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After years of expansion, Brazil's auto industry is facing an important obstacle to continued growth: the reluctance of local banks to provide credit.
Auto-loan default rates have been climbing in Brazil--where traditionally close to 70% of vehicles purchases are made via financing--and reached a three-year high of 5.5% in February, the most recent data provided by automaker financing group Anef said. According to MB Associados, which provides economic data for auto-dealer association Fenabrave, defaults likely climbed again in March to a record 5.7%.
The release of banks' first-quarter earnings added to concern about auto financing. Amid increasing non-performing loan rates, Brazil's two biggest banks in terms of assets, state-run Banco do Brasil SA (BBAS3.BR) and the country's biggest non-government bank, Itau Unibanco Holding SA (ITUB, ITUB3.BR, ITUB4.BR), both saw a reduction in their auto-credit portfolio in the first quarter.
Banco do Brasil's auto-credit portfolio dropped to 30.7 billion Brazilian reais ($15.9 billion) in the first-quarter, from BRL31.3 billion in the fourth quarter of 2011. Itau, meanwhile, saw its auto-credit portfolio fall to BRL59.8 billion in the period, from BRL60.1 billion in the fourth quarter of 2011.
"Banks opened up the taps too much before and now they're closing them too much," said Flavio Meneghetti, president of auto-dealer association Fenabrave. The high default rates are linked to the large number of Brazilians who entered the middle class in recent years and bought cars for the first time, he said. "Many people bought cars in 2009 and 2010 with 60 months of financing and no money down. What we're seeing now is the result of that, not something different happening now."
Some banks rewarded managers who originated more loans, which led to a decline in the quality of loans, said Banco do Brasil's Alexandre Abreu, vice president for retail. Banco Votorantim, which sold a 49% stake to Banco do Brasil in 2009, had such a policy before Banco do Brasil bought in, said Abreu. Nonetheless, the official said he doesn't see an "elevated" risk of default among car loans.
According to KPMG partner Salvatore Milanese, "with an increase in income, more Brazilians acquired vehicles and obtained financing. As the cost of living increased at a higher pace than income, defaults rates are increasing."
Another factor that has led to a restriction in credit is the widening price difference between new and used cars, analysts said. Whereas before used cars in Brazil retained a good portion of their resale value, the gulf between the two has been widening.
As banks see the cars they finance drop in value they've become reluctant to lend, knowing that if they have to take back the vehicle they'll have a difficult time recouping their money, said Paulo Roberto Garbossa, an auto analyst at the ADK Automotive consulting firm.
Garbossa, along with many in the industry, sees the jump in default rates as temporary and he thinks should begin to decline in the second half of this year.
"Banks took provisions in the fourth quarter of last year and cleaned a lot of the bad loans off their books in the first quarter of this year," MB Associados analyst Tereza Fernandez said. "They did a big sweep-up, which should allow for a gradual recovery in conceding new credit."
But Fernandez and Garbossa noted that credit growth will likely come at lower levels than in recent years. In the meantime, Fenabrave has already cut its growth estimate for this year, seeing sales of cars and light commercial vehicles expanding just 3.5% this year, from an earlier estimate of 4.5%.
The contraction in auto credit "was one of the main reasons for the drop in sales volume" so far this year, Meneghetti said Thursday. "But like most Brazilians we're optimists, and we expect to have a better second half, with growth returning to levels close to normal."
-By Rogerio Jelmayer and Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; firstname.lastname@example.org