Farmers' debt crisis shook the bank

The difficulty of farmers in Brazil to pay their debts puts the balance sheet of Banco do Brasil, the country's largest agricultural finance provider, under pressure.

The bank warned last year that it might stop providing loans to farmers who applied for bankruptcy protection. Banco do Brasil Senior Manager Tarciana Medeiros stated that agricultural loans are going through the worst period in the bank's 218-year history.

According to Bloomberg, delays in loan payments of Brazilian farmers, who face high interest and cost pressure, are close to the highest levels in the central bank's data set going back 15 years.

The government has stepped in to support farmers more than once. However, according to Medeiros, these supports also paved the way for the postponement of debt payments in anticipation of new aid.

During the election race between President Luiz Inácio Lula da Silva and his rival Flávio Bolsonaro, some large farmers in western Brazil chose not to pay their loans in the third quarter, according to a source familiar with the matter.

According to the same source, on-time payments fell overall during the election period as farmers evaluated whether the Bolsonaro administration would provide more support. Lula won the election by a narrow margin. Geovanne Tobias, the Bank's Finance Director, commented, "Maybe many farmers were waiting for a miracle, debt forgiveness. We don't know."

Shares of Banco do Brasil, which halved its profit expectation, fell by up to 13 percent on Thursday. This was the sharpest setback since October 26, the day after Lula's election victory.

Banco do Brasil, Brazil's second largest bank in terms of asset size, has long been the country's largest agricultural loan provider. In the past, the bank has benefited from the growth in production that has transformed Brazil into a global agricultural power.

However, farmers are now experiencing a more serious cash crunch compared to recent years. New regulations also force the bank to allocate more provisions in case the risks increase, even if the loans continue to be paid regularly.

In the third quarter, the bank's credit costs reached 21.2 billion reais, approximately $3.8 billion. 12.2 billion reais of this amount came from agricultural loans. Adjusted net profit fell nearly 67 percent to 1.3 billion reais over the same period. The average of analyst estimates compiled by Bloomberg was at 3.09 billion reais.

The bank's results were also reflected in other markets. While the shares of BB Seguridade Participações, the publicly held holding company controlled by Banco do Brasil, decreased by 4.4 percent, long-term swap rates increased by over 20 basis points.

Tivio Capital Portfolio Manager Isabela Fukase said that in addition to inflation data and the government's new financial packages, the markets are also evaluating whether the state will have to provide capital support to Banco do Brasil.

According to Fukase, such a step could affect public finances and increase risk premiums, especially in the long term. Bank restrictions on lending may weaken economic activity and growth prospects.

It created a chain effect on the markets

The results have raised concerns about Brazilian agriculture at a time when farmers operating on low profit margins are reducing their purchases of fertilizers and agricultural chemicals. Shares of plant protection company Corteva fell by up to 25 percent. Shares of other agriculture and food companies with Brazil ties, including JBS, also declined.

Banco do Brasil is working on 15 initiatives to preserve its capital next year. The bank will keep dividend distribution at the minimum level stipulated by the legislation and reduce risk appetite.

Negotiations will continue with customers whose payments are overdue to restructure their debts. If necessary, legal action will be taken to collect the guarantees.

Tobias said that they expect the problems to ease with restructuring and collections, but the results will not be immediate. He stated that the next two quarters will be difficult. Medeiros, on the other hand, stated that failure to make payments in anticipation of a new public support also penalizes farmers who pay their debts on time and limits credit opportunities.