Bradesco's Bad-Loan Provision Shows Depth of Brazil's Crisis

(Bloomberg) - Banco Bradesco SA, Brazil’s No. 2 bank by market value, set aside 836 million reais ($240 million) to cover souring loans to oil-rig supplier Sete Brasil Participacoes SA, a person familiar with the matter said, a sign the country’s worst-in-a-century crisis is taking a bigger bite from banks’ balance sheets and corporate profits.

Total provisions for bad loans at Bradesco jumped to 5.44 billion reais in the first quarter from 3.58 billion reais a year earlier, the Osasco-based company said in a statement Thursday. The bank said a single client accounted for most of the increase, without identifying the borrower other than to say it was from the oil and gas industry. Bradesco said the provision may need to increase further.

Sete Brasil may file for bankruptcy protection as early as this week, with Brazil’s state-owned banks and a government-affiliated fund accounting for more than half the oil-rig company’s 18 billion reais in liabilities, people with direct knowledge of the company’s finances said Wednesday.

Bradesco, which gained 53 percent this year through Wednesday, fell as much as 4.3 percent in Sao Paulo trading after earnings were released. The shares dropped 2.2 percent to 26.17 reais at 1:17 p.m. A bank official declined to comment on Sete Brasil.

“It’s a very bad result with provisions much higher than expected,” Max Bohm, an analyst at Sao Paulo-based consulting firm Empiricus Independent Research, said in a phone interview. “The higher provisions raise concern about what we might see in upcoming quarters, especially if you look at the rate of debt overdue for 60 days.”

2016 Outlook

Bradesco expects late payments to continue worsening this year before stabilizing at year-end, company executives said on a conference call. Delinquencies in Brazil have been increasing as the recession and a growing political crisis paralyze the economy. Latin American governments should be prepared to provide liquidity to companies suffering from tighter financial conditions and a prolonged economic downturn, the International Monetary Fund said in a report released Wednesday.

The country’s delinquency rate for loans more than 90 days overdue held at a three-year high of 3.5 percent in March, according to central bank data. Bradesco’s figure climbed to 4.2 percent in the first quarter from 3.6 percent a year earlier. The bank’s 60-day rate rose 0.8 percentage point to 5.3 percent.

Adjusted net income, which excludes one-time items, declined to 4.11 billion reais from 4.27 billion reais, the bank said. That compares with the 4.35 billion-real estimate of nine analysts surveyed by Bloomberg. Net income declined to 4.12 billion reais from 4.24 billion reais.

The loan book was virtually unchanged at 463.2 billion reais, compared with Bradesco’s forecast that lending would expand 1 percent to 5 percent this year. Return on equity, a measure of profitability, dropped to 17.5 percent in the first quarter from 20.6 percent a year earlier.

- With assistance from Filipe Pacheco. To contact the reporters on this story: Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net ;Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net Steve Dickson

Copyright 2016 Bloomberg News.

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