* Decision lowers issuer ratings for Caixa, BNDES
* Government has used banks to aggressively grow loans
Moody's Investors Service lowered on Wednesday the long-term issuer ratings of Brazilian state banks BNDES and Caixa Econômica Federal, citing their eroding capital position after years of rapid credit expansion.
Analysts led by Alexandre Albuquerque cut ratings on state development bank BNDES and on Caixa, the country's largest mortgage lender, to "Baa2" from "A3," according to a statement. Both rankings, which are within investment-grade ratings, bear a positive outlook - meaning that an upgrade would be likely to happen within 12 to 18 months.
Likewise, the foreign currency senior unsecured debt ratings of both lenders were downgraded to "Baa2" from "Baa1," with a positive outlook, "in line with the positive outlook on Brazil's government bond rating," Albuquerque said in a statement.
The unexpected decision reflects the growing concern among investors and analysts over Brazil's increased use of state lenders to revive growth regardless of the strategy's fiscal consequences.
Moody's said Wednesday's decision followed a deterioration of core capital indicators at BNDES and Caixa that only worsened in recent months.
BNDES and Caixa, which are fully controlled by the federal government, have been ordered by President Dilma Rousseff to boost credit access for individuals and companies while aggressively reducing borrowing costs. At the same time, BNDES and Caixa increased dividend payouts to the government, which has in turn replenished their capital with Treasury debt instead of cash.
"This practice has resulted in relatively low core capital levels, which limits the banks' ability to absorb losses in situations of stress, thus weakening their standalone credit strength," Albuquerque said in the statement.
By the end of last year, BNDES' core Tier 1 capital ratio reached 8.4 percent, while Caixa's dropped to 6.6 percent - well below the banking system's 12.4 percent average.
Caixa's loan book has risen by an annual average of 40 percent since 2009, while that of BNDES - which is almost three times as big as the World Bank's - has more than quadrupled since 2005. BNDES is considered as Brazil's main source of long-term corporate credit.
The press offices at Rio de Janeiro-based BNDES and Brasilia-based Caixa could not immediately respond to Reuters' queries after hours.