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EQUITY RESEARCH
Sector Report | Brazil | Homebuilders / Macroeconomics
6 JULY 2015
BRAZILIAN HOMEBUILDERS
ANATOMY OF A SECTOR TRANSFORMATION (PART 1): RESIZING THE SECTOR
Bruno Mendonca*
Renan Manda*
Éverton Gomes*
Brazil: Banco Santander S.A. (Equity Research)
Brazil: Banco Santander S.A. (Equity Research)
Brazil: Banco Santander S.A. (Macroeconomic Research)
+5511-3012-5759 | [email protected]
+5511 3012-6535 | [email protected]
+5511 3012-7677 | [email protected]
Net/Net: The foundations of the homebuilding world in Brazil are shifting. In searching for a new balance in terms of funding costs, we believe the sector will tend to stabilize
at a significantly smaller size. In this first report of our Anatomy of a Sector Transformation series (joint reports by our real estate equity research and our macroeconomic
teams), we discuss (1) our estimates for the new size of the sector (at least 53% smaller than 2014 in terms of SBPE credit); (2) the potentially negative impact of credit mix
(new units vs. second-hand vs. corporate) on the potential sales value of the sector; and (3) the potential impact of sector deceleration on Brazilian GDP.

New financing reality suggests a 53% downsizing in SBPE credit supply for the sector. Considering the exhaustion of SBPE (Brazilian savings accounts) subsidized
funding and assuming no additional net inflow (or outflow), we estimate that the maximum sustainable SBPE credit concessions (TR-indexed) probably will not be larger than
R$53 billion per year (down from R$113 billion in 2014), meaning a 53% reduction and leading the sector’s credit supply back to 2010 levels (in nominal terms). The government
measures aim to soften the landing (Minha Casa Minha Vida and other FGTS-funded programs tend to be more protected than the rest of the sector), but the transition still looks
rough, in our view, mainly for mid-to-high income projects.

Corporate credit may suffer even more during the transition period. We believe the adjustment period may temporarily cause up to 83% of the total corporate credit available for
new projects to dry up. We currently see banks prioritizing credit to clients buying units from projects financed in-house to avoid excessive delinquency in construction
financing. This means that credit for new units will be temporarily prioritized over second-hand units and construction financing for new projects, in our view. In this report,
we present an exercise where we show that, under current rules, SBPE may not be enough to support more than R$10 billion/year in project launches (total PSV Brazil),
gradually rising to R$28 billion/year when the sector reaches equilibrium (which could take a couple of years). As a reference, listed players launched R$27 billion and
R$20 billion in 2013 and 2014, respectively, down from a peak of R$38 billion in 2011. The sector needs resizing.

We estimate that 20% of the Brazilian GDP decline in 2015 may be attributable to the civil construction sector (including infrastructure). Civil construction accounts for 6.5% of total
Brazilian GDP. For 2015, we forecast a 4% drop in civil construction GDP, meaning that the direct contribution of the sector to total GDP will be -0.3 p.p. (20% of the expected
1.5% GDP drop for this year). The impact on the unemployment rate is also relevant and may reach +0.9pp if we consider formal and informal jobs under current trends.
IMPORTANT DISCLOSURES/CERTIFICATIONS ARE IN THE “IMPORTANT DISCLOSURES” SECTION OF THIS REPORT.
U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629 / (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under FINRA rules.
Contents
What is the new size of the sector? A credit supply perspective ........................................................................................................................... 3
The sector needs a new financing structure .......................................................................................................................................................... 7
The Macro View – Construction sector impacting GDP and jobs creation .......................................................................................................... 10
Minha Casa Minha Vida program (funded by FGTS) is less exposed than the rest of the sector........................................................................ 12
The Brazilian financing system ............................................................................................................................................................................ 13
2
WHAT IS THE NEW SIZE OF THE SECTOR? A CREDIT SUPPLY PERSPECTIVE
BANKS’ APPETITE FOR GRANTING NEW MORTGAGES IS DIMINISHING . . .
