Crisis? What crisis?

It’s not always easy to accept that a crisis can be good for profits.

Take Brazil. Last year was one of the most turbulent in the past decade

for this country. Elections to replace reforming president Fernando

Henrique Cardoso sent markets into a panic at the prospect of a

leftwing victory.

The currency slumped by one-third, and bonds entered default territory.

Despite buoyant growth in his first four-year term, a slump in recent

years ensured that during Cardoso’s eight years in office the economy

expanded by an average of barely 2% a year.

Luiz Inácio Lula da Silva, the leftwing candidate, won and has

maintained his predecessor’s tight monetary policies, restoring calm to

financial markets.

But last year’s turbulence, while it was bad news for industrial

production and employment, brought huge profits for the financial

sector. Banespa, owned by Santander of Spain, made 2.8bn real ($1bn).

Bradesco, Itaú and Unibanco, the three biggest private banks by assets,

were not far behind, clocking up 2.02bn real, 2.38bn real and 1.01bn

real.

How do they do it? One answer is government debt. Public sector

domestic debt totalled 675bn real at the end of March. Exposure to

government debt among the biggest banks is more than twice their

shareholders’ equity. Even after a half-point cut on June 18, the

central bank’s base rate was 26% a year. It’s very easy money.

Yet nothing raises the hackles on a Brazilian banker more quickly than

the suggestion that banks do well out of high interest rates. “The

high-interest rate environment is horrendous,” says Geraldo Travaglia

Filho, corporate director at Unibanco. “It restricts demand for credit,

it increases risk, and it reduces productive investment.”

Credit is extremely limited in Brazil. Bank lending was just 27.6% of GDP last year. Almost all of it is short term.

Spreads are very high: average interest rates for corporate borrowers

are currently 82.1% a year, and 163.5% for personal borrowers,

according to Anefac, an association of financial market executives. The

reasons include high rates of non-performance, taxes, and

unsatisfactory bankruptcy and foreclosure laws, along with other

structural causes of sluggish growth.

“Everybody is very anxious to increase credit,” says Mr Travaglia, “but

it will only grow as the economic situation improves and as the level

of public debt reduces.”

Profitability

What applies to Brazil applies even more so to Venezuela. Of the 10

most profitable banks in the Americas during the 12 months to March, no

less than six were Venezuelan (see table).

“Banks are making very important profits from intermediation,” says

Alejandro Grisanti, head of economic research at Banco de Venezuela,

also owned by Santander. “Banks are paying 15%-20% on savings accounts

and lending to the government at 30% a year.”

Profits from this source will be stronger this year than last, after

the government introduced capital controls in February. They are

designed to stop capital flight, running at about $8bn last year and

$11bn in 2001. Instead of going overseas, that money must now find

investments in Venezuela. As a result, savings deposits increased by

26.5% this year to the end of May.

Lending risks

But the luxury of lending to the government is one riddled with

uncertainty. The country has historically been one of South America’s

more stable democracies – it is also has one of the largest known oil

deposits in the world. A general strike and violent protests last

April, lead by Venezuela’s oil workers almost brought the country to

the point of collapse.

The fall from power of Venezuelan president Hugo Chávez seemed to be a

foregone conclusion. The head of the armed forces announced Mr Chávez

had resigned and named Pedro Carmona as head of transitional

government.

In a dramatic turn-around, Mr Chávez was returned to office days later

following the resignation of Mr Carmona and collapse of the interim

government following the short-lived coup. Mr Chávez and his Bolivarian

revolution remain in place but not knowing how long he will be around,

or how his policies will shift next, makes long-term planning

difficult. February’s exchange controls were introduced along with a

freeze on the exchange rate and selected price fixing. Measures like

these are likely to be disastrous for Venezuela, which imports about

half of its food and other refined products. Mr Grisanti expects the

economy to contract by 9.3% this year, after an 8.9% contraction last

year.

That means banks must be extremely cautious. Provisions in the system

are more than 130% of non-performing loans, currently running at 8.4%

of lending. Many banks are beginning to restrict their exposure to

government debt, although total exposure, including reserve

requirements, is about 61% of deposits.

Not everywhere in Latin America is as volatile. As Jacqueline Barrio,

director of investor relations at Banco de Chile in Santiago, says,

only half-joking: “We often say that Chilean banks look more like banks

than Brazilian banks. It’s always been the case.”

Chilean stability

If Chilean banks are “more like banks” – taking deposits, making

loans in a way that fosters economic development, and so on – it is

because of the economic stability won at great cost during the military

dictatorship and largely consolidated under democracy since 1990. At

Banco de Chile, lending to the government accounts for about $1.5bn out

of a credit portfolio of $8.5bn. The interbank rate set by the central

bank is a miserly 2.75% a year in nominal terms and – with inflation

running at about 3% – the true rate is slightly negative. Banco de

Chile charges an average spread of 3.5 percentage points on all

operations, ranging from 0.8 points for big corporate borrowers to

about 15 points for middle-income consumer credit.

Such figures seem almost surreal by comparison with Chile’s neighbours.

Profit levels also have an otherworldly feel. Return on equity among

Chilean banks was 14.4% last year, down from 17.7% in 2001.

In such a mature market, there are few obvious routes to faster growth.

Armen Kouyoumdjian, a banking sector analyst, says consumer lending

looks set to remain fairly stagnant. “There is not much left for the

sector to do,” he says. “What we see is a constant mixing of easier

credit, discounts and marketing, which has pushed up retail sales by a

bit more than 3% this year. Unless the economy picks up, which is not

really expected, lending is bound to abate soon, as people reach the

limit of their ability to take on debt.”

Retailers step in

One recent development is the granting of banking licences to

retailers. Two chains of department stores have opened banks recently

and a third is set to follow. That should help introduce more

lower-income Chileans to banking. However, with banking penetration

high for the region at 60%, growth is likely to come slowly, and then

only if the economy returns to faster growth.

Such considerations may seem rather plodding to bankers operating in

the heady volatility of Venezuela and Brazil. But despite the tempting

profits to be made in a volatile economic environment, it is less

exciting Chile that provides the healthiest banking environment in the

region.