Brazilian banks are nervously awaiting a major court ruling on $65 billion worth of depositor claims relating to adjustments to accounts to compensate for hyperinflation. Brazil’s Federal Supreme Court is expected to rule on the case as early as Wednesday.

Brazilian Banks 2

Brazilian banks lawsuit claims

The lawsuits claim that the banks understated their adjustments of savings accounts as required by law to compensate for the hyperinflation of the late 80s and early 90s. According to a Citi Research report out this morning (based on an article from the Brazilian newspaper Valor), there are over one million individual claims and more than 1,000 group claims against the banks. In total the claims amount to R$150 million or US$65 billion.

What a impact a decision in favor of the plaintiffs might actually have on Brazilian banks is quite murky. No one really knows how much exposure individual banks face, or of course, whether the court will rule that the banks have any liability at all.

A reasonable compromise is likely

According to Citi analysts Daniel Abut, Nicholas Riva  and Carlos Rivera, the supreme court ruling is likely to be a reasonable compromise. R$150 billion represents 32% of the total shareholder equity of the Brazilian banking sector, and a payout of that amount would obviously cripple Brazil’s banking sector. The banks have been lobbying the court and politicians for months regarding this reality, and you can be sure their concerns for Brazil’s economic health will be heeded.

Moreover, according to the Citi analysts, this $150 billion reais figure is probably a maximum figure including penalties and interest, which also makes an award of the full amount unlikely. Another point to consider is that around 60% of the total potential liability in this case lies with Brazil’s two large, government-controlled banks, so in reality the government is “on the hook” for the lion’s share of any award to the plaintiffs.

One final point on this topic is that Brazil’s banks have known about and been preparing for a potential award for many years, and most will have set aside at least some contingency funds for civil lawsuits and the like.