Figure 1. Estimating the Breakdown of SBPE Sources: Funding Needs
Replenishment – R$ billion
We estimate a 53% reduction in yearly SBPE credit supply. Considering the
Mortgage
Concessions
113
exhaustion of SBPE-subsidized funding from savings accounts and assuming no
-53%
additional net inflow, we see SBPE outstanding credit growing only in-line with the
Untapped Funding
Available
44
interest on savings accounts (6%+TR a.a.). Adding the expected average credit
Mortgage
Concessions
53
Net Inflow
15
Interest
22
turnover (amortizations) to this amount of interest, we estimate that the maximum
sustainable TR-indexed credit supply (SBPE) would not be larger than R$53 billion
Interest
22
Amortizations
(SBPE Turnover)
32
Amortizations
(SBPE Turnover)
31
2014
Annual Equilibrium
per year (down from R$113 billion in 2014), as shown in Figure 1. Any additional
withdrawals from savings accounts may add downside risk to our estimates. Such
restrictions are likely to add significant pressure to financing costs for companies
and individuals.
Sources: ABECIP data and Santander estimates.
Figure 2. Annual Mortgage Concessions from SBPE Funding – R$ billion
120
109
113
We see SBPE mortgage concessions returning to 2010 levels. The R$53 billion
100
80
83
potential credit availability figure we forecast is a 53% reduction from 2014’s credit
80
56
60
53
concessions and is comparable to 2010 levels. This sharp reduction stems mostly
from a combination of (1) exhaustion of the untapped funding from savings
40
20
30
34
accounts; (2) higher-than-expected withdrawals from savings accounts year to date
18
5
9
(with no signs of recovery in the short term); and (3) a recent hike in the Selic/CDI,
Equilibrium
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
which increased significantly the marginal cost of funding and limiting banks’
appetite.
Sources: BCB and Santander estimates.
3
. . . AND WE EXPECT THE TRANSITION PERIOD TO HAVE A LARGER IMPACT ON CORPORATE CREDIT
Figure 3. CEF’s Market Share and SBPE Mortgage Concessions – in R$ millions
Caixa Economica Federal (CEF) is pulling the hand break on SBPE mortgage
7,370
credit. According to Valor Economico newspaper (based on data from ABECIP and the
-51%
ItaúUnibanco
11.4%
Brazilian Central Bank), May 2015 data points to an 85% reduction in CEF’s monthly
4,798
Santander
9.1%
CEF
65.1%
3,608
840
Banco do Brasil
Others 4.7%
671
486
346
228
Apr-15
3.1%
credit origination, helping to push the market down 51% MoM. CEF’s May 2015
ItaúUnibanco
mortgage lending of R$0.7 billion compares to a monthly average of >R$4.0 billion in
Santander
725
Bradesco
6.6%
CEF
898
729
Bradesco
previous months (this is the only published data after CEF’s changes, so it may be too
Banco do Brasil
early to call it a new run rate). In May 2015, CEF introduced more restrictive rules for
Others
mortgage concessions, with (1) higher rates; (2) lower LTV (only 50% for second-hand
735
285
236
May-15
units, down from 80% previously); (3) stricter approval rules for unofficial income; and
(4) lower commissioning for its distribution network. In Figure 3, we show the
Source: Valor Econômico.
significance of Caixa’s restrictions for overall monthly credit concessions.
