Credit boom bolsters Banco do Brasil

Rapid credit expansion helped government-controlled Banco do Brasil, Latin America’s biggest bank by assets, achieve net profits of R$2.6bn ($1.5bn) in the third quarter of 2010, an increase of nearly 33 per cent over the same quarter in 2009.

Stripping out non-recurring items, profits were R$2.6bn in the quarter, an increase of 46 per cent over the year-earlier period and of nearly 11 per cent over the second quarter this year.

Total credit in the Brazilian economy has risen from the equivalent of just over 20 per cent of gross domestic product eight years ago to about 45 per cent today.

Much of the increase has come from consumer credit in new forms of collateralised loans, especially for purchases of motor vehicles and in payroll-linked loans where repayments are deducted from borrowers’ pay or pensions.

The ratio of credit to GDP remains low by the standards of developed markets, but analysts say that because interest rates in Brazil are so high households spend a share of their income on credit that is comparable with that spent by their developed-country peers.

The average cost of borrowing in Brazil was about 29 per cent a year for companies in September and about 40 per cent a year for private individuals, according to the central bank. Consumer price inflation is running at about 5 per cent a year.

However, market borrowing costs vary enormously. Rates of about 170 per cent a year are common on unsecured overdrafts on current accounts, while subsidised credit to companies from the BNDES, the government-owned national development bank, is charged at variable rates often of less than 8 per cent a year. Loans from the BNDES account for about 20 per cent of all credit in Brazil.

The central bank’s policy interest rate is 10.75 per cent a year.

Banco do Brasil said it had outstanding loans worth R$365bn at the end of the third quarter, an increase of 21.1 per cent over the year and of 4.4 per cent over the previous quarter.

It said it had a fifth of Brazil’s domestic credit market in the quarter and total assets were R$796.8bn at the end of the quarter, an increase of 16 per cent over the previous 12 months.

The bank said most growth in credit came from lending to private individuals, which increased by more than 25 per cent over the previous 12 months, to R$107.4bn at the end of the quarter, and by 6.2 per cent over the previous quarter.

Vehicle loans increased by 11.1 per cent over the third quarter of 2009, while payroll-linked loans increased by 4.2 per cent. The bank said payroll loans were its biggest form of consumer credit.

The pace of credit expansion in Brazil came under scrutiny last week with the rescue of Banco PanAmericano, a medium-sized bank that suffered from high default rates on car loans and similar credit, although regulators said its near collapse was an isolated incident and had no effect on other banks.