Itaú Unibanco paints gloomy picture of Brazilian economy

Itaú Unibanco, Latin America’s largest private sector bank, has painted a gloomy picture for the Brazilian economy for this year.

The bank now predicts GDP could contract by as much as 6.5% in the worst-case scenario, according to CEO Candido Bracher. Itaú is considering three outlooks: pessimistic, likely and optimistic.

"As the crisis persists" and the restriction measures continue, the projection for GDP for the rest of the year further deteriorates, Bracher said during the bank's results conference call.

Economists consulted by Brazil’s central bank for its weekly Focus survey, released on Monday, downgraded their average projections for 2020 GDP growth for another week in a row, to -3.76% from -3.34%.

Even if the COVID-19 restrictions were lifted on May 8, the economy would contract 8.9% in H1, according to Itaú’s projections.

If, however, measures stay in place until June 30, the economy would shrink 13.1% this half – marginally better than the previous projection, but with a significant carryover effect to the third quarter.

Bracher said it is not yet possible to assess the duration of the crisis and the distance to its peak, but said that "it will be a long period for the reconstruction of companies" and it is the bank's role to help.

In that line, Itaú extended the grace period for loan repayments. For individuals, the grace period has been extended to up to 120 days for loans of up to six years. For companies, there is a 180-day grace period, with terms of five years. For wholesale loans, the grace period will be 90 days.

In addition to credit lines and longer terms for repayments, Itaú announced the largest private donation ever made in Brazil, of 1bn reais (about US$180mn), to fight the pandemic.

Because the return to normalcy will be gradual and economic impacts tend to be greater, Itau made adjustments in its operation, with an impact on its balance sheet. 

In Q1, provisions for loan losses increased 147% year-over-year, to 10.4bn reais. Net income tumbled 49% to 3.4bn reais.

The bank suspended guidance for this year due to the unpredictable scenario, but made some projections, among which was that it will maintain high levels of liquidity and that there should be a greater participation of large companies and fewer individuals in its loan book, and with many loans being restructured. 

Also, that service and insurance revenues will continue to be pressured due to lower economic activity and the capital markets being closed.

LATIN AMERICA

Regarding Latin America, the bank said it has an adequate level of provisions to handle the cases of companies in debt negotiations.

But the scenario is deteriorating.

"The crisis did not reach the same intensity as in other countries, but the prospects are very negative for everybody as a whole. As time goes by, we believe that we’ll have to up our provisions for Latin America,” said CFO Milton Maluhy Filho.

POLITICAL CLIMATE

Talking to reporters, Bracher also commented on the political turbulence in Brazil.

"It’s very important that the market believes that public debt will be controlled as we exit the crisis and, for that, it’s very important that there’s harmony between the executive, legislative and judiciary [branches]," he said. "And, due to this situation, I naturally view with concern the whole scenario of political tension. We don’t need to add a political crisis to the big health and economic crisis we’re already experiencing."