Figure 4. Estimated Breakdown of Credit Concessions with SBPE’s Resources –
R$ billion
2014
Transition Period
Corporate
21%
Corporate
8%
Used
30%
Used
43%
New
62%
New
36%
Equilibrium
Corporate
22%
Used
47% New
31%
But CEF adjustments tend to temporarily distort credit mix. We expect the
transition period to have a major impact on corporate credit (new projects). As
an attempt to partially soften credit disruption for the homebuilders, we see Caixa (and
all other banks) prioritizing the transfer of clients from projects financed in-house to
avoid excessive delinquency in construction financing. This means that credit for new
Mortgage
Concessions: 113
Corporate: 23.3
Used: 48.5
units will be prioritized over second-hand units and construction financing for new
-83%
Mortgage
Concessions: 53
-67%
Corporate: 4.1
Used: 16.2
New: 41.0
-20%
2014
New: 32.8
Transition Period
Mortgage
Concessions: 53
projects. In this sense, we expect distortions in the credit mix in the short term, with
the bulk of the adjustment in second-hand units initially, but also significantly
Corporate: 11.7
pressuring the availability of subsidized corporate credit (SBPE) during the transition
Used: 25.0
period (Figure 4). We estimate corporate credit supply may be cut by 83% during the
New: 16.4
transition period, before banks find a new credit mix equilibrium (details on page 6).
Equlibrium
Sources: BCB and Santander estimates.
4
WITH LIMITED CORPORATE CREDIT AVAILABILITY, NEW LAUNCHES SHOULD DROP SIGNIFICANTLY
Figure 5. Potential SBPE Market Size – PSV (launches) in R$ billion
The SBPE market’s potential sales value (PSV) will decline significantly, in our
New Market Size
view. Considering our estimated amount of SBPE credit available for new projects
(R$4.1 billion/year during the transition period), and using an estimated average cost
PSV
29.2
structure of a project, the reverse math suggests that SBPE may be enough to
10.2
PSV
10.2
11.7
support only R$10 billion/year in launches, gradually rising to R$28 billion/year when
the sector reaches equilibrium. As a reference, listed players alone launched R$27
14.6
billion and R$20 billion in 2013 and 2014, respectively, down from a peak of R$38
3.6
5.1
4.1
Corporate Transition Period
Corporate Equilibrium
Land
billion in 2011.
4.4
1.5
Corporate Transition Period
Corporate Equilibrium
Construction Cost
Gross Profit
PSV
Source: Santander estimates.
Homebuilders dilemma: reduce corporate structure or inject equity. Not an easy
choice, mainly because it is still hard to precisely time the transition period. Reducing
Figure 6. CNI Survey – Construction Companies’ Expectations
launches indefinitely will hurt future results and eventually force managements to
70
significantly reduce corporate structure (which is – or at least should be – already
65
happening in most companies). On the other hand, maintaining the level of future
60
launches will likely demand additional equity in the projects to offset the mild credit
55
Optimism
supply in the period (also potentially pressuring returns). Currently, we would rather
50
45
see companies maintaining launches as low as possible, mainly considering the
Pessimism
40
current level of inventories in the market.
35
33
Current Credit Availability
Note: Construction companies ex-infrastructure. Source: IBGE.
1T15
4T14
3T14
2T14
1T14
4T13
3T13
2T13
1T13
4T12
3T12
2T12
1T12
4T11
3T11
2T11
1T11
4T10
3T10
2T10
1T10
4T09
30
Reality check on expectations. According to a survey conducted by the National
Construction Confederation (CNI), companies’ expectations on credit availability have
been gradually deteriorating since 2011 (Figure 6). After CEF’s recent restrictions, we
believe this relative pessimism seems reasonable.…
5
BUT RESTRICTIONS ON SECOND-HAND UNITS MAY NOT BE SUSTAINABLE INDEFINITELY; BANKS SHOULD PURSUE A BALANCED MIX
Without additional funding, banks need to reach cash-flow equilibrium for self-
Figure 7. Outstanding Credit Mix for Cash Flow Equilibrium – R$ Billion
Construction
New
sufficiency. For a non-growing housing financing system to remain balanced, the
Second-Hand
41.3
cash inflow from mortgage amortizations must equal the cash disbursements for
financing new projects (corporate financing). An unbalanced credit mix may lead the
47%
Credit Mix
22%
banks to inject additional resources in the system, in our view, which may not be
25.0
desirable in a scenario of funding constraints.
