The Brazilian banking sector is enjoying heady days, propelled by a roll-out of a number of key banking services on a major scale. Lending, particularly consumer credit, is exploding despite high costs. Another couple of points lower on rates and other markets, such as mortgages, will flourish. The one cloud on the horizon is a bracing dose of foreign competition.
In the consolidated banking world in Brazil, where a clutch of domestic banks dominate the national scene, the slowly unfolding takeover of ABN AMRO is the dominant topic of conversation. The tussle for ABN between the Santander-Fortis-Royal Bank of Scotland consortium and Barclays will be pivotal for the competitive landscape of the banking industry.
If Santander, which already has a substantial presence in the country, wins, it will have enough critical mass to put pressure on other participants.
| It might cause a shake-up, particularly in the mid-tier segment, believes Roberto Setúbal, president and CEO of Banco Itaú. A post-acquisition Santander would be similar in size to today’s giants Banco Bradesco, Itaú and Banco do Brasil, he notes. Plinio Chap Chap, professor of finance at Profins Business School, adds that for Santander: “Brazil would account for about 35% of the combined bank’s revenues, making it a key, strategic country.” |
If Barclays emerges victorious, Brazilian bankers will heave a sigh of relief. “We will see marginal and small niche acquisitions, but not large changes,” says Mr Setúbal.
Domestic domination
Nationally, Brazil remains heavily dominated by local banks and consolidation has been blocked because the three major private institutions, Itaú, Bradesco and Unibanco, still have family or foundation structures. That shields them from the awkward questions and pressure for change that minority shareholders exercise in the banking industry in other countries. It is improbable that either Bradesco or Itaú could be takeover targets and although the slightly smaller Unibanco, with its simpler ownership structure, is often cited as an attractive target about which rumours constantly swirl, bankers think it unlikely that the Moreira Salles family would want to divest such a profitable asset.
Has that allowed banks to overcharge routinely? There is no doubt that lately Brazilian banks have been profitable and are growing more so. Itaú’s first-quarter profits were up 30% year-on-year, Bradesco’s were up 11.4% over the same period and Unibanco’s increased 11.7%.
Critics say they make too much from basic services. Mr Chap Chap mentions one example: revenues from charges on basics cover 120% of costs in the industry, he says. “That’s incredibly high and might fall by 20% with competition. Without that as a driver, margins are unlikely to come down.”
Tight competition
Unsurprisingly, banks dispute the assertion that they charge too much. “The industry is amazingly competitive. We lose deals for fractions of basis points,” says Demósthenes Madureira de Pinho Neto, head of the wholesale business for Unibanco and its asset management unit.
Lending fees have everything to do with delinquency ratios and a disguised fiscal burden, says Márcio Cypriano, president of Bradesco. The problem that foreign banks encounter when they try to enter the country is the custo Brasil, the added and hidden burden of doing business in the country, he says. That includes transaction taxes and high social and payroll contributions, which make it nigh on impossible for foreigners to enter with lower pricing than Brazilian banks, he says.
“We charge an average per client of $3-$4 per month [for current accounts], which is not high given the quality of services we provide, such as a network of 20,000 ATMs and advanced internet services,” says Mr Setúbal. It is low compared with other countries that offer similar services, he believes. Charges on interest rate products price in a paucity of delinquency information, the economic volatility of the past, and the low size of each loan, at just $50-$100, which is typical of a lower income country but which drives up costs because the cost of processing a $100 loan is not dissimilar to a big ticket one, says Mr Setúbal.
Deposits or credit?
For Brazilian banks enjoying this heady growth period, the question now is one of measuring up opportunity costs. Does it make more sense to focus on the slow and tricky business of growing a deposit base and locking in customers or more sense to focus on credit services, which are more lucrative and arguably more immediately necessary?
The two giants, Itaú and Bradesco, which are often accused of copycat tactics, are pursuing different models that reflect philosophical differences.
Bradesco is continuing to work hard to provide accounts for unbanked and under-banked Brazilians. Mr Cypriano says that his is the best-positioned bank in the drive to provide universal coverage. Bradesco already has 20,000 points of contact and six million current accounts. It will focus on areas of growth where banking services are limited, recently opening eight branches in Rio de Janeiro and starting to open in growth cities in the Amazon. It will seek to balance this programme of openings by exploiting new channels, such as the internet and call centres, says Mr Cypriano. The aim is still to expand account coverage rapidly but new channels mean that branch growth can be undertaken selectively and “perhaps we will slow down the speed of openings”, he says.
