Brazil banking: Too much, too late


Rob Dwyer
Published on:

Brazil’s banks are now an election issue.


Here’s something interesting: Itaú Unibanco’s Strategy Council now meets much more frequently – the bank says they aren’t periodic, just whenever necessary. 

It’s important, too, for reasons I’ll come back to.

Meanwhile, the biggest issue facing the Brazilian banks is the negative impact of policies being proposed by candidates in the country’s presidential elections. Even those candidates in the centre ground (who unlikely to win) have seen the political expediency in suggesting policies to tackle the high cost of credit in the country.

One of the leading candidates – Jair Bolsonaro – has been adopted as the market favourite because of the credibility of his Chicago-trained economic adviser Paulo Guedes. 

However, in late September, Guedes began ducking public appearances after Bolsonaro shot down Guedes’s proposal for a new financial transaction tax (suggesting the market’s faith in Bolsanaro giving Guedes free reign to pursue liberal economic and financial reforms is little more than wishful thinking).

More specifically, the other of the leading two candidates, the PT’s Fernando Haddad, is proposing a graduated tax rate for financial institutions that charge higher interest rates. The idea is to incentivize banks to offer cheaper loans to all segments.

Bad idea

That’s a bad idea for many reasons, not least that it would be insanely complicated to enforce: for example, would taxes be levied on a bank’s aggregated interest rate? Would determining the tax rate include a weighting for portfolio sizes of each segment? Could banks keep charges the same by lowering interest rates and increasing fees? And, given the very high interest rates charged in Brazil, a levy would have to be very large to be meaningful, adding to the overall cost to the consumer.

It’s understandable that the banks are now an election issue; one of the presidential contenders, Ciro Gomes, even called the concentration of the banks “criminal”. The inference is that this high level of aggregation leads to a lack of competition and therefore high interest rates.

That is partially true, of course. But there are many other reasons for Brazil’s long history of high interest rates, and the irony of banks finally becoming an election issue this year is that, for the first time in decades, there have been some big steps taken since the last election to lower structural costs in the financial system. 

Brazil’s banking industry might be on the cusp of a new, lower-cost, higher-volume model 

For example, the creation of the TLP interest rate for BNDES lending will have a big impact. In the past, subsidized lending by the government’s state bank has led to higher free market rates. 

TLP reform was passed in 2017 and the lending rate will converge with the market-derived five-year, inflation-linked (NTN-B) bond yield by the end of 2022.

A second step was the creation of the positive lending bureau that, according to Rodrigo Abreu, chief executive of startup Quod, will lower non-performing loans and therefore lower interest charges. Lower costs and lower risks could, he tells Euromoney, add up to R$1 trillion ($258 billion) in credit in the medium term.

A third positive factor is the shifting position of the country’s central bank. True, the central bank allowed too much consolidation in the past, perhaps understandably prioritizing short-term stability in the system over longer-term competitiveness. But that, too, is changing. The central bank’s recent decision to prevent Itaú Unibanco from buying a majority of XP Investimentos was as important as it may have been belated.

Genuine competitors

Now new, genuine competitors to the established big banks are beginning to emerge and thrive. Banco Inter’s recent success – it opened 3,000 accounts in the second quarter of 2018, which justifies its IPO valuation – is just one of many new digital banks and fintechs that are emerging. 

The central bank has further helped the fintech sector by introducing a lighter regulatory regime that enables small companies to operate without being weighed down by unduly heavy capital or compliance requirements.

These new players are already injecting competition to the market. For example, Bradesco has launched Next, a 100% digital bank that targets millennials. At the start of 2018, Next had 37,500 accounts. By August, this has risen to 250,000. Management is targeting 500,000 accounts by the end of 2018. 

Which takes me back to that Itaú acquisition committee (the bank wouldn’t confirm or deny the change to the frequency of its meetings). Itaú’s instinct to protect its market share has long been a policy of assessing emerging competitors and buying those that are a credible threat. 

But as long as the central bank, under the leadership of Ilan Goldfajn, continues to deliver on its intent to ensure plurality, the banking market should evolve rapidly. With many of the structural issues for high interest rates already having been tackled – and with the central bank’s promise to protect competition – Brazil’s banking industry might be on the cusp of a new, lower-cost, higher-volume model.

That will benefit consumers, the economy and the government.

All the next president need do is let the market – and the central bank – evolve.  And that means, in so many words, stopping the Itaú acquisition committee doing its usual thing.