject almost €700 million in Novo Banco, again

Portugal’s Novo Banco, the ‘good bank’ created out of extinct BES toxicity has failed to fly, or even hobble.

The bank has just presented its results for the nine-month until September and the figures were worse than the expected.

«Consolidated results have worsened in a substantial way», writes Diário de Notícias – outlining ‘an accumulated loss of €572.3 million to the end of September. That’s 46% more than losses for the same period last year.

The government «had expected to inject €600 million euros into the bank (via the Resolution Fund) in 2020, due to the losses the bank reported this year, DN adds – but «in the end Novo Banco’s financial situation is worse than it seemed. Again».

The European Commission «estimates that the State will be called to inject €653 million, minimum, next year because of failings to balance capital ratios. (Finance minister) Mário Centeno forecast €600 million», the paper explains.

Grupo Novo Banco hasn’t specified exactly how much money it will request from the Resolution Fund – which DN stresses «is the property of Portuguese banks but doesn’t have the resources necessary to keep injecting this level of funds, so has to borrow from the State».

The country will have to wait for the results of the last three months of 2019 before Novo Banco formulates its «request».

As was explained when the bank was ‘sold’ to US equity fund Lone Star in 2017, Portuguese taxpayers are tied to helping recapitalise the bank to the tune of a maximum of €3.89 billion euros.

The figure was always touted as «the worst case scenario». But fast-forwarding to 2019 shows the financial situation «just continues to worsen», says DN.

«Just to have an idea, since 2014 – the year of BES’ implosion – to September this year, Group Novo Banco has presented cumulative losses in the order of €6.55 billion».

Whatever happens in the future, says the paper, «the negative consequences for the public purse are already substantial».

Original Story: Portugal Resident | Natasha Donn
Photo: Site Novo Banco
Edition: Prime Yield

Itaú Unibanco meets loan growth and cost control targets in Q3 2019

Brazil’s biggest private-sector lender Itau Unibanco Holding SA posted a 10.9% gain in third quarter recurring net income, as loan growth and cost control offset higher provisions.

Recurring net income, which excludes one-time items, came in at R$7.165 billion ($1.78 billion) in the third quarter, in line with a Refinitiv analysts’ consensus estimate.

The bank’s loan book picked up pace, rising 4.4% from the previous quarter to R$689 billion, as corporate loans resumed growth.

Both lending and trading gains boosted Itaú’s net interest income, which grew by 9.6% from the same period a year earlier. Return on equity came in stable at 23.5%, the highest among Brazilian banks.

Loans in arrears for more than 90 days stood stable at 2.9%. Still, loan loss provisions grew by 38% from a year earlier. Itaú said that the increase was caused by retail loan book growth in the period.

Itaú showed belt-tightening on the cost side, with a small increase of 1.2% in operating expenses from the same period a year earlier.

To fight back new competitors, mainly financial technology startups, Co-Chairman Roberto Setubal said in September that the bank would step up its emphasis on cost cutting.

Earlier this year, Itau launched a voluntary severance program. The bank said in a statement that 3,500 workers took part, triggering an estimated R$2.4 billion in one-time costs.

Other Brazilian banks such as Banco Bradesco SA and Banco do Brasil SA have also announced measures to slash costs amid tougher competition from online startups.

Original Story: Reuters |Carolina Mandl
Photo: Itaú Site
Edition: Prime Yield

Piraeus partners with Intrum and create the largest NPL servicer in Greece

Piræus Bank, one of Greece’s largest lenders, set up and agreement with Swedish loan servicer Intrum to manage its non-performing assets (NPA), creating thus the biggest independent loan servicer in the Greece market, according to executives from both firms.

Being Greece’s largest lender by assets, this deal with Intrum is part of Piraeus efforts to reduce its risk exposition from bad debt. 

«The deal is the biggest foreign direct investment by a Swedish company in the Greek financial sector, » Christos Megalou, CEO of Piraeus Bank told reporters. «We have created the first independent servicer of size in the Greek market. »

The transaction valued the new loan servicing platform at €410 million with Intrum acquiring 80% of the new company for €328 million. The remaining 20% will be held by Piraeus Bank. The non-performing credit will stay on Piraeus Bank’s balance sheet. 

