By Maria Ahmed
Brazil’s banking sector will have to square up to the demands of a maturing economy. Emerging Markets asks industry bosses how well they’ve prepared
Brazil’s banking chiefs expect that the country’s unprecedented economic stability will open new markets. Having survived interest rates of 50% and inflation over 2,500% in the 1990s, they argue the industry is well placed to meet new demand.
“We live in a different environment to that of the years behind us,” says Roberto Setubal, president of Banco Itau, Brazil’s largest privately owned bank. Brazil’s macroeconomic fundamentals have improved drastically since the IMF bailout of 2001, he points out.
With net worth of $305.6 billion, Brazil’s banking industry is the biggest in Latin America. Since a cycle of consolidation in the 1990s, four local players have come to dominate: Banco do Brasil, Bradesco, Banco Itau and Unibanco – along with stiff competition from multinationals like Santander and HSBC.
Regulation and reform of the banking sector have helped foster competition and innovation, according to Setubal. For example, the government has not obstructed bids by foreigners to acquire Brazilian banks.
Interest rate push
The key driver of business will be a cut in the interest rate from its current 18%, which will encourage firms and consumers to borrow. Setubal predicts that the process will begin this year. The high interest rate has discouraged banks from lending to the productive sector of the economy, because of the high returns to be had from investing in government credit.
However, private investment in government bonds is coming down, from around 30% of GDP in 2004 to 27% last year, according to Jose Maria Rabelo, senior vice-president at Banco do Brasil, Brazil’s largest bank, 71% of which is state-owned.
Industries hungry to expand capacity include oil production, hydropower and agribusinesses like soy and sugar/ethanol.
The other great opportunity on the corporate side is in products that allow investors, both local and foreign, to access Brazilian capital markets. The secondary market for corporate bonds in Brazil is picking up: “The public sector’s technical capacity and professionalism when it comes to managing funds has improved,” says William Bethlem, head of international banking at Unibanco. “They are investing their pension funds, and the secondary markets have become more liquid.”
As Brazil’s sovereign credit rating quickly approaches investment-grade, demand is up for “anything that allows outside investors to enter the domestic market and access that high interest rate,” he adds. “We’re developing new derivative and structured products that can be traded both inside and outside Brazil.” He predicts an increase in corporate issuance on the international markets by rail and road companies, although he stresses there is a need to ease access to capital by simplifying the process of registering new equity or fixed income issues.
As growth picks up and incomes rise, the consumer market will also offer new opportunities that will be reflected in corporate issues: “Any businesses involved in consumer goods – electronics, supermarkets, air travel – will all grow,” adds Bethlem.
Compared to the United States, Brazilian banking still has some catching up. “We’re 10 years behind,” says Setubal, of Brazil’s consumer loan industry. Consumer credit and credit to small firms should grow at 30% to 40% a year through 2006 and 2007. However, he would like to see an improvement in information on individual and company credit ratings, which enables banks to develop “positive track records for our clients as well as negative ones”.
Setubal says that there is room to reduce the burden and complexity of taxes on banks: however, he acknowledged that reducing taxes is “much easier in a growth environment” and will probably happen slowly.
The government has made a start on cutting taxes on financial transactions. In February of this year it announced measures to cut taxes on foreign investments in locally issued public debt, and tax-free migration for foreigners between equity and fixed-income instruments.
Competitive edge?
But as Brazil’s capital markets open up, so will competition for the Big Four. Bethlem says: “Our major challenge is not the other Brazilian banks but global players who have global distribution, particularly in Asia, as it becomes an important source of capital.” However, he added that there was time for Brazilian banks to adapt: “The Brazilian credit market is still a domestic game”.
“Domestic capital markets will grow a lot and that will be to Brazilian banks’ advantage ... We have the geographical coverage. We’re well positioned to exploit opportunities with fast-growing local companies.”
Rabelo at Banco do Brasil is more precise about the edge the Big Four have over their international counterparts. Having seen off two financial disasters a last decade, he is confident that Brazil’s banks are best positioned to exploit new opportunities in the country: “Only the strong survive.”