The acquisition helps it to vie with Itaú to be the largest private bank. It also adds credibility and experience in the mass affluent market – a profitable one – and one that creates leads for the private bank – another profitable segment.
But wait – aren’t all Brazilian retail banking segments profitable? And to a degree that, while generating huge profits for the banks, creates an obstacle to growth for other companies? Average non-earmarked rates are now 58.6% for consumers and 27.5% for companies.
Further consolidation certainly will not help, but the Brazilian banks were uncommonly profitable before Bradesco’s acquisition of HSBC and it probably won’t make much difference. The problem – and it is a problem to have consumers paying an estimated 30% of income on debt repayments and companies facing debt so expensive that it disincentivises investment – is that the central bank has allowed the consolidation of the system without creating the necessary balances to avoid oligopolistic pricing.
The easy passage of Brazilian banks through the 2008 crisis is testament to the solidity of the system, but solidity is now damaging the potential vigour of the economy.
In the past the government has tried to use the publicly-held banks to push down interest rates and to offer credit to higher risk sectors. This has led the private sector to hold just 30.3% of banking system credit today – the lowest level since 2000. But the private banks have been happy to let the public sector banks extend credit to the riskier segments.
The government also tried forcing down the Selic rate, artificially as it turned out, unleashing inflation and leading to the central bank hike to 14.25% – another policy own-goal.
Instead, the central bank would better serve consumers and companies by creating the conditions for competition. A reversal of consolidation seems impractical. Fitch optimistically suggested in early August that foreign entrants might acquire the mid-sized banks but the struggles of HSBC and Santander through lack of scale suggest it would take a brave, or foolish, foreign bank to try its hand where others have dared and failed.
However, there are ways in which the central bank could foster competition: for example, cutting regulation on bank accounts or by helping to cut the links between current accounts and all other financial products. The long-discussed positive credit rating databank would also help – banks would have visibility about new clients and could therefore offer competitive rates to entice new customers. These practical steps to stimulate competition would shake up what is a far-too cosy existence for Brazil’s large banks.