31%
Cash Flow Equilibrium
Different durations of corporate credit and mortgages mismatch cash flows. The
longer duration of mortgage loans versus corporate loans (project financing) leads to
16.4
3.9
11.7
2.4
3.9
Corporate Loans
Avg. Annual
Disbursement
an imbalance between the cash received from individual mortgage amortizations
1.5
(Figure 7.2) and the cash needed to finance the next round of new projects (Figure
Avg. Annual
Amortization
Mortgage Loans
7.1). This gap must be filled by second-hand units.
Source: Santander estimates.
Second-hand market is needed to rebalance cash flows. In order to rebalance the
system’s cash flow, an additional source of amortization is needed, namely secondhand units. Figure 7 shows an equilibrium exercise assuming (1) 70% LTV; (2) 20% of
units paid in cash (no mortgage); and (3) 80% construction financing.
Figure 8. Breaking Down the Credit Mix to Reach Cash-Flow Equilibrium with a Constant Amount of Available Funding – R$ Billion
Corporate
Mortgage – Second-Hand Units
Mortgage – New Units
Transfer to Banks
10.7
5.8
7.0
29.2
35.7
29.2
16.4
14.6
11.7
Value Financed Construction
(80%)
Cost
+
PSV
PSV
Paid in Cash
Downpayment Mortgage (70%
(30%)
LTV)
Mortgage
(70% LTV)
Avg. Duration: 11 Years
Avg. Maturity: 3 Years
Avg. Annual Disbursement: 3.9
1
=
Avg. Annual Amortization: 1.5
25.0
Downpayment
(30%)
PSV
Avg. Duration: 11 Years
2
+
Avg. Annual Amortization: 2.4
3
Sources: Santander estimates.
6
THE SECTOR NEEDS A NEW FINANCING STRUCTURE
Exhaustion of SBPE-subsidized funding pressures banks to fund new projects and mortgages with alternative sources, most likely through CDI-linked securities
such as LCI/LH. This need comes at a time when the interest rate continues to rise, widening the minimum spread necessary to continue having a profitable credit line for
new concessions. Altogether, this puts additional pressure on the banks to continue raising interest rates for new projects and new mortgages.
Current market rates (and/or home prices) are only sustainable with the Selic/CDI at <9% a.a. This is an old discussion, but increasingly relevant currently, in our view.
Considering average mortgage rates currently at 9.4% (Figure 9) and assuming banks’ marginal funding through a 90%-of-the-CDI LCI/LH (currently a 12.4% a.a. funding
cost), banks’ minimum demanded profitability (e.g., a 150-200-bp spread) will likely cap the homebuilding sector’s growth until the Selic/CDI stabilize at <9%, when non-SBPE
financing becomes sustainable. Before that, equilibrium will require significantly higher mortgage rates (putting pressure on home prices and/or demand).
The timing of the transition still looks like a two-year rolling target. The sector needs resizing. Santander’s macroeconomic team estimates the Selic at 11% by
YE2016 (down from 13.75% currently). Even if our scenario is confirmed (considering we are below consensus and the Brazilian Central Bank still sounds hawkish), an
additional two-year period for a natural rebalancing may seem too optimistic. Until then (and for as long as it may take), the sector needs resizing, in our opinion.
Figure 9. SBPE Funding for Mortgages Is Fully Used . . . (in R$ billions)
Figure 10. . . . and Current Market Rates Are Lower Than the Banks’ Marginal Cost Of
Funding (CDI), Putting Pressure on Banks to Raise Rates and Cap Credit Growth
15%
14%
65%
13.25%
13.75%
13%
12%
11%
510.1
10%
331.6
349
9.37%
9%
<9%
8%
-18
7%
6%
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
SBPE
Earmarked for housing
Granted
Available
SELIC
SBPE: Savings Account. Sources: BCB, CEF, ABECIP, and Santander estimates.
Mortgage Rates - Total
Source: IBGE, BCB, and Santander estimates.
7
SO WHERE IS THE ADJUSTMENT COMING FROM?
