Brazil’s largest banks are struggling to reinvent themselves for digital reasons
The big Brazilian banks have been good for years.
A small club of institutions dominates the main street of Latin America’s largest economy, with long-known bank rates being expensive and lending rates, with their thick margins often a source of public outrage.
“The profits are huge in the banks. They are really exaggerated, ”said the verdict handed down in 2019 by a politician – not a left-wing firefighter, but Paulo Guedes, the country’s pro-market economy minister.
But as the oligopoly faces a trifecta of low interest rates, Covid-19 and digital lenders face unprecedented pressure to accelerate reforms and provide better value for money to customers.
The chief executive of the country’s largest private sector bank, Itaú Unibanco, has given a positive shine to what he says is a “tough scenario” in terms of competition.
“The Brazilian banking sector is changing rapidly, which is very good for both consumers and so-called traditional banks,” said Milton Maluhy. But he acknowledged: “We need to be faster and better to overcome the competition for our products and services.”
Five giants in the country’s financial system – Itaú, Bradesco and Santander Brazil, along with state-controlled Banco do Brasil and Caixa Econômica Federal – have made technology investments in recent years to prevent customers from switching to challenges, among other things. as Nubank, A Brazilian Internet banking unicorn.
Since the start of the coronavirus crisis, many have also delved into cost-cutting measures, including branch closures and layoffs. The need for reform is more urgent than ever as the pandemic has accelerated the pace of digital change.
Regulators are also trying to boost customer choice: the central bank is developing an “open bank” initiative with the goal of giving customers greater control over their data and boosting competition, and last November set up a free instant payment system for individuals.
Named “Pix,” it provides a way for ordinary Brazilians to avoid at least a range of charges that banks typically attach to standard services, such as checking accounts and money transfers.
Moody’s estimates that next year banks could lose $ 16 billion ($ 2.9 billion) in these fees, nearly 10% of their total earnings, as free or cheaper alternatives are available. The fees are about 30% of the bank’s earnings, according to the rating agency.
As in many Latin American countries, the margins of the Brazilian banking sector are envious elsewhere. According to S&P Global Market Intelligence, the average return on earnings (ROE), an important industry metric for profitability, was 17.2 percent in 2019. With 10.6% in the US, 8.8% in Asia-Pacific and 5.8% in Europe.
“There is a lot of debate in Brazil [on] what will happen to the profitability of large banks, “said Mario Pierry, an analyst at Bank of America.” Now that interest rates have dropped, they can’t survive buying government bonds – they need to start borrowing more. ”
But big loans are not standing still. According to annual reports, with the closure of 1,500 branches and the reduction of 13,000 jobs last year, many copy strategies are being developed to make fintech a success.
This has ranged from launching its own digital banking and investment brokerage to joining the wave of new Brazilian retail investors until it has acquired stakes in promising start-ups.
Itaú offers third-party products in its insurance and asset management businesses, while Santander Brazil has followed rivals by introducing a virtual bot assistant.
Bradesco has announced plans to float or sell its stake in its separate digital bank, which charges no fees over the next two years, and has 4 million users.
“When you have smaller margins, the only remedy for that is to gain scale,” said Junior General Manager Octavio de Lazari.
The shake-up for consumers and businesses is quite backward. Credit has traditionally been very expensive and often difficult to access, partly a reflection of the high interest rates that were part of the country’s long struggles with inflation.
For a long time, banks made easy profits, putting money into high-yield government debt. However, with the central bank’s benchmark Selic rate of 2.75 per cent, which has recently risen from a minimum level of 2 per cent, this model is under strain.
The pandemic had serious damage to earnings in 2020. Although lenders remained in the black, large provisions to cover bad loans caused the largest percentage drop in two decades as profits in the entire sector fell by almost a quarter, according to data provider Economatica.
But it is the intersection of competitive forces and regulatory changes that has raised doubts about the long-term trajectory.
Despite a downward trend in recent years, Brazil’s borrowing costs are among the highest in the world.
According to central bank data, the average annual interest rate on loans rose to 22 per cent in households and 11.3% in companies.
Ilan Goldfajn, president of Credit Suisse Brazil and president of the central bank between 2016 and 2019, believes that low rates are here to stay and will eventually be fueled by credit.
“Loan rates are still very high and they’re going down over time – it’s a process.”
Holders and their comfortable ways of operating have been shaken by a group of low-income homeowners and hornless fintechs.
The package is led by Nubank, which has nearly 35 million customers in Brazil out of a population of 213 million. After raising $ 400 million this year, it has a valuation of about $ 25 billion, according to two people who know the situation. Other rising brands are Neon and C6.
Rafael Schiozer, a professor at the Getúlio Vargas Foundation, said that while traditional banks adjusted their investment products, they were still behind fintech in terms of lending. “They need to go faster because fintech has easier and better priced credit operations.”
However, there is some skepticism about how much fintech can take on a loan pie. “At the end of the day, new entrants to digital credit don’t have the balance to save everything [loan] origin in their books, ”said Citi analyst Jorg Friedemann.
For now, the headlines still have the advantage of scale, brand power, and physical presence.
Although low interest rates tend to squeeze bank profits, they do provide conditions for expanding loans in a country with a low level of credit access.
“Brazil has never had a time like this [low] mortgage recovery rates, ”said Ceres Lisboa, an analyst at Moody’s.
The publicly owned Caixa Econômica Federal Brazil wants to promote financial inclusion for the poorest.
According to customers already the largest lender, Caixa created 35 million new accounts last year to pay the benefits of the coronavirus to people who were first “bankless” and are now opening new branches and promoting their digital arm.
“We will launch a microcredit for 10-30 million people through mobile phones,” said CEO Pedro Guimarães. “These customers [our app] Those entering the financial market can get microinsurance and cheap credit cards step by step. ”
Additional news from Carolina Pulice