BRAZIL: Agreement With Savers Could Cost More Than R$ 15 Billion To Banks

(RTTNews) - An agreement between the Brazilian Bank Federation (Febraban) and consumer defense agencies to end litigation on savings-accounts' losses could cost up to R$ 15 billion (US$ 4.65 billion) to financial institutions.

The legal battle between banks and savers in Brazil, which lasted for almost three decades, was related to government economic plans to fight inflation between the end of the 1980's and the beginning of the 1990's. Savers said that banks underpaid them by miscalculating the interest rate on their savings accounts. Banks argued that they were merely following existing rules.

Taking into account only the cases of collective and individual lawsuits against the banks, which amount to almost 1 million complaints, the agreement with savers would cost R$ 10 billion to the financial sector.

However, sources close to the talks believe that the Supreme Court (STF), which will review the agreement, will extend the deal terms to all entitled savers, increasing the cost to R$ 15 billion.

According to one source, the STF has preferred not to privilege only those who engaged in lawsuits against the banks, but all the possible victims to avoid new, extended claims.

Luis Santacreu, an analyst at Austin Ratings, said that it would make sense to extend the decision to all potential claimers.

The payment schedules, however, would probably be extended and could follow the same rules established by the federal government when it allowed Brazilian workers to redeem part of their quotas in a public severance fund known as FGTS.

The ruling on FGTS's inactive accounts was mentioned as a model for the payment to the savers during the negotiations, sources said. According to them, the payment should be made in stages and may even be organized by date of birth, as was the case of FGTS.

Transparency towards the savers should also have cost to the banks, which are likely to start to repay their clients in the first quarter of next year. When IDEC, one of the consumer protection agencies representing savers, started discussing the topic with Febraban, almost two years ago, it expected disbursements by the end of 2017.

Even now, with a final agreement, three more meetings between the parties involved in the deal are still required to conclude the documentation that will be sent to the STF.

If the Brazilian Supreme Court decides to extend the payment to all those affected by the economic plans, some banks would require more provisions.

"Working with the possibility that all savings-account holders at the time have a right, there will be a need for an extra level of provision," Santacreu said.

In their balance sheets, all Brazilian banks state that they followed the rules in this case, but consider as "likely" the risk of loss in civil lawsuits.

According to JP Morgan analyst Domingos Falavina, the state-owned Caixa Econômica Federal should be the most exposed financial institution to this lawsuit, since it held 36.4% of the savings in the period be the second most impacted, followed by Bradesco and Itaú Unibanco.

In its first half balance sheet, Caixa Econômica said it had set aside R$ 1.533 billion in provisions for lawsuits related to the economic plans. Total money set aside for civil claims amount to R$ 3.298 billion, less than the provisioned by other banks.

Banco do Brasil, according to Falavina, has a R$ 4.3 billion provision for the matter. In the third quarter of 2017, the bank had a R$ 6.7 billion budget to potential losses from civil lawsuits. Falavina points out to a possible downward revision, since the impact on the bank may be close to R$ 3.3 billion.

Bradesco indicated that it had R$ 5.17 billion provisioned for civil lawsuits. Meanwhile, Itaú Unibanco, which held 12.8% of the savings in the period, according to JP Morgan, has R$ 5.348 billion in provisions for civil lawsuits.

"Our initial view on the agreement is positive since a coordinated and agreed solution presents much less risk to the financial system than a potential court ruling," Falavina said.