Nearly four years ago, following the election of former factory worker and union leader Luiz Inácio Lula da Silva as president of Brazil, the government announced plans to sell an 18% share of state-owned Banco do Brasil on São Paulo’s Bovespa stock exchange. Amid a climate of fear for the future of Brazil’s economy, demand for the shares was nearly non-existent and the government was forced to suspend the offer.
Much has changed since then. Brazilian companies are going public in record numbers and international investors are hungry for local equities. In June, Banco do Brasil listed on the Bovespa Novo Mercado, which has higher corporate governance standards. Despite adverse market conditions, the share offer was nearly 30% over-subscribed.
Other public banks, such as São Paulo state-controlled Nossa Caixa, have also been successful on the stock market. Since October 2005, when the state government sold a 25% share of the bank on the Bovespa raising roughly R$829m ($384.8m), the share price has soared by 66%. Nossa Caixa was the first bank to issue shares on the Novo Mercado and it attracted a record number of individual investors. The state had planned to sell an additional 20%, but decided to suspend the offer for political reasons.
Ready to compete
Like many of its peers, Nossa Caixa, which is Brazil’s third largest public bank, faced solvency issues in the 1990s and undertook a massive restructuring. Following a complete turnaround in its management philosophy, Nossa Caixa president Carlos Eduardo Monteiro believes that the bank can now compete with any private bank in terms of service, technology and profitability. “We consider ourselves a private bank with a public owner,” he says in an interview with The Banker.
Unlike Banco do Brasil or Caixa Econômica Federal, Nossa Caixa does not have a national network of agencies. “We made a decision to focus on the state of São Paulo and we are now the only bank present in all municipalities of the state,” says Mr Monteiro.
Although Nossa Caixa has been posting positive growth in recent years, it is now preparing for a significant increase in its operations. In January 2007, it will receive the remaining public employees that have accounts with Banespa, which was acquired by Spain’s Santander in 2000 in a privatisation auction.
Expansion investment
As a result of the changes, Nossa Caixa estimates that it will open an additional 650,000 accounts by January 1, 2007. In preparation, the bank is investing heavily in expansion. This year alone, it plans to open an additional 51 agencies, along with a slew of automatic teller machines, in an effort to keep its new clients happy. According to Mr Monteiro, 52% of the bank’s credit portfolio is with public employees, who have extremely low rates of bad debt.
With the expansion of payroll loans, Brazil’s army of public servants have been the focus of marketing efforts to expand credit and, in a scenario of declining interest rates, banks are fighting to boost lending.
So far, state banks have been fairly successful at increasing their lending. “Over the past three years, we have seen our credit portfolio rise at average annual rates of 20% per year,” says Mr Monteiro.
The scenario is similar at Brazil’s second largest bank, Caixa Econômica Federal, where the personal loan portfolio expand by 116% between 2002 and 2006. According to Caixa president Maria Fernanda Ramos Coelho, a significant portion of the increase in lending was due to payroll loans but recently the bank has also increased its credit card portfolio significantly. “Caixa is already the largest mortgage and payroll lender in Brazil and we are hoping to repeat our success in other areas,” she says.
Caixa hopes to capitalise on the increase in the number of its account holders in recent years. Between early 2003 and mid-2006, the number of accounts rose by 58%; today the bank has more accounts than Banco do Brasil. Ms Coelho attributes this to the introduction of the Caixa Fácil account, which is aimed at low-income groups and brought in 4.5 million accounts. Another factor is that the bank is present in 5562 municipalities and has the largest service network in the country.
In addition to its national reach, the Caixa also benefits from its near-monopoly on the mortgages, which help increase client fidelity and facilitate the sale of other products. However, as rates come down, analysts expect much more competition from the private sector in this area.
Despite the improvements in public banks in recent years, analysts are cautious about the political manipulation of public banks.
“State-controlled banks have come a long way but, at the end of the day, they are controlled by the government and there is always the risk of interference,” says Tomas Awad, a banking analyst from São Paulo-based brokerage house Itaú Corretora.