It is hard to precisely quantify the impact during the transition period (which we expect to take two to four years, depending on an economic recovery and/or government
bailouts/stimulus), but based on the current situation, we believe that:

Mortgage rates will tend to go even higher: With limited subsidized funding, we expect banks to be more restrictive and, mainly, more selective in granting credit. So
we see room for additional increases in financing costs (for companies and individuals).

Low average income may not absorb higher rates/lower LTV. Brazil is an “installment market”: In Figure 13, we present a sensitivity of rates and LTV, and their
impact on housing affordability (maximum income commitment with installments). For example: a 150-bp increase in rates (already a reality), combined with a 10-pp
reduction in LTV (also happening), leads to a 16% reduction in affordability.

Without additional income or subsidized funding, the liquidity of the market is sustainable only if home prices adjust downward. At a time when stagnation in
income growth is evident, we see pressure on home prices. Although each city (or even neighborhood) may present different realities, we see the transition period, on
average, as being characterized by a combination of a lower number of deals and higher discounts.
In a forthcoming report, we will provide more details on the following: (1) the role of private banks on credit supply for the sector; (2) home prices and particular drivers;
and (3) the housing deficit and the relation with the level of income in Brazil.
Figure 11. Sensitivity Analysis of Change in Purchasing Power vs. LTV and Mortgage Rates – Base 100
Effective Interest Rate
-16%
Initially Planned
11.0%
Income Commitment
35.0%
LTV
80.0%
Loan Term
80
100
70
64
84
LTV
Interest Rate p.a.
-7%
11.0%
11.5%
12.0%
12.5%
13.0%
40%
-40%
-41%
-43%
-43%
-45%
50%
-30%
-32%
-33%
-34%
-36%
60%
-20%
-22%
-24%
-25%
-27%
70%
-10%
-12%
-15%
-16%
-18%
80%
0%
-3%
-6%
-7%
-10%
30 years
20
PSV
Initially
Planned
20
20
-10p.p. in +150bps in Purchasing
LTV
Mortgage
Power
Rates
Down Payment
Mortgage
Sources: ABECIP and Santander estimates.
8
OUR SCENARIO HAS DOWNSIDES AND UPSIDES
Record-high withdrawals from savings accounts in 2015 are driving the sector
Figure 12. SBPE Net Inflow vs. Mortgage Concessions – in R$ billions
into a perfect storm. If the overall macro environment is already challenging, it adds to
35
what we see as the main disruption for the sector: exhaustion of subsidized funding for
25
mortgages (savings accounts). In light of the unexpected record-high withdrawals from
15
savings accounts (Figure 11), public banks like Caixa Economica Federal are being
5
forced to reduce significantly the credit offered to the sector. CEF is historically the main
provider of mortgages and construction credit in Brazil, with a 65% market share
-5
-5
-15
in Brazil, please refer to page 13 of this report.)
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
Mortgage / Construction Loans Origination
Apr/15
-19
-25
through March 2015. (For details on the structure of the financing system for the sector
Savings Account Net Inflow
Higher duration of new mortgages adds downside to our estimates. In addition to
the risk of additional withdrawals from savings accounts, we note that new concessions
Sources: ABECIP data and Santander estimates.
have higher average maturity (Figure 12). In this sense, credit turnover (amortizations)
tends to decrease, potentially reducing the amount of funding available for new credits.
Figure 13. Average Maturity of New Mortgages Is Higher than Outstanding Portfolios
35
On the upside, net inflow may recover, in our view, once the economy rebounds and
interest rates retract.
30
29.0
25
What could change this scenario? We do not rule out additional government
measures to ease this transition. We acknowledge that there is a significant number
20
of assumptions in the conclusions here presented, but we believe the big picture would
15
be changed significantly only if (1) interest rates in Brazil drop faster than we expect,
10.6
10
5
0
Mar-11
finding a new balance (Selic <9%) before YE2017; or (2) there are significant changes
in the structure of the Brazilian financing system (e.g., reserve requirements or changes
Sep-11
Mar-12
Sep-12
New Mortgages - Maturity
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Mortgage Portfolio - Duration
in the rules for use of FGTS as a financing source). So far, we see the government’s
measures as providing only brief temporary relief.
