BRADESCO BBI Equity Research
Understanding the Impact of New Credit Restriction Measures
Today the Central Bank and the Brazilian Monetary Council announced measures to reduce liquidity in credit markets: 1) an increase in the capital requirement for credit operations for individuals with terms longer than 24 months (36 months for payroll loans); 2) an increase in the reserve requirement for time deposits and demand deposits, whose impact the Central Bank estimates at R$61bn (the estimate for the last reserve requirement increase, in Feb. 2010, was R$71bn); 3) a schedule for lowering limits on time deposits banks can issue with guarantee from the Credit Guarantee Fund (FGC); and 4) elimination of the reserve requirement for long-term local bonds issued by banks (“letras financeiras”), which was previously 15%. These measures should contribute to reducing liquidity in the market and avoiding an overheating of the Brazilian economy.
We expect the impact on the companies we cover to be limited. We anticipate a greater impact on vehicle sales, with the influence on sales by the companies we cover being small. The direct impact should be quite limited, in fact, since most financed sales are with credit cards, which will not be affected. Nevertheless, one indirect impact is that some people may be borrowing money through payroll loans to purchase refrigerators, large TVs or other home appliances, and these sales (which we believe account for a very small portion) could be impacted. Additionally, the economy in general is poised to slow down (as our economists already expected, with a 3.5% GDP growth forecast for 2011), with less liquidity in the market.
More reserve requirements are much better for retailers than higher interest rates. Besides having some influence on sales, higher interest rates have a direct impact on some retailers’ cost of capital. For instance, B2W and Pão de Açúcar (especially with Ponto Frio and Casas Bahia) have to finance sales in interest-free installments, factoring (selling at a discount) receivables such as credit card receivables. The cost of these credit lines is usually the interbank interest rate plus a spread. The less interest rates go up (and they should go up in 2011), the smaller the increase in cost of capital should be for these retailers.
Sales of low-ticket items should not suffer. Companies like Drogasil (average ticket of R$37, with credit cards accounting for ~45% of total sales) and Lojas Americanas’ brick-and-mortar division (average ticket of ~R$30, with credit cards representing ~46% of total sales) should not be impacted since financing consumption is not a relevant part of the business. Moreover, with people committing less money to pay down vehicle loans and payroll loan installments, disposable income for discretionary spending could rise.
Could this bolster retailers’ consumer financing business? Although we do not expect a relevant impact here, people could become more interested in getting store credit cards (private label or co-branded) to finance higher-ticket items such as hardline goods if the availability of payroll loans diminishes. This could represent a positive externality for the consumer financing divisions of companies like Lojas Americanas, Pão de Açúcar, B2W and Lojas Renner.
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