Q3 earnings results show credit risk appetite among Brazil’s banks


Rob Dwyer
Published on:

Itaú overtakes state-controlled Banco do Brasil to become the largest lender.

Brazil’s private sector banks are firmly in ‘risk-on’ mode, after the third-quarter reporting season.

The economy is expected to grow GDP a little under 1% this year, but the banks are anticipating stronger growth to come and are ramping-up their credit portfolios to retain – or even gain – market share.

Amid many eye-catching statistics, one highlight was the fact that Itaú overtook state-controlled Banco do Brasil in terms of its credit portfolio: Itaú grew its total credit by 8.27% to R$688.9 billion, just ahead of Banco do Brasil’s R$686.7 billion.

Analysts expect Itaú to extend this newly claimed leadership in the quarters ahead, as Banco do Brasil continues to focus on profitability. The bank increased its return on equity (ROE) to 18.0% in the third quarter by de-risking its loan book, which fell by 0.68% in the quarter.

Meanwhile, the other private sector banks were also aggressively extending loans.

Bradesco – the second-largest bank in terms of assets and deposits – grew the most, with a double-digit increase in its credit portfolio (10.49%).

Bradesco outgrew Santander Brazil (which grew credit by 7.35%), but remains less profitable: with an ROE of 20.2% (up from 19.0% 3Q18), compared with Santander Brasil’s ROE of 21.1% (up from 19.5%).


As well as becoming the largest bank, Itaú also continues to skew its portfolio to higher margin business – the fall in the country’s interest rate makes corporate loans less attractive to both the banks and the companies, with domestic capital markets issuance booming.

Itaú grew its loans to individuals and small and medium-sized enterprises (SMEs) by 17.3% year on year, which helped net interest income (NII) to expanded 9% year on year.

This growth in the risker, unsecured segments of consumer banking is notable for Itaú. In recent years, the bank has been the most conservative in the system – in some calls, analysts have been actively advocating for the bank to increase its risk appetite.

Now it seems management is prepared to add that risk.

Candido Bracher, CEO of Itaú, conceded on the analyst conference call that “we have been growing more in credit card loans and personal loans than in mortgage, vehicle or payroll loans.

“This, I think, is one of the reasons behind the mild increase in NPL 90 in individuals’ portfolio [NPLs in the individuals segment moved up 20 basis points to 4.7% in Brazil].”

Pensions reform was fundamental to the long-term sustainability of the public finances 
 - Octavio de Lazari, Bradesco

Meanwhile, Santander Brasil remains in “attack mode”, according to BTG Pactual’s Eduardo Rosman, although its strong outperformance in recent years means it is less able to surprise analysts and the market.

“With a smaller size, in attack mode, a very energetic CEO and with several new businesses and room to improve cross-selling, the bank could continue to be an outperformer in the years to come in Brazil,” he says.

Bradesco’s CEO Octavio de Lazari explained the bank’s good perspectives for growth when he announced the bank’s quarterly results, saying: “Pensions reform was fundamental to the long-term sustainability of the public finances, and the control of fiscal and monetary policy has provide a macro-economic environment with low inflation.

“Bradesco is well positioned to capture the benefits from the [coming] cycle of growth.”

In the third quarter, Bradesco reported a largely neutral set of results, with headline reporting in line with expectations, but higher-than-expected costs due to the bank’s increase in variable rewards – an attempt to increase the sales culture within the bank.

BTG Pactual also reported a strong third quarter. The bank continues to grow away from its investment banking and private banking core – adding consumer banking products.

Net income grew 4% quarter on quarter and 57% year over year to R$1.1billion. ROE, at 20.8%, was at the highest level since 1Q16. However, one of the leading drivers of the strong Q3 results was BTG Pactual’s ‘traditional’ capital markets business.

Lower selic, not lower NIMs

The key issue for banks and investors will be the impact of the lower interest rate environment on net interest margins (NIMs) and NIIs.

There is a persistent question about how long banks can achieve ROEs of around and above 20% with the base rate (Selic) continuing to fall: and it is expected that the next meeting of the central bank will see this fall to 4.5%.

However, the banks have been resisting matching the size and speed of the central bank’s cuts. The banks have also responded to the direction of lower interest rates by cutting costs: Itaú, Bradesco and Banco do Brasil plan to cut a combined 1,200 agencies by the end of 2020; and Itaú announced that 3,500 employees had accepted voluntary redundancies.

The strong performance of fee generation by the banks – for example Itaú increased fees by 7% in Q3, largely thanks to its investment banking business – is reinforcing the reweighting of credit to higher margin segments to offset the central bank’s lower rates.

As Itaú’s Bracher notes: “The key drivers of this performance were the acceleration of our financial margin with clients as well as a stronger fee revenue generation.”

The banks’ ability to maintain margins and profitability – as demonstrated by the Q3 results – may be why Roberto Campos Neto, president of the Central Bank of Brazil, expressed exasperation at an event in São Paulo on Friday.

According to Exame, a local business magazine, Campos Neto said that interest rates haven’t fallen “as desired by the central bank in 90% of credit segments”.

The president added that he hopes the plans to introduce open banking to the country will help lower interest rates further by removing the “problem of asymmetric credit information and giving banks’ clients greater power over their data”, as well as improvements to the bankruptcy regime to improve recovery rates and thereby lower credit spreads.