Banco do Brasil announced a reorganization programme on January 11 to rationalize its cost base, refocus its strategy and boost margins.
The plan’s author, and the bank’s chief executive, Andre Brandao, had been recruited to the role the previous September from HSBC, where he was head of global banking and markets for the Americas and had overseen a similar strategic challenge.
Analysts welcomed the plan, which proposed a ‘de-activation’ of 361 business units, including 112 full branches, and envisaged redundancy of 5,000 employees.
A report from Citi praised the move, which would lead to savings in administration of R$2.7 billion ($513 million) by 2025, as well as putting the bank in a better position for a new competitive environment.
Citi also estimated the plan would generate 42 basis points of improvement in the bank’s efficiency rating every year for the next four years.
However, two days later, on January 13, Valor, Brazil’s leading financial paper, splashed a headline saying that the country’s president, Jair Bolsonaro, had fired Brandao after becoming incensed at the planned lay-offs.
The bank issued a statement the following day saying that no official termination had come.
It then emerged that the president of the central bank, Roberto Campos – who had nominated Brandao for the position – and Paulo Guedes, the finance minister who had approved the plan, had intervened to stave off Brandao’s dismissal.
Murky waters
By January 15, the water was murkier still: although Brandao was still in place, it is not clear if his survival depended on the rationalization plan being postponed – or even scrapped. Being Brazil, there is also a sub-plot about the power struggle of the centralist parties in Congress, who want to nominate their own appointees for senior positions at the bank.
Aside from this confusion, what is certain is that the news has been bad for the bank. Banco do Brasil’s shares fell 7% in an otherwise positive week for bank equities.
Shareholders – rightly – saw the cost of the political risk that will likely constrain Brandao’s room for strategic manoeuvre. And though the bank has improved its financial results in recent years, it needs to continue improving if it is to meet its aim of generating a return on equity that is even close to the private sector banks.
One banker said to me that this demonstration of state intervention in the management of a listed company instantly makes the government’s ambitions for privatizations this year at least twice as hard as they were – and they weren’t easy.
The future of the banking industry is as clear as the status of Banco do Brasil’s CEO is not
The plan from Banco do Brasil was far from radical.
A report from Standard & Poor’s published in December last year highlighted the rapidly changing dynamics of Brazil’s banking industry.
For example, at fellow state-controlled bank, Caixa Economica, only 1.5% of transactions had taken place at a branch that year.
Interestingly, the report showed that ATM usage had also fallen, by 18%, as the bank’s customers switched to digital channels – those were up 64% from 2019.
The same dynamic is apparent at the private sector banks: Bradesco’s physical branch transactions fell by a whopping 80% last year alone, and the bank is accelerating its bank closures this year with a proposal to cut another 25% by the end of 2021.
Combined, Brazil’s largest three banks added 8.8 million digital customers last year. The future of the banking industry is as clear as the status of Banco do Brasil’s CEO is not.
Bad timing
A key factor in this debacle was timing. Ford had just announced a complete withdrawal from Brazil – a country in which it had operated for more than 100 years – with the loss of 5,000 jobs.
Bolsonaro had smarted over that decision and blamed, with much justification, the inability to keep subsidizing Ford’s production in the country.
However, despite Guedes being aware and happy with Banco do Brasil’s plan, the president reportedly flipped when he saw another 5,000 job cuts being announced – and this time from an organization within state control.
Cue the angry plan to fire Brandao that Valor reported, albeit a little prematurely.
The broader issue is that the government has failed to implement proactive reforms that address all the inter-correlated issues of subsidies, tax regimes, productivity and privatization.
Without the articulation of a cohesive, forward-looking agenda to modernize the country’s macroeconomic framework – let alone steer through its implementation – private companies have to assume the worst and pare back investment.
The fact that Ford is maintaining production in Argentina is particularly galling to the Brazilian government.
That puts it into reactive mode – in this case, rashly so. The plan aims to reinvigorate, strengthen and preserve a leading financial institution as a competitive force and a supplier of credit to the Brazilian economy.
