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Banco do Brasil looks most exposed to Petrobras probe, UBS says

Brazil's Banco do Brasil Chief Executive Aldemir Bendine speaks during the Reuters Latin American Investment Summit in Sao Paulo April 1, 2011. REUTERS/Nacho Doce

SAO PAULO (Reuters) - Fallout from a corruption scandal at Brazil's state-controlled oil producer could hurt Banco do Brasil SA more than any other large bank, though quantifying damage from potential loan losses is difficult, UBS Securities said on Monday. In a client note, strategist Philip Finch said that if problems related to the scandal lead to a 0.1 percentage point rise in borrowing costs, the government-controlled bank's net income and return on equity could decline by 4.5 percent and 0.6 percentage point, respectively. Banco do Brasil is the nation's largest lender by assets. However, Finch said rules that prevent banks from detailing their exposure to specific firms make it difficult to assess a deterioration in the quality of a bank's loan book stemming from "Operation Car Wash" - the name given to the corruption scandal afflicting Petróleo Brasileiro SA. The report underscores how asset quality has become a central issue for investors following Brazilian banks in the wake of Operation Car Wash. Until uncertainties related to Brazil's slowdown, the risk of water and electricity rationing and the scandal start receding, UBS will keep a "neutral" recommendation on Brazilian banks, Finch said. Prosecutors allege that ruling coalition politicians used the oil company known as Petrobras to skim billions of reais through overpriced contracts with construction and oil services for more than a decade. Operation Car Wash fanned risk aversion, and corporate loan approvals stand to suffer temporarily, Grupo BTG Pactual analysts said last week. On the other hand, Itaú Unibanco Holding SA and Banco Bradesco SA , the nation's largest private-sector banks, look well-prepared to withstand any losses stemming from the probe. Itaú has a coverage ratio - the measure of reserves for soured credit - of 1.93 reais for 1 real in bad credit, with provisions currently at 6 percent of its loan book. According to Finch's estimates, Bradesco would be the least affected, with earnings and ROE declining by 1.3 percent and 0.24 percentage point. Bradesco has the biggest loan exposure to the oil and gas and construction sectors, at 13.8 percent of outstanding loans, while Banco do Brasil appears to be most exposed to Petrobras, the UBS note said. (Reporting by Guillermo Parra-Bernal; Editing by Ken Wills)