May 23, 2014 09:49 AM Eastern Daylight Time

RIO DE JANEIRO–(BUSINESS WIRE)–Fitch Ratings believes that the May 21st ruling by the Brazilian Superior Court of Justice (STJ) may have negative implications for large banks in Brazil. The STJ ruled in favor of a group of saving accounts holders disputing the remuneration of their saving deposits during the implementation of several economic plans during late 80’s and early 90’s. More specifically, the STJ ruled that saving account holders related to the Verao Plan are entitled to receive interest from the time the lawsuits were filed.

This ruling does not necessarily encompass all the plans under dispute and also does not result in a final decision about the final amount to be paid (if any) to the plaintiffs. Even though this decision could be appealed and the final outcome of such claims remains uncertain, this decision may have negative implications for many large banks in Brazil.

An unfavorable final Supreme Federal Court (STF) decision in favor of savings deposits holders could potentially trigger a rating review of larger Brazilian banks depending of the extent of the final impact of such contingencies and the financial strength of each bank. More specifically, this contingency may have the greatest impact on two government-owned banks and the three largest privately-owned commercial banks. Medium and small size banks are not affected by this decision given their limited participation on saving deposits management during the application of those economic plans.

Even though the timing, size and overall impact of possible rulings are uncertain, Fitch acknowledges that a ruling against the banks may result in pressures on their financial strength in terms of additional expenses, possible charges against their equity base and may result in more conservative growth in order to compensate the possible burden of the contingency.

Even when the range of possible outcomes is too wide to make an individual judgment for each bank today, Fitch acknowledges that above average profitability and capitalization of private owned banks (Banco Bradesco, Itau Unibanco Holding S.A. and Banco Santander (Brasil) S.A.) will bode well to confront the possible outcome. However, depending on the size of a possible judgement it may become a significant burden to short- and medium-term results. In the case of publicly-owned banks (Caixa Economica Federal and Banco do Brasil) the buffers to compensate a possible negative outcome from the court are significantly lower and may result in additional capital need to be provided by the government.

In any case, a significant reduction on a bank’s capital base due to overall net losses or a larger-than-expected period of limited earnings due to this unfavorable event risk, or any other related cause, may trigger a negative review of the ratings of any of the affected banks.

Fitch will keep monitoring future decisions from the courts and incorporate such results in the surveillance of our ratings.