Brazil firms face shift to capital markets from banks

Brazilian companies will need to look to capital markets instead of traditional bank loans for a substantial portion of their funding by early next year, as stricter international capital rules pressure lenders to cut balance sheets, a study found. Brazilian banks must comply by January 2019 with the new Basel III capital requirements, conceived after the 2008 financial crash to force banks worldwide to hold more capital. The research paper, by the asset management unit of Brazil’s largest private lender Itaú Unibanco Holding SA, found that corporate borrowing through bonds and other debt securities will need to grow by between 2 and 4.8 times the current level by 2022 to meet companies’ financing needs as banks are compelled to cut outstanding loans.

As a result, Brazil’s corporate debt stock is likely to soar to between 343 billion reais ($87.67 billion) and 799 billion reais by 2022 from 165 billion reais in 2018, the study found.

“Under Basel III, banks will turn to loans that require less capital expenditure, such as mortgages and payroll-backed credit, leaving companies to seek more financing in the capital markets,” said Gerson Knoshi, the Itaú Asset Management portfolio specialist who was responsible for the study.

In addition to requiring banks to boost their core capital ratio to 7 per cent from 4.5 per cent, Brazil’s central bank is also obliying them to set aside more capital for corporate loans. A loan to a large company is almost 2.5 times costlier to banks in terms of capital than mortgages, for instance, according to the central bank rules.

The situation will challenge Brazilian companies to get financing as the country’s capital markets lag not just developed countries but many other emerging markets. International bond markets are often expensive for Brazilian companies, which generally need to hedge foreign currency debts.

Bonds and equities sold by private companies comprised just 2 per cent of Brazil’s gross domestic product between 2013 and 2015, a Mckinsey study found, lagging countries such as Chile (6 per cent), China (8 per cent) and the Philippines (4 per cent).

If companies cannot borrow through the capital markets, the economy could slow, the Itaú study found. The Basel III requirements are also likely to drive corporate borrowing rates higher if demand exceeds supply, according to the study.

Exacerbating the challenges, government financing sources like state development bank BNDES have also scaled back lending due to tight budgets.

Brazilian banks, including state-controlled lenders like Banco do Brasil SA, have already started cutting corporate loan exposure in favour of retail. Banco do Brasil’s corporate loan book shrank 3 per cent over the latest year to 133.8 billion reais.