 |
Márcio Cypriano,
Bradesco’s president |
When Banco Bradesco posted third-quarter results in November, most people focused on the impressive headline figures. After all, profits had nearly doubled year on year, as had earnings. All product areas, including retail and corporate banking, asset management and insurance, had produced positive results.
Tucked away in the middle of the report, though, was one line acknowledging disappointment. More than that it also provided a clue as to where the bank will focus a large part of its attention in coming months. “Referring to large corporates,” it read, “a 3.1% decrease in the loan portfolio was recorded in the last 12 months... mainly due to the appreciation of the real against the US dollar, besides [which] these companies are currently well capitalized and opting for raising funds through the capital markets.”
It’s the last part of that statement that stands out and its significance is not lost on Márcio Cypriano, Bradesco’s president. Speaking to Euromoney the week before the report was released, Cypriano acknowledged that the capital markets present a big opportunity for Latin America’s biggest bank, whose strengths lie more in retail and corporate banking.
“When you analyse capital markets, our performance is similar to [local] peers’,” he says. “In some products we are stronger, in others we are weaker.” However, he adds: “In general, we should be bigger and better in capital markets. [That business] should closely match Bradesco’s retail performance.”
One of the problems for Bradesco is that the capital markets business is not a distinct entity in the bank, unlike say asset management or broking. The head of corporate banking, for example, also oversees the capital markets business. Developing its investment banking franchise and providing it with the infrastructure to flourish is one of Cypriano’s biggest challenges for the next 12 months.
“To build and unify all the capital markets structures we have inside the group into a separate entity, still belonging to Bradesco, but integrating the capital markets businesses, similar to an investment bank concept,” is what Cypriano plans. If need be, the bank will hire seasoned bankers from outside to ensure that Bradesco performs as strongly “as we believe it should,” he says. “We definitely see capital markets as a growth area in Brazil.”
Brazil’s equity markets, in particular, have begun to pick up steam. There have been 24 initial and secondary offerings on the São Paulo stock exchange (Bovespa) over the past two years, raising R$14.35 billion (US$6.5 billion). Bradesco, though, has struggled with its equity capital markets business and lags behind local rivals Unibanco, Pactual and Banco Itaú as well as leading international equity players such as Credit Suisse and UBS. Bradesco has not even underwritten an equity deal this year, according to Dealogic. To his credit, Cypriano acknowledges his bank’s weaknesses in this area. He hopes, though, it will be able to leverage its relationship with Brazil’s top corporates and start to win IPO business, especially as that strategy has paid rich dividends on the debt capital markets side.
“About 85% of Brazilian companies have a relationship with us and based on that we have already generated a fantastic number of deals,” says Cypriano, who has been president of the bank since 1999.
Bradesco is the number one ranked bank for local currency bond deals this year, according to Dealogic. The bank has helped underwrite five domestic debt deals, which have raised $2.9 billion, or a third of the total volume raised by Brazil’s corporates in reais this year. The bank also has a 45% share of the debenture market.
What the restructuring of the investment banking unit will also do is make it a more transparent business. At the moment, for example, the bank’s management does not know precisely how much the capital markets business contributes to the bottom line. “Integration of the capital markets business will allow us to analyse better its performance and will allow us to set targets,” says Cypriano.
Strengths
No matter what Bradesco achieves in investment banking, though, its real strength will always lie in retail and corporate banking. The loan portfolio, which accounted for 39% of its earnings, was up 25.4% for the first nine months of this year on the same period in 2004. Much of that is attributable to greater borrowing by individuals and small and medium-size enterprises, and Cypriano foresees even greater opportunities in this sphere. He reckons that lending volumes will grow by another 20% to 25% next year on the back of a relatively healthy economy.
“Economic growth has helped cut the unemployment rate and helped raise salary levels, in general,” says Cypriano. Brazil has been traditionally a society of extremes of wealth and poverty. But now, slowly, a middle class is emerging and it is these people who will constitute the main battleground for Brazil’s banks. Bradesco is well placed to take advantage. The bank has more than 3,000 branches nationwide and it has also struck deals with retailers, such as Casas Bahia, the country’s leading outlet for furniture and household appliances. If it can’t access a customer directly, this is a way it can do so through third parties.
The deal with Casas Bahia, which was signed last year, helps extend Bradesco’s client base to the lower end of the income spectrum. The bank manages Casas Bahia’s credit portfolio, which more than doubled to R$1.5 billion between July and October.
Bradesco’s instincts in the retail market are a credit to Cypriano’s banking skills. Although he trained as a lawyer, he became a banker at 24. At 30 he joined Bradesco as a branch manager before working his way up the ladder. Because of his background, he understands the value of building relationships and realizes just how powerful the branch bankers can be. He visits Bradesco’s branch managers twice a year and has made the bank a more open organization. One symbol of this openness is that all of the directors sit in the same room, about the size of a mini-football field. Outside, a bank of secretaries can track their every movement on screens on the wall.
This use of technology should not come as a surprise to people familiar with the bank. Bradesco has always been at the forefront of banking technology in the region. It was the first Latin American bank to offer internet banking services in the mid-1990s and today over one-third of its customers bank online.
Organic growth
Despite the presence of some of Latin America’s best private banks, such as Itaú, Unibanco and Banco Real, Cypriano says his biggest competitor is government-owned Banco do Brasil. “It is positioned throughout Brazil,” he says. Itaú, on the other hand, is at its strongest in São Paulo, Rio de Janeiro and Minas Gerais. Cypriano says he has combated the threat of both Banco do Brasil and Itaú by opening more branches and finding new products that prove to be as successful as the agreement he signed in 2002 with the postal service.
That deal gives Bradesco the exclusive right to sell products through the service’s 5,500-branch network. The initiative gave the bank an additional 4 million customers. Now Cypriano hopes that further product innovation will help the bank meet its target of attracting another 2 million customers over the next 12 months.
One thing not on the immediate agenda is a big acquisition. Cypriano made waves when he first became president through a series of astute purchases. These included the asset management units of Deutsche Bank and JPMorgan as well as Banco Mercantil, a family-owned bank that served Brazil’s wealthy elite. Now that the Brazilian market is more consolidated there are fewer buying opportunities. Bradesco might participate in the privatizations of half-a-dozen small state-owned banks that are due to be sold next year. In general, though, the emphasis is on organic growth.
Cypriano presumably hopes that this strategy will help consolidate Bradesco’s financial position. One constant criticism of the bank was that for all its financial muscle it lacked the nimbleness of its big rival Itaú. Cypriano says this problem has now been addressed. “We are a big ship but we can move quickly like a small yacht.”
Bradesco’s efficiency ratio at the end of September was 45.7%, compared with 58.3% a year before. He says that this improvement is largely attributable to the bank having finally digested the various businesses it has bought over the past eight years. Administrative and personnel costs have been cut and market capitalization has almost doubled in the past year.
With the outlook for the economy quite good, Cypriano reckons that now is an opportune time for the country’s banks. But he also knows that Brazil is the toughest banking market in Latin America. It’s for that reason that Bradesco is beefing up its capital markets business so that it can compete across all products, as well as build on its traditional strengths.
