Brazil's State Banks Most Exposed to Petrobras Scandal

Brazilian state-controlled banks are most at risk over loans to oil producer Petróleo Brasileiro SA and third-party contractors in the oil services and construction industries, Moody's Investors Service said on Tuesday.

An ongoing investigation into alleged corruption at Petrobras, as the state-run firm is known, triggered concerns about banks with exposure to companies involved in the scandal, Moody's analysts led by Celina Vansetti said in a report.

State-run banks, in particular, would be compelled by the Brazilian government to help Petrobras and suppliers cope with restricted access to credit in the wake of the scandal, Vansetti said. Apart from state development bank BNDES, which is Petrobras' largest creditor, other government lenders with exposure to the oil giant include Banco do Brasil SA and Caixa Econômica Federal.

Private-sector lenders including Itaú Unibanco Holding SA have ramped up loan-loss provisions and tightened credit disbursement standards to mitigate problems stemming from the Petrobras scandal. Banks fear that some companies could be blocked from bidding on government contracts, impeding their access to financing.

"The investigation into Petrobras could exacerbate the situation for Brazil's banks, given that expectations for loan growth in 2015 were already modest," Vansetti said in the report.

Any increase in loan-loss provisions related to credit disbursed to Petrobras and its suppliers, as well as to the broader oil and gas and construction sectors, "would hurt earnings and lead to a tightening of credit, which would reverberate throughout Brazil's economy," the report said.

Last month Moody's stripped Petrobras of its investment-grade rating and warned that further cuts were possible. Worries over a looming cash crunch and the scandal were behind the downgrade, Moody's said at the time.

Brazilian banks are likely to continue to finance Petrobras because of the company's "relatively sound operating performance and the high expectation of government support," Vansetti said. Petrobras is possibly President Dilma Rousseff's most powerful policy instrument to foster industrial, job and economic growth.

But the company is faced with near-term liquidity concerns as the investigation has prevented it from delivering audited financial statements on a timely basis, Vansetti said.

Reporting by Guillermo Parra-Bernal