Other analysts agree. “Banco do Brasil and other government-controlled banks have become less politicised in recent years, but that doesn’t mean there is no risk of political intervention,” says Jason Mollin, a bank analyst at Bear Stearns based in New York. He adds that if you take away the benefits granted by state and federal governments, which include payroll deposits and access to credit at below market rates, the assets would lose a lot of their lustre.
Upside is ignored
However, analysts do see positive aspects of banks such as Banco do Brasil and Nossa Caixa. “The market has punished these banks just for being state-owned and has failed to look at the upside,” says Pedro Guimarães, an analyst from Banco Pactual, based in São Paulo. “Banco do Brasil has a national network of agencies and in the country’s fastest growing regions, such as the centre-west and north, private banks have a very limited presence.”
Mr Guimarães says that public banks have focused significant resources on improvements in efficiency. “Under hyper-inflation, many of the problems of these banks were hidden. But now, the central bank has been able to monitor their operations and avoid problems.”
He says that Brazil has the strongest banking system among the emerging markets: “The Brazilian banking system has already been restructured and is now extremely solid.”
With the improvements in the sector, the clamour for privatisation has all but disappeared. After a series of privatisations of state banks in recent years, analysts agree that, given the current political climate, there are unlikely to be any privatisations in the near future.
The two banks that are part of the government’s programme to reduce state participation in the financial system, but are yet to go to auction – Banco do Estado de Santa Catarina (BESC) and Banco do Estado de Piauí (BEP) – are likely to remain in public hands or be wound up. The two banks receive bail-outs of R$2.02bn and R$145.8m respectively, but their sale is not on the agenda.
Sales on hold
According to a central bank spokesperson, the sale of the banks is suspended and privatisation discussions are unlikely to take place until early next year. In the case of BESC, they would never take place if the bank’s current management had its way. “The people of the state of Santa Catarina don’t want BESC to be privatised. In the past four years, we have shown that BESC is a financially viable institution and have expanded both the number of account holders and the number of services offered,” says bank president Eurides Luiz Mescolotto.
He believes BESC can compete on an equal footing with private banks. “The bank has invested heavily in technology and offers the same services as its privately owned competitors,” he says.
One of the bank’s strongest selling points is its presence in all of the municipalities in the state, says Mr Mescolotto. In 147 of them, BESC is the only bank present. “No other bank, not even Banco do Brasil, has such a strong presence in the state,” he adds.
Like other state banks, BESC is most popular among public employees. All of the state public employees and the lion’s share of municipal employees are paid through the bank, says Mr Mescolotto. Public employees have been the base of the bank’s growing portfolio of payroll loans.
If the state-controlled banks lose their monopoly on payroll deposits, as is currently being debated by the government, their value could plummet. “Without the public payroll, there will need to be a new valuation done of BESC and BEP, and their value would decline significantly,” says Itaú Corretora’s Mr Awad.
Like other state-owned banks, Banestes, which is controlled by the state of Espirito Santo, is unlikely to be privatised any time soon. “The bank was on the path to privatisation, but since the election of governor Paulo Hartug in 2002, the bank has seen enormous improvements,” says Banestes president Roberto da Cunha Penedo.
The bank has increased its assets fourfold in the past four years, he says. “There is no need for Banestes to be privatised. The bank is doing its job and has been posting profit.”
He adds that with lower interest rates, Banestes, like other state-controlled banks, will have to increase the volume of credit to maintain profitability. “We will no longer be able to rely on government bonds and are going to have to sweat to increase loan volumes.”
Questioned existence
Similarly, in a scenario of lower interest rates, the subsidised credit that public banks have access to will become less important. “As market rates continue to decline, there is less of a need for subsidised lending,” says Mr Mollin, at Bear Stearns. As a result, there could be a time when state banks are no longer needed.
“It’s a long-term question that needs to be debated by society. Now, Brazilians do not see the need for these banks to be sold, but this could change,” says Mr Guimarães, adding that there might come a time when the federal government would see the advantage of selling either Banco do Brasil or Caixa Econômica Federal. “In the future, a foreign investor could pay a huge premium for one of these banks.”
