By Marcela Ayres
BRASILIA (Reuters) - Brazil's central bank has placed nine banks under "special surveillance" and is closely monitoring the liquidity and stability of their operations, according to an undated internal bank document reviewed by Reuters.
The document, labeled as a presentation prepared for a May 19 meeting of the central bank's financial stability committee, which coordinates regulation of the banking system, says the small banks under surveillance include Banif, Maxima, Ficsa, Gerador, Pottencial, BPN Brasil, Mercantil do Brasil
The heightened scrutiny reflects regulators' concerns, outlined in the document, that excessive leverage, recurring losses, tough-to-sell assets or reputational risks could eventually threaten the lenders' stability.
The list also includes BTG Pactual (SA:BBTG11), Latin America's largest investment bank, which was plunged into turmoil by the arrest of its founder Andres Esteves in November in a corruption probe. Esteves has since been released and the bank has implemented a recovery program.
The institutions under surveillance have little or no presence in the retail banking market and are focused instead on niche markets such as mortgages, payroll lending and mid-cap corporate loans.
Still, the close monitoring and, in some cases, limits on new lending and dividends, reflect regulators' determination to keep the Brazilian banking system well capitalized as the worst downturn in decades tightens credit and increases defaults.
A spokesman for the central bank said in a statement that "due to secrecy rules and in line with its governance guidelines, the central bank will not make any public comments on the situation of financial institutions."
The central bank spokesman declined to answer questions about the document reviewed by Reuters. Told of its contents, he said, without providing specifics, that the information was "incomplete, out of context and included elements that did not correspond to reality."
Several banks named in the document confirmed they had been in touch with the central bank, addressing its concerns and strengthening their balance sheets through asset sales, improved lending practices or, in one instance, the sale of the bank. Other lenders declined to comment.
Close surveillance by the central bank does not mean that a bank's solvency is in question, according to a former central bank official familiar with the surveillance regime. The regulatory presentation itself distinguishes between three ascending "levels of concern" color-coded yellow, orange and red, without spelling out specific criteria for each category.
The former central bank official, who spoke on the condition of anonymity, said that having more than "a half dozen" banks on the list was worrying.
"There are always banks under surveillance and you would expect the list to grow in an economic recession," the former official added. "The chances of getting off the list easily also depend on the economy."
Together, the nine institutions group just 2.6 percent of the loans in Brazil's financial system, according to December central bank data.
Despite a contraction of 3.8 percent in Latin America's largest economy last year, Brazil's banking system has remained robust. The 130 banks in Brazil saw their return on equity rise to 15.4 percent last year, from 13.0 percent in 2014.
While data shows non-performing loans increasing this year, the average regulatory capital level for Brazilian banks stands at 16.3 percent, according to central bank data, comfortably above the global benchmark of 8 percent under Basel rules.
'UNDER CONTROL'
The Brazilian unit of Madeira-based bank Banif was the only bank in the document listed in the red category corresponding to the highest "level of concern." Portuguese authorities undertook a 2.2 billion euro bailout of its parent bank in December.
Brazil's central bank stepped in to demand a recovery plan from Banif earlier this year after observing problems with its balance sheet, strain on its cash flow and a reliance on illiquid assets such as real estate, the presentation said.
Banif told Reuters in a statement that its situation was "absolutely under control," with indicators inside regulatory norms and a restructuring process almost complete.
The central bank report indicated three small banks - Maxima, Ficsa and Gerador – raised a secondary "level of concern," labeled orange in the presentation.
A table in the document showed those were the only three banks under surveillance whose capital levels late last year fell short of the 11 percent minimum regulatory capital ratio established under Brazil's Basel regulations.
The document also said that Maxima lent money without observing principles of "selectivity, liquidity and guarantees," but did not elaborate.
In a statement to Reuters, Maxima said the central bank's questions about loans had been clarified and resolved.
Maxima said its decision to focus exclusively on real estate lending in recent years has affected its results but its loan book was showing improvement and its Basel capital ratio improved to 12.79 percent in February.
In the case of Gerador, the central bank document flagged "deteriorating equity, resulting in the violation of various operating limits."
Gerador's Chairman Paulo Macedo told Reuters that shareholders had decided to sell the bank and were working transparently with the central bank so depositors did not suffer any losses.
Brazilian lender Agiplan agreed to buy Gerador this month with plans to inject 80 million reais and rename it Banco Agiplan once the acquisition was approved by the central bank.
FREEZING SALARIES
Ficsa was one of three banks in the document where the central bank had applied "preventive prudential measures," a term for regulators' discretionary limits on banking operations, which were not specified in Ficsa's case.
Ficsa has been deleveraging since it suspended operations in 2012, the bank said in a statement, adding that its partners were "open to a possible opportunity to sell."
The central bank also applied "preventive prudential measures" to Banif and BTG Pactual, including the suspension of executive pay raises, bonuses and dividends beyond minimum legal limits, according to the report. None of the three banks commented on the measures.
BTG Pactual, along with Pan, Pottencial, Mercantil do Brasil and BPN Brasil, were covered under the lowest "level of concern” in the presentation.
The report on BTG Pactual focused on withdrawals by investors after Esteves' arrest in a sweeping corruption probe stemming from state-run oil company Petroleo Brasileiro SA (SA:PETR4).
Esteves was released from house arrest in late April and has returned to Latin America's largest investment bank as a senior partner advising on strategic issues. BTG Pactual has been executing a plan to improve its liquidity, including the sale of credit portfolios and stakes in companies.
BTG Pactual and BPN declined to comment on the central bank surveillance described in the report. Pottencial did not respond to questions on the matter. Pan and Mercantil said their business models were solid. Mercantil added that its business was expanding, with plans to open 20 new branches this year.