Tuesday, 10 February 2009

Brazil Car Loans and The Risk They Pose to the Health of Credit Portfolios ... With The Help of the Government

According to a report by the National Association of Auto Financing Companies (Anef), 64 percent of total sales of vehicles, buses and trucks in Brazil were financed through loan agreements. Lease agreements accounted for about 38 percent of the total, reaching 57 billion reais (about $22 billion.) Adding up leasing contracts to direct financing for consumers, (a modality of credit that is known in Brazil as CDC), the portfolio of auto loans rose 24 percent last year to 138.1 billion reais. The Lula government must be proud of the numbers, for sure.

The problem is -- because there is always a ''but,´´ -- auto loans have become one of the riskiest segments of credit in Brazil. As we have seen in the media, in this blog and the TV and almost everywhere, more than 800,000 jobs were lost in Brazil in the past three months. As we can infer from such development, the drop in employment and job quality has a causal impact upon the quality of credit portfolios. No analyst in the financial industry says it clearly, or openly, but auto loans are becoming a problem -- and they will become a real pain in the medium term: debtors have become quite vulnerable to the job market fallout, the collateral involved is a fast- and highly-depreciating one, the low borrowing costs practiced by banks for the past three years might be unable to cover the risks of rising defaults and, especially, the loans have long duration.

Now -- the media reported this, not me. Banco do Brasil, the powerful state-controlled lender that lost No. 1 spot in Brazil last year, is the biggest lender for car buyers in Brazil. Banco Votorantim, through its consumer finance unit, is another important player in this market. It happens that BB bought 49.99 percent of Votorantim not long ago. I wonder whether one serious analyst in Brazil has warned us about the potential risk embedded in this transaction, talking solely about the car loan issue. The only thing I get to read about the BB-BV transaction is that BB paid too much for its rival, that synergies could be relatively hard to implement, ... nothing about the quality of their portfolios or the vulnerabilities that both banks face amidst this crisis.

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