Sources: ABECIP data and Santander estimates.
9
THE MACRO VIEW – CONSTRUCTION SECTOR IMPACTING GDP AND JOBS CREATION
CONSTRUCTION GDP WEAKER THAN OVERALL AVERAGE, BUT CONTAMINATION RISK IS LOWER THAN OTHER INDUSTRIES’ AVERAGE
We estimate that 20% of the Brazilian GDP decline in 2015 may be
Figure 14. Construction GDP Growth (including infrastructure)
15.0
attributable to the civil construction sector. Civil construction accounts for
Civil Construction Boom
6.5% of total Brazilian GDP (including infrastructure, which represents ~45% of
9%
10.0
this figure). For 2015, we forecast a 4% drop in civil construction GDP, meaning
that the direct contribution of the sector to total GDP will be -0.3 pp (20% of the
4%
5.0
expected 1.5% GDP drop for this year). All the drivers are in the negative
0.6%
0.0
-1.2%
-5.0
Civil Construction GDP
-4.0%
direction: (i) interest rates are increasing; (ii) total wages are expected to fall 4%
this year; (iii) consumer confidence is at its lowest level in the data series; and (iv)
the Car-Wash federal police investigations.
GDP excluding Civil Construction
-10.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E2016E
The intra-sectoral impact matrix (Leontief Matrix) is used to indicate cross-
Sources: IBGE and Santander estimates.
sector impact of changes in demand from a given industry. For example, the
matrix can be used to estimate the potential impact of the downturn of the
Figure 15. Leontief Matrix’s Multiplying Factor on Intrasectoral Impact
construction sector on the overall Brazilian economy, as a consequence of the
2.5x
deceleration in the sector’s supply chain. For each R$ 1 in demand reduction in
the construction sector, the Leontief Matrix estimates a total of R$1.7 of demand
2.2x
Average: 2.0x
1.9x
reduction in the overall economy.
1.7x
The ripple effect of the construction sector is relevant, but lower than
1.3x
1.1x
average. The constructions sector’s multiplying effect (1.7x) is slightly lower than
the average of all other sectors (2.0x), but significantly lower than industries such
Automakers
Sources: IBGE.
Machinery &
Equipment
Oil & Gas
Civil Works
Public
Education
Real Estate
Brokerage and
Rental
as the automakers (2.5x) or industrial machinery & equipment (2.2x). This
exercise does not consider other indirect impacts such as additional layoffs or
changes in consumer confidence and unemployment, which may create another
round of ripples.
10
WE EXPECT A REDUCTION OF 290,000 FORMAL JOBS IN THE CONSTRUCTION SECTOR IN 2015 (+0.3 P.P. IN UNEMPLOYMENT RATE)
The impact on the unemployment rate may reach +0.9pp if we consider informal jobs following the same trend. The sector already reduced 106,000 formal jobs year to date
(until May/15). Brazilian government data lacks a detailed breakdown just for homebuilders, but we estimate the subsector breakdown of total jobs as follows (based on
IBGE): 1) 40% building construction (residential and corporate); 2) 34% infrastructure (e.g. roads, airports); and 3) 25% construction services (e.g. ground leveling, detailed
finishing).
# of jobs in the sector is dropping faster in the North and Mid-West regions, but the trend is negative in all regions. Figure 16 shows the breakdown of net formal jobs
creation by region in the construction sector in Brazil. The sector trends down, but the impacts are not the same throughout the country. In absolute terms, the southeast
region is cutting the largest number of employees in the last twelve months, with -137,900 jobs (a 9.7% YoY drop in the total number of jobs), being 93,300 cuts in the last six
months, showing acceleration in the negative trend. In relative terms, the impact was worse on the Mid-West (-18% YoY) and North (-14%YoY) regions. The most impacted
state in Brazil was Pernambuco (one of the Northeast’s most relevant states), with an impressive 26% reduction in formal jobs since May/14.