Intrum Hellas is already up and running, managing Piraeus Bank’s €26 billion of non-performing exposure (NPEs). In comparison, the 18 licensed credit servicers in Greece were servicing a total of €17.5 billion euros of NPL as of June this year. About 1,000 employees of Piraeus have moved to the new company.

The new company hopes to take up the loan servicing of third parties as well. Executives said there was about €10 billion of NPL that have been bought by specialist funds which are looking for independent loan servicers.

Intrum, with a current market value of about €3.5 billion, operates in 24 European countries, employing 10,000 people. It did a similar deal with Italy’s Intesa Sanpaolo in December last year.

«It is our market entry into Greece, we hope to offer our value proposition to other institutions as well. We are here to stay, » said Intrum’s CEO Mikael Ericson. «We seek the right balance between amicable and legal collection. » 

Greek banks have been working to reduce a pile of sour credit, about €75.4 billion at the end of June, the legacy of a financial crisis that shrank the country’s economy by a quarter.

Original Story:
 Reuters | Georgiopoulos
Photo: Piraeus Site
Edition: Prime Yield

Santander’s profit plunge 35% thanks to Brexit

Santander, Spain’s biggest bank, recorded a 35% drop in its net profits during the first nine-months of the year, after its British subsidiary profits fell 19%.

The Spanish bank recorded a net profit of €3,732 million between January and September, while its British arm earned €828 million. Difficulties in the UK were offset by a 19% increase in profits in Brazil, where Santander earned €2,249 million. The bank’s Brazilian arm remains its most profitable subsidiary.

The company’s American division witnessed the biggest leap in profits, seeing them rise to €619 million, an increase of 27%.

Profits were also up significantly in Mexico, which saw a 14% rise to €659 million and in Portugal where profits surged 12% to €385 million. 

The company’s Spanish wing remains its second most profitable division, seeing profits rise by 3% to €1.185 million. 

Ana Botin, the group’s president, said that the company had maintained «good trends» despite a difficult business environment. She added that diversifying into both European and American markets had helped Santander distinguish itself from competitors.

Original Story:
 The Olive Press | Robert Firth
Photo: Santander Facebook
Edition: Prime Yield

Moody’s cut the Portuguese banking outlook to stable

Rating agency Moody’s cut the Portuguese banking outlook to stable from positive, warning the domestic economy will continue to weaken as euro zone growth slows, capping current low levels of profitability.

After a severe debt and economic crisis, Portuguese banks returned to profitability last year with reported net income of €1.1 billion, compared with a net loss of €88 million in 2017, Moody’s said.

However, Moody’s said banks’ profitability in recent years has been «distorted by sizable losses reported at Novo Banco», which emerged from the ruins of Banco Espírito Santo after its collapse in 2014.

Novo Banco has been 75% owned by U.S. buyout firm Lone Star since October 2017 and 25% by the Portuguese Resolution Fund. If Novo Banco’s losses are excluded, Portuguese banks’ return on assets stood at a low level of 0.7% at the end of last year and 0.8% in the first six months of 2019.

Moody’s said Portuguese banks’ capital, profitability and funding conditions were expected to «hold steady over the next 12 to 18 months» and that they were likely to «further reduce their stock of non-performing assets».

But even though Portuguese banks’ non-performing assets will continue to «fall organically», their «stock of problematic assets» will remain high, Moody’s said.

«Profitability will likely remain close to current low levels, with lower provisioning expenses and cost reduction initiatives broadly offsetting subdued business volumes and very low interest rates,» said Moody’s senior analyst Maria Vinuela.

According to Moody’s, banks have improved their «loss absorption capacity» in recent years, but a large volume of deferred tax assets – those carrying losses from previous years that may be used to reduce later taxable income – undermines their capital strength.

Original Story:
 Euronews | Catarina Demony
Photo: / Armindo Caetano
Edition: Prime Yield