LatinFinance - September/October 2015 - 81

more capital to cover risks have European
banks reconsidering the efficiency of some
of their investments. Very low returns that
may have been acceptable in the past, are
now subject to greater discipline because of
those allocation requirements, Repka says.
"[Our] activities suffered in 2011 to 2012
due to the rise in the cost of risk, like all our
peers, and returning to the breakeven point
is no longer good enough," Repka says.
Société Générale will focus its consumer
credit activities in markets where it owns a
retail network, such as Europe and Africa,
Repka says, adding that in Brazil the bank
will concentrate on corporate and institutional clients.
Foreign lenders also had difficulty accounting for some unique changes in Brazilian consumer credit. Originally, high real
interest rates allowed banks to take on a
higher level of risk than they might in other
activities, says Repka. However, the Lula
government launched a new form of credit
in the mid-2000s, known as payroll loans,
that changed the game with much smaller
interest rates and margins, since installments are directly deducted from wages or
pension benefits.
Meanwhile, consumer credit became
a competitive tool that large retail banks
wielded to attract new customers. "It
helped them boost customer loyalty and
sell consumers other products at preferential terms," says Repka.
Small- and mid-sized banks were struggling to reach the critical mass of their
larger competitors who enjoyed economies
of scale with fixed-cost services, such as call
centers and information technology support. "In Brazil, we could not operate in this
niche activity due to the competition and
scale-related issues," Repka says.
HSBC made a run at size when it acquired Losango, the former local consumer
credit arm of Lloyds Bank, for $815 million
in 2003. By 2014 it ranked sixth in assets in
banking league tables tracked by the central
bank in Brazil.
HSBC never issued separate financial
statements for Losango, but bankers say its
performance was disappointing due to a
high level of non-performing loans and the
lack of real guarantees in case of default.
HSBC was working with JPMorgan in 2011
to sell Losango, but the unit attracted little
interest, says Luis Miguel Santacreu, a bank
analyst at Austin Ratings, a local credit rating agency in São Paulo. "It looked like an
attractive asset when HSBC bought it, but
Losango is currently a great headache. You

had been active in areas where they could
have enjoyed larger spreads, maybe they
would not have registered any losses last
year," he says.
Other issues have also eaten into HSBC
Brasil's bottom line. Pecúnia, for instance,
specialized in used car financing, which is
a risky business in Brazil. "Credit is also a
bit of a cultural issue... There is a different
relationship with customers in Pernambuco
[in the Northeast] than in Paraná [in the
South]. It would not help to turn everything
into a Big Mac or a centralized operation,"
says Santacreu.
Moreover, the credit boom has all but
petered out as the Brazilian central bank
has tightened its monetary policy. The
central bank raised its benchmark Selic
rate to 14.25% in late July. Standard & Poor's
has forecast that Brazil's credit growth will
be between 8%
and 12% in 2015
Banking inclusion
in nominal terms
Percentage of adults with accounts at financial institutions
(inflation may hit
Brazil
9%), after an 11.3%
Costa Rica
expansion in 2014.
Chile
In real terms,
Venezuela
the value of nonArgentina
Belize
earmarked loans
Ecuador
actually fell by 1.7%
Uruguay
last year, and is exPanama
pected to decline
Guatemala
by a further 3.5%
Bolivia
Mexico
in 2015, according
Colombia
to Goldman Sachs.
El Salvador
Surveying the
Honduras
remains
Peru
Nicaragua
While notable
0
10
20
30
40
50
60
70 global players
have been making
Percentage (%) of the population over 15 years of age
headlines with
Source: Global Findex
exits en masse, international lenders may
be compounding their mistakes by giving
up completely on what has been the world's
second largest emerging market economy.
"Banks have been forced to make some
hard choices. But there is still some room
for those who can position themselves in
good niches," says another banker, pointing
to investment banking, trade finance and
asset management as potential areas for
need to scrutinize the books to find out who
growth.
the good clients are."
There is no sugar-coating the lessons
HSBC's Brazilian subsidiary reported
learned from consumer credit, however.
losses of 549 million reais ($171 million)
"They committed a strategic mistake," says
in 2014. Santacreu acknowledged a small
Santacreu of international lenders in Brazil.
deterioration in non-performing loans last
"They combined a small scale with high
year, but says that was offset by a decline
level of payment arrears and high operain financial margins and a relatively high
tional costs. In the end, it has not been a
cost structure. "If they had experienced a
lucrative business for them." LF
greater expansion in credit activities and
FRANCIS REPKA, SOCIÉTÉ GÉNÉRALE

"ACTIVITIES SUFFERED
IN 2011 TO 2012 DUE
TO THE RISE IN THE
COST OF RISK, LIKE
ALL OUR PEERS, AND
RETURNING TO THE
BREAKEVEN POINT
IS NO LONGER GOOD
ENOUGH"

September/October 2015 - L ATINFINA NCE.COM 81

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