Latin Finance - July/August 2012 - 21

Brazilian banking

“the measures will help to ensure more sustainable performance and improved bank asset quality, especially given the resulting decline in prices and borrowing costs,” the report adds. Meanwhile, Brazilian president Dilma Rousseff continues to reiterate that Brazil needs spreads that are in line with developed countries and that it is “unacceptable that Brazil … continues to have the highest interest rates in the world”.  Overall, the rates charged by banks have been coming down fast although from sky-high levels. Rates on special cheques, a short-term means for individual borrowers to tide themselves over for a few months at most, have come down from an average of 186% to 169.5% per annum since the start of the year, according to official data from the Central Bank. Personal credit lines have also fallen and are down at 23.4% from the 26.8% seen at the start of the year (see table for more details). This may have resonated with the public, but analysts are cautious about

“The government is using the wrong tool at the wrong time. It is increasing hazards [by boosting credit]”
Mauro Cunha, Amec
the likely success of such measures. Public sector institutions increased credit by 28.3% in the 12 months to April while the private sector increased by 17.7% over the same period, according to central bank figures. It’s not just through lower spreads that banks are suffering. If rates do come down fast, they would hit bank profits in a double whammy, reducing returns on fixed-income investments and triggering cuts in spreads on lending products, observers such as Celina Vansetti-

Hutchins, senior analyst at Moody’s in New York, believe. With lower rates, bank investments are already yielding less and banks are being forced to cut administration fees to keep third party investors who have seen returns drop alarmingly. Itaú Unibanco’s administration charges, for example, dropped from 2.3% to 2% per year. Nick Robinson, equity fund manager at Aberdeen Asset Management in São Paulo holding some $10 billion in assets in Brazil, says that as much as 12% of Bradesco profits come from such fees. With lower rates, banks will be obliged to launch new products with higher risk profiles, including equity funds, to compensate for lower rates. Robinson believes that: “The low growth environment globally means there are very few issues why rates could not come down further,” he says. The measures aimed at bringing bank spreads down involve a mixture of moral persuasion and pressure on public banks to lend more. These measures echo moves in 2009 when the then-government of

Private banks: the impact

L

ower interest rates, commercial pressures to lend, and competition from public banks are all negative for private banks. The key question is: will private players really make substantive cuts to rates or just tinker with headline rates to appease the government? Itaú-Unibanco has been trumpeting rate cuts: it quickly announced that it will cut rates for vehicle financing from a range of 1.27%2.41% down to a range of 0.99%-2.39% per month, for example. But overall, private bank rate cuts have been limited so far. Analysts say that even though banks are announcing lower rates, such discounts are highly selective, usually aimed at only the most creditworthy customers, and come with a raft of conditions. Plinio Chapchap, a partner at EagleIN Investimentos in São Paulo , believes that announcements from private banks on rate cuts are restricted, and primarily designed to appease the government. Private banks are still worried about outstanding debt: “We need 1-1/2 to two years just to digest the existing debt,” Chapchap says. Celina Vansetti-Hutchins, senior analyst at Moody’s in New York, agrees that private sector banks are more talk than action. While banks have been willing to go along with reductions in rates for some asset classes, mostly changes have been cosmetic. Moreover, a lot of new consumer credit is destined for refinancing, she says. But even if spreads are falling more slowly than headlines suggest, bank profits are going to wilt. Deutsche Bank analyst Mario Pierry has reduced earnings forecasts from 10% to 0% for this year. For 2013, he has reduced earnings growth to 10% from 16%. “This is much weaker than we anticipated,” he says. Of the large three private banks, Itaú is likely to suffer most, analysts agree. The most aggressive private sector bank has recently turned a lot more cautious. The bank has about a 30% market share in auto loans, the sector which has suffered the most from non-payment, and it will grow less than the other two banks, says Pierry. Bradesco and Santander have seen problem loans increase, but delinquencies have not been as meaningful as Itaú. He predicts Itaú will grow its loan book some 10% this year while Bradesco and Santander grow at 13%. Bradesco is the most conservative of the three large banks and is likely to be the most protected as its lending policies were already rigorous, says Robinson. Santander has not managed to deploy all its capital yet and has enjoyed fewer operational efficiencies than expected from its acquisitions, he adds. Return on equity has fallen to less than 20% in the private bank sector. If spreads continue to fall rapidly, ROE could reach 15%, says Pierry. Chapchap believes this could fall further than that.

July/August 2012

LatinFinance 21



Latin Finance - July/August 2012

Table of Contents for the Digital Edition of Latin Finance - July/August 2012

Latin Finance - July/August 2012
Contents
Cover story: Mexico
Corporate bankruptcy
Brazilian banking
Panama
Corporate performance ranking
Healthcare
Retail
Structured finance
Latin Finance - July/August 2012 - Latin Finance - July/August 2012
Latin Finance - July/August 2012 - Cover2
Latin Finance - July/August 2012 - 1
Latin Finance - July/August 2012 - Contents
Latin Finance - July/August 2012 - 3
Latin Finance - July/August 2012 - 4
Latin Finance - July/August 2012 - 5
Latin Finance - July/August 2012 - 6
Latin Finance - July/August 2012 - 7
Latin Finance - July/August 2012 - 8
Latin Finance - July/August 2012 - 9
Latin Finance - July/August 2012 - Cover story: Mexico
Latin Finance - July/August 2012 - 11
Latin Finance - July/August 2012 - 12
Latin Finance - July/August 2012 - 13
Latin Finance - July/August 2012 - 14
Latin Finance - July/August 2012 - 15
Latin Finance - July/August 2012 - 16
Latin Finance - July/August 2012 - 17
Latin Finance - July/August 2012 - Corporate bankruptcy
Latin Finance - July/August 2012 - 19
Latin Finance - July/August 2012 - Brazilian banking
Latin Finance - July/August 2012 - 21
Latin Finance - July/August 2012 - 22
Latin Finance - July/August 2012 - 23
Latin Finance - July/August 2012 - 24
Latin Finance - July/August 2012 - 25
Latin Finance - July/August 2012 - Panama
Latin Finance - July/August 2012 - 27
Latin Finance - July/August 2012 - 28
Latin Finance - July/August 2012 - 29
Latin Finance - July/August 2012 - 30
Latin Finance - July/August 2012 - 31
Latin Finance - July/August 2012 - 32
Latin Finance - July/August 2012 - 33
Latin Finance - July/August 2012 - Corporate performance ranking
Latin Finance - July/August 2012 - 35
Latin Finance - July/August 2012 - 36
Latin Finance - July/August 2012 - 37
Latin Finance - July/August 2012 - 38
Latin Finance - July/August 2012 - 39
Latin Finance - July/August 2012 - Healthcare
Latin Finance - July/August 2012 - 41
Latin Finance - July/August 2012 - 42
Latin Finance - July/August 2012 - Retail
Latin Finance - July/August 2012 - 44
Latin Finance - July/August 2012 - 45
Latin Finance - July/August 2012 - 46
Latin Finance - July/August 2012 - Structured finance
Latin Finance - July/August 2012 - 48
Latin Finance - July/August 2012 - Cover3
Latin Finance - July/August 2012 - Cover4
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