Brazilian retail banks: a positive credit story
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Brazilian retail banks: a positive credit story

Still-high lending rates, weak competition and an information deficit have all served to moderate the growth of retail-focused financial products in the country, despite the sector’s allure.

The Brazilian government wants a lower interest rate environment. It rightly identifies high debt interest as a burden to growth in consumption, investment and GDP. Taking advantage of the global slowdown it has aggressively lowered its Selic – which now stands at 7.25%.

But the banks aren’t responding – or at least in any meaningful way. Under direct pressure, state banks Banco do Brasil and Caixa have cut their rates. The private banks have made some cosmetic changes, lowering rate ranges but the premium clients that qualify for the lower rates wouldn’t require access to credit at these rates anyway – even at the lower end of the range. And the real story is at the high end of the range, and the credit cards which still charge 200% per annum.

This adverse selection cycle mean non performing loans and loan loss provisions have been high. This, the private banks argue, is why they can’t respond to lower rates. And they have a point. And so they watch the public sector banks lowering their rates and winning market share, safe in the knowledge that they will win share back when the market takes off and the state banks’ anti-cyclical role takes a back seat.

If the government really wants to lower Brazilian interest rates it is right in its prescription of increasing competition, but using Banco do Brasil is not the best strategy to achieve this. Rather, the government needs to increase competition within the private sector.

Because it has not just been the high interest rates that have provided Brazilian banks with a profitable environment. There has also been consolidation of the system into a few very large banks, a lack of transparency of the cost of these banks’ products, low levels of financial education and a system which prevents customer mobility – in practice credit cards, loans and mortgages require an customers to open a current account. High current account fees prevent clients shopping around, not just because dual fees are prohibitively expensive but so too is the time and level of bureaucracy required to open accounts in Brazil.

"With pressure in pricing, banks will need to remake their entire loan portfolios by attracting more educated clients with lower default rates" -Sergio Furio, BankFacil

Brazilian banks, therefore, compete on an all-or-nothing basis. A client is a client of a bank or she is not. And comparing the competitiveness across a bank’s range of products – including those clients want and have today and those they may want tomorrow – is fiendishly difficult. Competition, therefore, occurs at the brand level. Adverts almost never mention APRs. It has been about coverage – opening branches and hovering up the growing middle class.

The major reason for this competitive landscape is the lack of a positive credit bureau. If a client of Itaú Unibanco walks into Bradesco to ask for more competitive rate on a mortgage the bank has no basis on which to base that decision. President Lula enacted the legislation that would create such a positive credit bureau during his last week of office but nothing has happened since. Strangely, the customer advocacy groups lobbied against this centralised storage of data that would show good credit and payment histories of Brazilians to all financial institutional. Instead of seeing this as a basis for competition these groups saw privacy issues. The big banks must have been delighted – as they would have been the biggest providers of information to the database they would also have been potentially the biggest losers, as smaller competitors could target the better credits with lower – but still juicy – interest rates (and hasn’t the Brazilian government been trying to help the small- to mid-tier Brazilian banks who have been struggling in recent years?)

All of which makes Experian’s acquisition of the remainder of its Brazilian subsidiary Serasa very interesting. Experian entered the Brazilian market in 2007 but its latest move – at the end of October – it bought the remaining 29.6% for $1.5 billion values the company at more than double what it did five years ago. Does Experian know something we don’t? Is the central bank about to relax its prohibition on Serasa’s provision of data to third parties?

Such a move would have a genuinely revolutionary impact on the retail banking market in Brazil. The big banks would be forced to compete more between themselves, and with smaller banks. Intermediaries such as mortgage brokers and new online businesses like BankFacil would be able to close the circle: presently they can ‘sell’ best product rates to consumers but can’t sell prospects to the banks. This competition would also spur rapid improvements in the banks’ efficiency ratios and productivity. The banks that won the efficiency war – those that best adopt the opportunity that new technology brings for both cutting costs and raising revenues; those that challenged their new business acquisition strategies and costs; those that ensure their branch model is most productive – would have a huge competitive edge.

It’s often said that Brazilian banks’ management teams are hugely gifted in making profits. And it’s true – in whatever environment that has been thrown at the banks they have managed to make money. However, the current environment in which they operate has been benign. Throw it open to competitive forces and you will see a response. And that response will be a boon to shareholders (of the better banks), businesses, consumers and the economy alike.

For an in-depth look at what Brazil's retail banks need to adapt to the new low interest rate environment, see A question of Efficiency published by Euromoney in November.

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