Moody's: Brazilian government policies will slow BNDES's loan growth

The decision by the Brazilian government to cut funding to Banco Nacional de Desenvolvimento Econômico e Social (BNDES; Baa2 negative) could hurt the bank's asset quality over the short term, but could also result in a decline in credit risk over the long term, as BNDES scales back the direct financing it provides the corporate sector, according to a new report from Moody's Investors Service.

"The policy change, which is part of the government's fiscal tightening strategy, could also spur growth for the private banks," says Alexandre Albuquerque, a Moody's associate vice president, adding that "as BNDES's loan growth slows, the bank can focus more on developing Brazil's credit market, rather than act as a direct lender."

As its role shifts, firms that had previously benefitted from BNDES's low-cost funding will have to turn to the private banks. Because many of these borrowers are in industries that are sensitive to Brazil's economic downturn, delinquencies on BNDES's balance sheet could rise over the near term, as the market adapts to the new strategy.

However, the decline in growth will also decrease demand on BNDES's balance sheet over the long term, eventually strengthening its credit profile. In addition, because the bank will no longer be the agent of the government's heavily subsidized lending programs (the costs of which have become a fiscal burden), its balance sheet will improve as well.

As a result, the role of Brazil's private banks will expand as BNDES's direct market influence dwindles. Moreover, slower growth at the development bank will also undo the distortions in the corporate finance market and in monetary conditions in recent years stemming from BNDES's market dominance. Still, private banks will be able to boost fee income by helping companies sell debt and could benefit from further development of the country's capital markets to raise funding and increase their participation in financing projects and investments.