Itaú’s attitude is much more focused on credit and services than deposit taking. “We are not planning to get to new clients using a bank platform but much more through credit products, consumer loans and credit cards,” says Mr Setúbal. The bank will not be looking at a large move to open branches, but act more as a distributor of financial services, particularly credit, which both serves the needs of the poorer population (few of whom have savings) and is cheaper for the bank than a roll-out of branches, he says.
Unibanco, with its stronger tradition of wholesale and corporate banking, is in the middle. It has been moving into the lower income area over a long period but its roots have made it more geared to corporate and wealthier clients. In the past five years, it has designed a strategy aimed at penetrating the lower income portion of the population. “We have our own financial company, Fininvest, which is entirely focused on this segment of the population,” says Mr Madureira de Pinho Neto. He agrees with Mr Setúbal that there is much more need for credit than for accounts and savings products but reasons that will be supplied through bricks-and-mortar outlets of the bank. Fininvest is a 100%-owned subsidiary.
Window of opportunity
In the short term then, the fizzing market for credit dominates the agenda as banks reap the rewards of years of economic stability. Growth is particularly strong in the lucrative consumer lending sector, where there is plenty of pent-up demand. Brazilian banks, cautious because of the country’s peculiar history but eager to exploit what may be a limited window of opportunity, are striving to get the right balance across different risk profiles.
Bradesco has been active across the board and has been growing through acquisitions as well as organically, says Mr Cypriano. It has been particularly strong in payroll-deducted credit, which is seen as a safe area, buying BMC, a specialist institution in the area for R$800m ($412m) in January. “It gave us access where we didn’t have penetration before, in an area where structures are relatively complex,” says Mr Cypriano. The segment is attractive because “delinquency rates are very low in payroll loans and we can offer attractive rates to clients”, he says.
The payroll-deducted credit segment has been the main driver in credit although increasingly credit card and auto loans are becoming popular.
Bradesco has been active in credit cards, issuing 1.5 million of them in a two-pronged strategy. First, it is reaching middle and lower income clients partly through agreements with well-known chain stores such as Casas Bahia. Second, last year’s purchase of the Brazilian card business of American Express will allow it to reach the upper end of the consumer market and build a strong corporate card franchise.
Itaú will be focusing on organic growth. “We believe much more in our ability to build business channels and our own assets. Buying portfolios is opportunistic for us,” says Mr Setúbal. The bank is market driven, he adds. “If the market wants auto loans, we give them auto loans.” For Itaú, autos have been the story of the past couple of years, with growth of between 40% and 50% per year.
Unibanco is focusing on consumer lending through Fininvest, which has about 250 small stores. It’s a more rational way of expanding the network as a compromise between joint ventures and using a full blown bank roll-out. “You need distribution to get clients. It’s naďve to think that you can reach clients only through joint ventures. These are complimentary and additional channels,” says Mr Madureira de Pinho Neto.
There is little to suggest that the credit markets will turn down in the near future with a glut of liquidity worldwide and the story of declining rates at home. Default levels are not throwing up any red flags. “Delinquency rates have been stable and a bit lower than their peak, particularly since the central bank started cutting rates,” says Mr Setúbal.
Herd mentality
Still, Christian Stracke, head of emerging markets research at CreditSights, says the composition of Brazilian bank loans is worrying. “It’s basically a herd mentality where everyone is chasing market share,” he says.
The emphasis is on consumer and increasingly non-collateralised lending. That has represented 60% of total growth in the past 12 months and, with the exception of Itaú, disclosure is very poor at individual banks, says Mr Stracke. Any downturn would expose vulnerabilities, he says.
Banks are aware that business diversification would strengthen their operations. That is happening slowly as they join the swinging party in, for example, investment banking, where foreign investment banks are making money hand over fist. Local banks are starting to grapple with how to leverage relationships with corporate clients to act as adviser and originator as they migrate to the capital markets. They get to expand the relationship – and pocket the fee.
