State-owned Banco do Brasil is the largest bank by assets in Latin America so new business lines have to be pretty big to make an impact on the balance sheet. But the rationale for some of the bank’s businesses is to attract and retain customers, rather than just to boost the bottom line. Two such activities are the remittance business and microcredit; another is the creation of the subsidiary Banco Popular do Brasil to provide services for low-income groups without bank accounts.
“The total assets of Banco Popular are almost nothing in terms of Banco do Brasil’s assets, which closed last year at 253bn reais ($126bn),” says Banco do Brasil president Rossano Maranhao Pinto. “The most important thing with Banco Popular is the strategy, so that in the future we can gain new clients by introducing them to banking now.”
Client reach
Banco Popular was established in February 2004 and operates through supermarkets and petrol stations in the suburbs of big cities. There are now 5000 points of sale and 1.5 million clients, the average loan size is 100 reais and 220m reais has been advanced so far. This kind of business would not be profitable in Banco do Brasil’s branches because of their higher costs but by tapping into the informal (that is, non-bank) sector, the bank hopes many customers may graduate to its other services.
Similarly, Banco do Brasil lends about 500,000 reais in microcredit to low-income customers, who may also become bigger clients in future. With the remittance business, the aim is to keep families tied into the bank. “Banco do Brasil is so large that the revenue from the remittance business is small in comparison but what is more relevant is the strategic importance because we keep the family as our clients,” explains Mr Maranhao Pinto.
Pool of customers
Accordingly, Banco do Brasil has operations in major destinations for Brazilian migrants, such as the US where it works in partnership with Western Union; in Japan, where there are seven branches and a large savings pool; and in Portugal, where the client base has grown from 2000 to 50,000 in three years.
Yet even if these are not the businesses that drive Banco do Brasil’s growth, they help the bank to grow and become more efficient.
“When we compare last year with five years ago, we have come from a net income of 1bn reais to 4.2bn reais, and reached a return on equity of 27% compared with 22.6%. Capital adequacy has increased from 12.2% in 2002 to 17.1% last year. And, very importantly, the efficiency ratio has improved from 55.8% in 2003 to 48.1% last year,” says Mr Maranhao Pinto.
“We are the leaders in assets, in credit cards, in asset management, deposits, trade finance, investment and client base. The latter is important to highlight. Last year, we had 22.9 million clients compared with 16.4 million in 2002.”
The bank has 40,000 ATMs and the largest wholly owned branch network in Brazil with 14,800 outlets distributed over 3052 municipalities.
Transition management
The challenge facing Banco do Brasil – as with other Brazilian banks – is to manage the transition from an environment of high interest rates to more moderate rates as the country marches on towards investment grade status. Loans are expected to increase by 30% this year, reflecting the enormous growth potential in Brazil, and risk management and corporate governance systems have been improved to ensure that the portfolio remains strong.
The bank has a large agricultural heritage, which still accounts for 30%-35% of the credit portfolio. “We operate as a government agent in the agricultural sector but we assume the risk and we do not give credit that will not produce a return,” says Mr Maranhao Pinto.
Currently 6% of the bank is floated on the stock market but it recently announced plans to increase this to 12.5%. It also has plans to list on the Novo Mercado, which requires a free float of 20%.
