By Marcelo Ballve.

It’s a small bank, but this is big. Banco Cruzeiro do Sul, a Brazilian bank specializing in payroll-deductible loans, (about 7 billon reais worth, or $3.4 billion of these, according to the bank), has been taken over by Brazil’s version of the U.S. Federal Deposit Insurance Corporation, known as the FGC in Brazil.

The takeover refocuses attention on ongoing problems in Brazil’s consumer credit markets. The Estado de São Paulo newspaper, quoting the head of the FGC, reports the hole in the bank’s books at about 1.3 billion reais, and implies a sale is the likely exit for all concerned.

Brazil’s Central Bank, in a press release explaining the takeover, references violations of market rules, and questions about asset items on the balance sheet. Assets, for a bank, of course, means loans. So almost certainly there will be some reckoning for Cruzeiro’s loan book, and some uglies may be contained there.

Considering what’s going on at Cruzeiro now, this PDF copy of a presentation made by Luis Octavio Indio da Costa at a 2011 hedge fund conference makes for fascinating reading. Back then, the bank was riding high: its net income had grown 13.8% between Q2 2010 and Q2 2011. And, as of June 2011, the bank’s traded shares had appreciated over 30% in 12 months. That said, typical of Brazilian “public” companies, only 19% of the shares were free float, with most of the rest controlled by the Indio da Costa family.

Below is a visualization, from that presentation, of the bank’s ownership structure.

As I wrote recently in a post on Brazil’s strained auto loan market, paycheck-deductible or payroll loans are a major segment of Brazilian banks’ credit to consumers. It is a common way to lower lender’s credit risk in high-interest rate Brazil, by lending against future payments deducted automatically from public servants and pensioners’ paychecks. According to an S&P study of consumer credit and securitization in Brazil, these types of loans account for 34% of the bank system’s total credit to individuals (versus 36% for vehicle financing).

More from S&P:

… (Brazilian) payroll-deductible loans represent about 65% of personal loans … 85% of which were granted to public workers that enjoy more predictable income levels and greater job stability than those in the private sector.

In 2003, Cruzeiro issued a credit card that also deducted payments automatically from consumers’ paychecks. It had also entered wholesale lending, but according to its March 31 results, 96% of its loans were still in the payroll-deductible form. So if there’s trouble with Cruzeiro’s asset side, it’s likely to be tied to this form of consumer credit.

Yesterday, on this website, Vernon Budinger of Latin America Structured Finance Advisors mentioned concerns about this market.

Consignado or payroll loans are another problem area in Brazil. In fact, Moody’s recently downgraded a few Brazilian banks because of their exposure to payroll loans.

According to Bloomberg, one of those downgraded banks was Cruzeiro. The chart below shows how Cruzeiro’s credit operations doubled between 2007 and 2001, and how a large portion of Cruzeiro’s assets are in FIDCs or Brazilian asset-backed securities (ABS), shown in the blue bars. Paycheck-deductible loans are often packaged and sold into the ABS market.

Under the government takeover, Cruzeiro enters a kind of 180-day government receivership known as RAET (Regime de Administração Especial Temporária), during which time its directors and officers relinquish control of the bank so irregularities can be corrected, even as the bank continues to function normally with respect to depositors and borrowers, according to the Central Bank release.

Another consumer-oriented lender, Banco Panamericano, was bailed out in late 2010 and later parts of it were sold to investment bank BTG Pactual. Panamericano specialized in vehicle loans, and was also an aggressive participant in the FIDC market.

There were rumors recently, published by Dow Jones, that BTG would also buy Cruzeiro.

According to an FGC release, depositors are guaranteed up to 70,000 reais, while participants in a special deposit guarantee program known as DPGE are insured up to 20 million reais.

(Check out Marcelo Ballve’s blog for future updates on the story)


Marcelo Ballve is a reporter who for over ten years specialized in Latin America. During that time, he worked in about a dozen countries, and wrote about politics, arts and culture, and business. He was a Jorge Paulo Lemann Fellow at Columbia University’s School of International and Public Affairs (SIPA) and the Fundação Getulio Vargas School of Management in São Paulo.

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