|Finance minister Henrique Meirelles begins micro reforms to kick start growth|
The Brazilian government and central bank is examining changes to financial services regulation in an attempt to boost consumption and help to pull the country out of a seemingly endless recession.
Predictions that the Brazilian economy would come out of recession by posting positive growth in the last quarters of 2016 have been dashed and economists have recently been paring their growth forecasts for 2017 – the central bank’s survey of economists now expects less than 1% growth next year and predicts this year’s slump will come in around -3.5%.
Facing persistent weakness, the government has decided to introduce micro-reforms to boost credit. These reforms will be mostly negative for the banks and will be particularly negative for payment companies such as Cielo.
In mid-December, finance minister Henrique Meirelles announced the three-pronged micro-stimulus package to reform merchant payment companies.
The three main possibilities comprise: the centralization of credit-card receivables onto a single platform; the ability for merchants to apply surcharges and therefore charge different amounts depending on the payment system being used; and the reduction of the settlement period to two days for the current 30-day settlement period.
The big question mark, in our view, is whether and to what extent acquirers will be able to pass-through the higher interchange fees to merchants
- Credit Suisse
According to banking analysts, these changes will negatively impact banks’ credit-card operations – particularly if merchants can reflect the increased costs they face from credit-card payments by offering discounts to consumers using cash or debit cards. Banks will clearly offset some of these declines through increasing debit-card transactions.
In a client report, Credit Suisse says the size of the impact on fees to banks is uncertain and points out that many retailers already unofficially offer discounts for using cash and debit cards.
“On a very preliminary basis, we believe that a 3.6% hit on credit-card volumes might be a good ballpark figure,” it states. “In addition, we assume that half of credit-card volumes will be replaced by debit-card volumes, resulting in a 3.0% increase in volumes and partially offsetting the negative impact of this regulatory change.”
However, while the banks will be able to offset the impact of regulatory change, the payment companies such as Cielo are likely to be harder hit.
Credit Suisse estimates that the reforms “could jeopardize 20%-25% of pre-payment revenue (4.0%-5.0% of net profit) and might increase pressure to increase MDRs [merchant discount rates]. The big question mark, in our view, is whether and to what extent acquirers will be able to pass-through the higher interchange fees to merchants, in view of the increasing importance of interchange fees in gross MDRs.”
Cielo’s share price fell by nearly 10% in the two trading sessions since the announcement. Investors believe the reduction in the settlement period is the most likely reform to be adopted given that the central bank has expressed support for this – to bring Brazil more into line with international standards.
The centralization of receivables would also hit Cielo hardest, depending on the nature of the platform. However, whatever the final structure it would likely lead to increased competition for Cielo and impair its volumes as it would remove barriers for other financial and payment institutions to anticipate merchants’ receivables.
Meanwhile, in a more positive move for the banking industry, the government is also proposing to allow workers to withdraw up to R$1000 from their state severance pay fund (FGTS) to repay debts.
The move – reported first by local newspaper Valor Econômico – hints at the growing realisation that any economic recovery in 2017 is likely to be shallow given the high level of consumer indebtedness, as well as still-growing unemployment.
The level of consumer debt continues to be problematic: despite NPLs over 90 days (the main delinquency ratio), stress is showing at short levels and 58.5 million individuals were incorporated into November 2016’s results by SPC Brasil, a local credit bureau.
Roughly 50% of consumer debt (number of debts, not volumes) consists of bank debt, and the government believes that allowing consumers to use these FGTS could release R$30 billion to repay bank debt – equivalent to 16% of 15-day unmarked consumer loans.
Marcelo Telles, bank analyst for Credit Suisse in New York, says the “ballpark” impact of this measure would be equal to between 1.0% and 2.0% of the market capitalization of Brazilian banks.
“This measure would likely improve the short-to-medium retail asset quality indicators and cost of risk of Brazilian banks,” says Telles. “By distributing the R$15 billion FGTS benefit [50% of the R$30 billion target] according to the 15-day NPM of the banks under our coverage, we believe it could lower 2017 cost of risk by 4.0% to 12.0%, with the contribution amounting to 1.0% to 2.0% of banks’ market cap.”
His bank-specific forecasts are for 1.9% for Bradesco, 1.7% for Banco do Brasil and 1.2% for Itaú.