Construction was responsible for 54% of formal jobs cut in the last twelve months. The construction sector created 2.7 million formal jobs between 2006 and 2013,
which accounted for 20% of total jobs created in Brazil in the period (Figure 18). More recently, after the trend reverted, the construction sector (including infrastructure) was
responsible for 54% of the reduction in formal jobs in the country in the last twelve months (from May/15). Currently, jobs in civil construction represent 6.7% of the total
formal jobs in Brazil (a total of 38.9 million formal jobs in May/15).
NE
-30.1
-30.4
MW
S
-25.8
-16.2
SP
PE
-34.2
-20.9
-45.2
-5.4%
-93.3
-8.0%
-89.7
-13.1%
-137.9
-9.7%
Last 12 Months
Last 6 Months
55
50
-26.3%
15%
400
65
10%
300
60
-35.5
-57.1
-18.4%
SBPE: CAGED.
500
70
-22.6
-80.9
-14.9%
SE
Figure 18. Civil Construction Formal Job Creation
200
Optimism
5%
100
Pessimism
45
45
44
40
0
0%
-100
-95
-200
35
-300
30
-400
4T09
1T10
2T10
3T10
4T10
1T11
2T11
3T11
4T11
1T12
2T12
3T12
4T12
1T13
2T13
3T13
4T13
1T14
2T14
3T14
4T14
1T15
N
Figure 17. CNI Survey – Construction Companies’
Expectations indicates additional job cuts
Business Activity Expectation
Source: IBGE.
Workforce Expected
-5%
-290
-10%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
Figure 16. Sector’s Net Job Creation by Region – 000’s of
Jobs and % Variation YoY
Formal Jobs Net Creation ('000)
Civil Construction GDP Growth (%)
Sources: CAGED and Santander estimates
11
MINHA CASA MINHA VIDA PROGRAM (FUNDED BY FGTS) IS LESS EXPOSED THAN THE REST OF THE SECTOR
Units from the MCMV have regulated mortgage rates and are funded through FGTS (Brazilian workers’ mandatory savings accounts). CEF manages 100% of the
FGTS funds, but rates and credit offered through FGTS-funded mortgages have not yet been directly affected by the recent hike in mortgage rates by the banks and more
restrictive credit. The risk for the segment is more on the macro side, in our view, as, in a scenario of low GDP growth, a rising unemployment rate, high inflation, and high
interest rates, disposable income for low-income families tends to be the most affected, potentially jeopardizing their ability to purchase a new home.
Recent delays in CEF payments are worse for Group 1. Delays in payments tend to have a higher impact on Group 1 developers, as they have shorter working capital
cycles and are much more dependent on cash inflow to continue advancing production.
Group 1: Subsidies from FAR (government) account for up to 96% of the unit’s value and have regulated mortgage rates The remainder is financed through CEF at fixed
installments and with no downpayment.
Group 2: Subsidies from FGTS and regulated mortgage rates. Conventional sales (downpayment, mortgage, credit screening).
Group 3: No subsidies and regulated mortgage rates. Conventional sales (downpayment, mortgage, credit screening).
The next stage of the program, still to be announced by the government, is
Figure 19. FGTS Net Inflow – from 2000 to 1Q15
20
18.0
likely to have broadly the same format as the current one, albeit with a
18.8 18.4
potential additional group parallel to Group 1 with subsidies from FGTS, in order
18
16
14.6
14
to minimize government spending. As the inflow to FGTS comes from compulsory
11.9
contributions from payrolls, and any withdrawals or use of its funds have strict
12
requirements, its net inflow remains strong at R$6.1 billion in 1Q15 compared to
10
8
6.2
6
6.8
6.0
6.9
6.1
the savings account’s net outflow of R$19 billion (and R$24 billion until Apr/15).
