SAO PAULO--(BUSINESS WIRE)--Measures of Brazilian banks' traditional loan-to-deposit (LTD) ratios can reasonably include three relatively new funding sources to provide a greater understanding of these banks' liquidity profiles, says Fitch Ratings.
The three funding sources (together, Letras) include Letras Financeiras (LFs), Letras de Credito Imobiliarias (LCIs) and Letras de Credito do Agronegocio (LCAs). While the instruments have differing qualities and are used for funding different loan types, they are directed at investor types with characteristics similar to time deposit investors, and generally have sufficient stability to be viewed as being deposit-like.
LFs are freely negotiable and permissibly transferable funding instruments that are most similar to time deposits, but have long tenors (usually two to three years) and do not include liquidity clauses. LCIs and LCAs are fixed-income securities that can offer daily liquidity backed by real estate and agricultural loans, respectively.
So far, the market for these funding sources has been mostly driven by private issuances done at the banks' treasury desks rather than public offerings. Even though there is not yet a secondary market for Letras, these securities have been largely accepted by investors and have grown at a fast pace, year after year. When and if a secondary market develops, this could lead to a positive impact on lowering these securities' costs, further benefiting banks.
Because LCIs and LCAs do not limit redemptions, the rollover rate of these instruments could be more affected under a liquidity stress, thus Fitch sees these two securities as adding less stability to a banks' funding when compared to LFs, which allow no redemptions.
The amount of LFs issued reached BRL209 billion in December 2013, while the combined total of LCAs and LCIs reached BRL258 billion as of June 2014. Meanwhile, the amount of time deposits held by Brazilian banks increased from BRL576 billion in 2009 to BRL698 billion in 2014. Even though the largest Brazilian banks hold the bulk of these amounts, the new instruments have been more impactful on small and midsized banks, often contributing roughly 15% to 30% of their total funding base.
As a group, Brazilian banks display among the weakest LTDs of all the developed emerging markets. These ratios have sharply increased over the past five years, which can lead to the conclusion that Brazilian banks' funding and liquidity positions have deteriorated. When including Letras-based funding sources, however, Fitch has calculated that the combined LTD of the Brazilian banking system is 133.8%, versus 187.1% without including Letras, based on the year-end 2013 account balances of 42 banks operating in the country.
The ratio adjustment brings Brazil's banks nearer to, although still above, the funding ratio averages of other developed emerging markets. By comparison, Fitch estimates the banking systems of Chile, Mexico, Turkey and Russia have LTDs of 117.5%, 95.6%, 113.9% and 108.8%, respectively, at year-end 2013.
Fitch's perspective of Brazilian banks' funding profiles also may include calculating another adjusted LTD ratio in order to account for funding from Brazil's development bank, BNDES. BNDES disburses funds through the banking system by providing infrastructure and capital expenditure funding to Brazilian companies. BNDES funding to banks represents an important slice of many Brazilian's banks' loan portfolios. Fitch's second recalculated LTD excludes BNDES on-lending from the total amount of loans, as these portfolios are directly funded via BNDES. This second version of the recalculated LTD ratio results in a 98.3% ratio for the Brazilian banking system at year-end 2013, which brings Brazil's LTD ratio to be the second-lowest among its emerging market peers.
A complete report on LFs, LCIs and LCAs can be found in Fitch's "Demystifying the Loan to Deposits Ratio in Brazil," published Nov. 24, 2014.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Demystifying the Loan to Deposits Ratio in Brazil