Brazilian banks carry on regardless


Rob Dwyer
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The rapid fall in interest rates in Brazil, from a peak of 14.25% in 2016 to 6.5% in February 2018, created expectations among analysts that the biggest banks’ famously high net interest margin was finally about to be eroded.


Brazilian banks have enjoyed double-digit base rates for much of the past 20 years. The couple of times rates have dipped into single figures for a year or so they have rebounded quickly.

However, this time that spread isn’t expected to rebound. On the contrary, the markets are pricing in further falls with a lurch down to a new all-time record floor of around 5.5%.

Worse: competition is also finally picking up. The Brazilian Central Bank had allowed the banking sector to consolidate to an incredible degree. With the acquisition of Citi by Itaú and HSBC by Bradesco the top five banks (excluding development banks) held 84% of total loans. In retail branch banking, the top five banks held 90% of branches, up from 71% in 2007.

However, the regulator appears to realise that consolidation has created an oligopolistic market structure and decided in August 2018 to prevent Itaú from taking a majority of the voting shares of online stockbroker XP Holding Investimentos. Roberto Setubal, chairman of Itaú, told Euromoney in February this year that the central bank has actually gone further and said: ‘That’s it, you can’t buy anything important, you are already too big in Brazil.’

The central bank is also fostering conditions for the growth of fintechs. There are more than 500 fintechs in Brazil, attracted by the scale of the market and the high profitability of the incumbents. The central bank has also introduced new credit rules to provide transparency about retail credit risks and enable all players to better price – and compete – for consumer and corporate accounts.

So, with structurally lower rates and a resurgence in competitive forces, are we about to see erosion in those Brazilian ROEs?

The short-term answer appears to be: no.


Take Santander Brasil: it had increased its credit market share to 9.5% by May 2019, up from 9.1% in May 2018. But this market share wasn’t ‘bought’ through lower prices: the bank’s funding spread remains constant at 1.3%. Nevertheless, Santander Brasil’s return on equity actually rose, to 21.3% (compared to 19.3% a year ago).

Itaú and Bradesco have also been growing, and profitably so. Analysts expect the coming second quarter results from these banks to confirm a remarkable stability in their ROEs.

So, what is – or rather what isn’t – going on with the expected pressure on margins?

The obvious answer is that private banks are growing without having to compete on price because the public banks are now withdrawing credit from the market.

The public banks are no longer able – nor care – to dominate the market

The role of the two large public banks – Banco do Brasil and Caixa – has been an important factor in the last decade. They were both pushed to act as a macro-prudential tool to give the economy a fiscal boost and try to get private banks to respond by lowering their credit charges (Reader, they didn’t).

The public banks are no longer able – nor care – to dominate the market and last month the public banks’ share of total credit fell to 50%. Their market share will continue to decline. Private banks are, therefore, able to grow their volume by taking market share from the public sector banks rather than each other.

There are other factors too, of course. Interest rates are falling because the country’s fundamentals are sound: inflation is low and expectations of future inflation are well managed. This structurally-better macro-economic environment has led to a lower cost of equity, which has helped maintain the banks’ net interest margins (NIMs).


The changing mix of bank credit portfolios is also a factor. As the country has entered a new credit cycle there has been a distinct lack of demand for credit from the corporate and large-corporate sectors. This is partly because the domestic capital markets have become such a strong and lower-cost source of funding for these groups, and partly because the anaemic economic recovery to date has led to a cautious approach to corporates green-lighting fresh investment plans. Corporate credit growth has flat-lined.

Meanwhile, credit growth from SMEs and retail segments has grown. This has shifted the balance of credit portfolios in most banks: Santander has seen its SME and retail segments increase by about 10 percentage points in the past couple of years and now account for about 70% of its total credit portfolio. The growth in these higher risk, but crucially higher margin, sectors has also given buoyancy to banks’ NIMs.

Of course, this might add risk to the banks in a downturn. But for now, with non-performing loans low and stable, it’s undoubtedly a positive.

The last factor is those fintechs: there are signs of price pressure in certain products (payments company Cielo just reported a marked drop in profitability) but in credit the established players have adopted state-of-the-art technology to respond to the fintech cost threat, and the big banks also still enjoy lower costs of credit thanks to their scale.

The future is, of course, uncertain and it may be that ROEs at 20% are unsustainable in the longer term. But for now, Brazil’s biggest private banks are carrying on regardless.