2.3
2.8
2002
1.5
2001
4.6
4
2
6.3
3.3
1Q15
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2000
-
Source: FGTS.
12
THE BRAZILIAN FINANCING SYSTEM (AS OF APRIL 2015)
Figure 20. Brazilian Mortgage Financing System
Source of Funding
Contributors
CEF Infrastructure
FGTS
Total Assets: R$405
billion (Nov/14)
Employers
Unit Prices
Borrowers
3% p.a. + TR
FGTS Resources
From 5% + TR
to 8.16% + TR
SBPE Resources
Borrowers
Units up to
R$190 thousand
SFH
80%
65%
Mortgage Lending
From 9.4%¹ + TR to
12% + TR
Savings Deposits
Total Assets: R$510
billion (Apr/15)
20%
Reserve Requirements
Interest Rate
6% p.a. + TR
If Selic<8,5% p.a.
70% of Selic + TR
10%
Additional
Reserve
Loans at Market Rate
Non-SFH
20%
5%
Units from
R$190 To R$650³
thousand
Borrowers
Starting from 11.0%² +
TR
Resources Available
Units above
R$650³ thousand
Borrowers
Other Sources
Starting from
10%² + TR
(1) If the client has a salary account in CEF the interest rate can reach 9.0%+TR;
(2) If the client has a salary account in CEF the interest rate can reach 10.7%+TR.
(3) For SP, RJ, MG, and DF the ceiling price is R$750,000.
Sources: BCB, FGTS, CEF, and Santander.
13
IMPORTANT DISCLOSURES
Key to Investment Codes
Rating
Buy (B)
Definition
Expected to outperform the local market benchmark by more than 10%.
Hold (H)
Expected to perform within a range of 0% to 10% above the local market
benchmark.
Underperform
Expected to underperform the local market benchmark.
Under Review (U/R)
% of % of Companies Provided
Companies
Investment Banking
Covered with
Services in the Past 12
This Rating
Months
47.62
9.89
42.49
6.96
9.89
1.10
0.00
0.00
The numbers above reflect our Latin American universe as of Sunday, July 05, 2015.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving
these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other
electronic systems.
Target prices are year-end 2015 unless otherwise specified. Recommendations are based on a total return basis (expected share price
appreciation + prospective dividend yield) unless otherwise specified.
Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment
Securities Inc., 45 East 53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY 10022 USA.
Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above
methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the
report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American
equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included
in the body of this report.
The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk
premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable
with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974.
This research report (“report”) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment I, S.A.
which is wholly owned by Banco Santander, S.A. "Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for
information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities
mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities).
Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should
take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that
their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous
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Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income
arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Renan Manda*, and Bruno Mendonca*
*Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules and is
not an associated person of the member firm, and, therefore, may not be subject to the FINRA Rule 2711 and Incorporated NYSE Rule 472 restrictions
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As per the requirements of the Brazilian CVM, the following analysts hereby certify that we do not maintain a relationship with any individual working for
the companies whose securities were evaluated in the disclosed report. That we do not own, directly or indirectly, securities issued by the company
evaluated. That we are not involved in the acquisition, disposal and intermediation of such securities on the market: Bruno Mendonca*, and Renan
Manda*
Santander or its affiliates and the securities investment clubs, portfolios and funds managed by them do not have any direct or indirect ownership
interest equal to or higher than one percent (1%) of the capital stock of any of the companies whose securities were evaluated in this report and are not
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The information contained within this report has been compiled from sources believed to be reliable. Although all reasonable care has been taken to
ensure the information contained within these reports is not untrue or misleading, we make no representation that such information is accurate or
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From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly
interested in, the securities, options, rights or warrants of companies mentioned herein.
Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any
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© 2015 by Santander Investment Securities Inc. All Rights Reserved.
IMPORTANT DISCLOSURES/CERTIFICATIONS ARE IN THE “IMPORTANT DISCLOSURES” SECTION OF THIS REPORT.
U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629 / (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under FINRA rules.