It is hardly news that life has become more challenging for
Brazil¹s big banks. With economic growth slowing and the
Selic benchmark interest rate falling to earthly levels,
lenders are waving goodbye to profitability rates above 20%.
Although consumer credit has not brought the bubble many
feared, there is still the danger that lenders may have
overextended, particularly if the economy which few can
count on any more to grow at the 6% of years past turns
for the worse.
On top of this, the government has been piling pressure on
credit providers to lower the rates charged to consumers for
loans, credit cards and other products. Private lenders are
additionally challenged in that they have to compete with
state-owned Banco do Brasil and Caixa Econômica Federal,
which enjoy lower-cost federal funding.
Brazil¹s larger banks are best equipped to withstand
lower profits and an increase in impairments, as well as the
new lower interest rate environment.
The key will be keeping credit costs low.
³The Selic is in an adjustment phase and is moving
towards a normal rate that is compatible with the solid
fundamentals the Brazilian economy now has,² Bradesco CEO
Luiz Trabuco Cappi tells LatinFinance. ³The quality of our
economy means there is no longer any reason for double-digit
interest rates. Bradesco¹s working scenario is one in
which Brazil has changed for the better and this change is
For the second year in a row, Bradesco¹s
diversification and retail focus leave it in a strong position
to confront these challenges. Focused on organic retail growth
and buoyed by an insurance business responsible for 30% of its
profits, the well-capitalized bank has nearly caught up with
Itaú Brazil¹s biggest bank since its merger
with Unibanco in 2008 in terms of total assets.
As of June 30, Itaú was Brazil¹s largest bank by
assets with $888 billion reais ($437 billion), with Bradesco at
$831 billion reais. In 2008, the gap was much larger, with
Itaú leading by $632 billion reais to $454 billion
reais. The growth has been entirely organic. Since the
Itaú-Unibanco merger, organic expansion has been the key
for all the players, with no remaining large banks left to
While other banks have made small acquisitions abroad,
Bradesco still sees plenty of room to grow in Brazil. The bank
has been aggressively expanding its retail operations this
year, redirecting resources after losing out on the postal bank
contract to Banco do Brasil.
³The price in the auction was too high,² says Luiz
Angelotti, the bank¹s executive managing director,
explaining why Bradesco did not continue with the contract.
³We had an alternative plan which we decided was better.
We made the correct decision. This adds more value for the
The bank opened 1,000 new branches in the second half of
2011. Bradesco reckons it can retain the postal clients who
will be reluctant to shift their accounts.
³We don¹t expect to invest in retail abroad,²
Angelotti. ³Our main strategy is to invest in the
Brazilian retail business. There is plenty of opportunity for
growth in Brazil.²
The bank sees its limited presence abroad solely as a means
of supporting Brazilian companies overseas.
³We have a better return here in Brazil and we know the
market very well,² says Angelotti. He highlights upward
trends in social mobility over the last eight years and points
out that 40 million Brazilians have yet to tap banking
Its extended presence across the country, its broad range of
clients and its insurance business, leaves Bradesco better
placed to compete with the other large domestic banks.
Its insurance business also offers plenty of room to expand.
Brazil has exceptionally low insurance premiums for such a
large country. This stands at about 3.2% of GDP, and compares
with 8% in the US and 11% in Japan.
Bradesco also believes there are opportunities to be found
in the consolidation of the Brazilian insurance market where
there are still many small companies.
Trouble from Brasilia
As the country¹s benchmark rate plummets, the
government is pressing lenders to charge customers fees closer
to international norms. In September, Bradesco lowered its
interest rates on credit card products, along with other
Improving efficiency is the key to operating in this new
environment. In this regard, Trabucco Cappi says the
bank¹s prospects are ³good.² The main challenge
for Bradesco is how to do this while also expanding the scale
of its activity, Trabuco Cappi says. As part of this the bank
also wants to enlarge the relationships it has with existing
clients who are demanding new products and services.
The bank sees ROE in the long term to be in the region of
18%-20%, compared to 20% this year. The spread adjustments
should continue in the future, says Angelotti, and there are
some factors are not under Bradesco¹s control, such as the
delinquency ratio, taxation and administrative costs. Angelotti
expects delinquencies to reduce in the future, but says the
government needs to do its share to reduce taxes and
³We are taking measures to reduce the cost of our
credit and credit card operations,² Trabuco Cappi says.
³The reduction in interest rates will improve default
ratios and expand the loan portfolio. These effects are
positive for banking.²
So far, the impact of these reductions in spreads has been
mostly marginal even for state banks, according to Fitch.
This is mostly due to asset growth remaining strong and to
reductions in deposit rates. The ratings agency expects that
the effect on overall margins will become more important over
time, as they will more clearly highlight operational
Lower spreads, increased competition, the outlook for slower
GDP growth, and greater capital requirements will limit
Bradesco¹s future profitability ratios, Fitch says, but
they will be at good levels and better than the peer
Coping with a new reality
Non-performing loans have been an increasing problem for
Bradesco¹s delinquency ratios have nudged up this year,
though not as much as other banks. Small and medium-sized
business lending was affected in 2011, and this year vehicle
loans have caused concern, affecting the delinquency ratios for
banks including Itaú and Banco do Brasil.
The sector¹s NPL rate has reached 6% this year,
according to Fitch, compared to 2% in some Latin American
countries, and a 4% emerging markets average.
Angelotti expects Bradesco¹s delinquency ratio to
reduce in the second half to around 4% (where it was at the
beginning of the year).
³The decrease should continue in 2013,² Angelotti
says. ³In this area, structurally lower Selic rates are a
good thing, as businesses and individuals will find it easier
to make payments.²
Solid employment figures will have a positive effect on
individuals¹ ability to make payments. The bank expects
the unemployment rate to improve from an already low 5.6%.
Fitch says the bank¹s credit quality is in line with its
peer average and its loan loss coverage among the highest in
Bradesco¹s large competitors have started to venture
into the payroll lending segment, once the focus of the
sector¹s mid-size banks. Normally, experimentation starts
with smaller players and trickles up to the likes of Bradesco
and Itaú. This year Itaú formed a $1 billion
reais joint venture with mid-sized lender Banco BMG for payroll
lending. The deal allows Itaú access to the fast-growing
payroll lending segment while keeping the risks at arm¹s
length. If it goes well the joint venture could be a model for
other large players to follow.
Itaú has also moved this year to bring credit card
processing in-house, spending more than $5 billion to buy up
all of the shares in Redecard.
Though seen as an expensive acquisition, the synergies
created are expected to be positive for the bank.
With inflation threatening to rise in 2013 possibly
forcing the central bank to lift rates next year‹ this
may not yet be the time to experiment.
Still the steady expansion seen for Brazil¹s economy
ahead should provide ample room for Brazil¹s large banks
to keep growing.
Bradesco plans to continue to expand organically to keep
pace with its large public and private competition. At the same
time lower funding costs and continued government pressure to
lend more to stimulate the economy should help Banco do Brasil
and Caixa continue to grow stronger.
³The greater participation by the federal banks on the
market is positive and creates a challenging situation,²
Trabuco Cappi says. ³However, challenges have always been
part of banking activity in Brazil. The current situation is
motivating us to redouble our efforts and overcome these
challenges once again.² LF