Bloomberg News

Itau Profit Hit by Defaults, Wage War: Corporate Brazil

July 25, 2012

Itau Profit Hit as Defaults, Wage War Converge

Itau has tumbled 11 percent and Bradesco, based in Osasco, is down 4.6 percent this year after the banks boosted provisions for delinquencies on debt that is 90 days or more overdue. Photographer: Dado Galdieri/Bloomberg

Itau Unibanco Holding SA (ITUB4) and Banco Bradesco SA (BBDC4), Latin America’s largest banks by market value, face shrinking margins this quarter as higher delinquencies converge with surging labor costs.

Bank workers are asking for a 10.25 percent raise, outpacing the 4.9 percent annual rate of inflation through June. The demands come as banks grapple with consumer default rates at a 30-month high. Government measures to cut interest rates and ease reserve requirements fueled an 18 percent expansion in May of outstanding credit to 2.14 trillion reais ($1.04 trillion).

Such companies as state-run Centrais Eletricas Brasileiras SA (ELET6) to public universities and regulatory agencies face strikes as workers seek above-inflation raises in annual wage disputes, which shut banks by about three weeks in the third quarter of 2011. Record low unemployment and a lack of skilled workers may bolster union demands even as growth slows in the world’s second-largest emerging economy, said Rafael Bacciotti, an economist at Tendencias Consultoria Integrada.

“Every year it’s an issue,” Pedro Galdi, chief strategist at Sao Paulo-based brokerage SLW Corretora, said in a telephone interview. As salaries improve, “labor costs start to become a bigger burden on the industry.”

Itau has tumbled 11 percent and Bradesco, based in Osasco, is down 4.6 percent in Sao Paulo this year through yesterday after the banks boosted provisions for delinquencies on debt that is 90 days or more overdue. The benchmark Bovespa index has declined 7.3 percent in the period.

Itau, based in Sao Paulo, rose 1 percent to 30.50 reais at 10:48 a.m. Bradesco gained 1.3 percent to 29.71 reais.

Default Rates

Brazil’s central bank reported June 26 that consumer default rates rose to 8 percent in May, the highest since November 2009, as borrowers struggle to pay down debt amid slowing growth in Brazil. The bank will release its June report tomorrow.

Economists predict growth in the second-biggest emerging market after China will slow for a second straight year even as the government has cut interest rates to a record low, granted tax breaks on industrial and consumer goods and provided more subsidized credit. The economy expanded 2.7 percent last year after growing 7.5 percent in 2010.

Itau booked provisions for bad loans of 5.99 billion reais at the end of the second quarter, up from 5.11 billion reais a year earlier, the company said in its quarterly results released yesterday. The default rate for payments at least 90 days overdue climbed to 5.2 percent from 4.5 percent.

Rising Delinquencies

“Delinquency rates may still grow a little bit in the second half,” Rogerio Calderon, Itau’s head of investor relations, said in a conference call.

Bradesco shares plunged as much as 6.5 percent after it released its second-quarter results on July 23. The bank reported provisions of 3.41 billion reais, up 40 percent from a year earlier, as default rates rose to 4.2 percent.

“This provision shows conservatism,” Chief Executive Officer Luiz Carlos Trabuco Cappi, 60, told reporters in a conference call July 23. “Delinquencies are under control.”

He said yesterday on a conference call that he expects delinquency rates to fall to 3.8 percent to 3.9 percent at the end of this.

Brazilian companies are set to meet with unions in coming months as part of annual talks to negotiate wage increases and benefits, known as the dissidio adjustment.

Above-Inflation Raises

Most workers have won pay increases that outpaced inflation every year since 2004, according to a survey by Dieese, a trade union research institute. Last year, 87 percent of workers won above-inflation adjustments, while 7.5 percent had pay adjusted in line with consumer price increases, the survey found.

“We would anticipate some noise,” Fabio Zagatti, a Sao Paulo-based analyst at Barclays Plc, wrote in a report July 16. “Partial strikes and extensive press coverage are almost generally part of the negotiations.”

Bank employees have held a nationwide strike every year since 2004, the union representing Sao Paulo-area workers said in an e-mailed statement yesterday.

“Bradesco is confident in the negotiating process,” the bank’s press office said in an e-mailed statement, without commenting on the effect of possible strikes or above-inflation wage increases.

Workers may win bigger raises than in 2011 after the government increased minimum wages earlier this year, Tendencias’s Bacciotti said.

‘Bargaining Point’

“The favorable labor market environment with low unemployment rates becomes a bargaining point,” Bacciotti said in a telephone interview on July 20. Bacciotti forecasts the unemployment rate to average 5.8 percent this year, down from about 6 percent in 2011.

The national bank federation, known as Fenaban, which represents banks, is set to start negotiations in early August, said Magnus Apostolico, the group’s director of labor relations.

“If you use last year’s agreement as a reference, when the real wage increase was a little above 1 percent, then it doesn’t make sense to have a 5 percent increase in a tough year like this one,” he said in a telephone interview. “We hope the negotiations won’t be as contentious as last year. Strikes undermine clients and even bank workers.”

Last year, workers accepted a 9 percent wage increase to end a 20-day strike, Fenaban said on its website. Barclays’ Zagatti said in his report he forecasts personnel expenses to rise an average 9 percent for Brazilian banks in 2012.

“It cannot be deemed a conservative assumption, judging from past experience,” he said.

To contact the reporter on this story: Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net


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