Brazil BANKS: Uncertain outlook raises concern
Analysts expect the trend towards consolidation to pick up as the recession and competitive pressures force more banks to fall by the wayside. John Barham in Sao Paulo.
The uncertain outlook for Brazil's economy next year has raised concern about the health of the country's banking system. The slide into recession, punishing interest rates and heightened competition could threaten the survival of some weaker banks.
However, the country's big banks appear almost unsinkable. Analysts are projecting a tough year ahead, but none are expecting a collapse among the big private local banks, the continent's best-capitalised institutions.
Liberalisation may have allowed foreign banks to vault into commanding positions in many countries in the region, but interlopers are finding the going hard in Brazil.
The lure of a big, underbanked country such as Brazil is irresistible. Michael Geoghegan, president of the local arm of HSBC, says: "We have wanted to come to Brazil for over 20 years because it is one of the world's leading economies. The bank is investing here for the long term."
However, he concedes that turning HSBC's acquisition of a distressed local bank, a deal that cost an estimated $940m in April last year, into a successful concern is taking time.
Kevin Beck, a banking analyst with Robert Fleming, the UK-based investment bank, says that on the whole foreigners "bought banks that were in trouble. They were underinvested, bankrupted banks with low market shares and their names were stained."
Undeterred, foreign banks paid top prices for access to the Brazilian market: Spain's Banco Santander bought two banks last year for about $700m.
In July, ABN-Amro of the Netherlands acquired the highly respected Banco Real, a mid-sized bank, but in retrospect its $2.1bn price tag looks high.
In August. Banco Bilbao Vizcaya put up $463m for Banco Excel Economico, which lost $1.03bn in the nine months to September.
In contrast, Brazil's big banks have been successful in acquiring weaker houses and reaping substantial savings and economies of scale. The market is set to consolidate further next year with the privatisation of Banespa, the former state bank of Sao Paulo, a bank with $24.47bn in assets.
Banco Bradesco, the biggest bank, and Banco Itau, the second-largest, are the favourites to take Banespa. Both are rich enough to pay a substantial premium for Banespa: Bradesco has $1.2bn in excess tier-1 capital and Itau has $1.4bn in excess capital.
The winner of this prize, a big, highly liquid bank with a large client network, could emerge as the dominant private bank in Brazil.
Analysts expect the trend towards consolidation to pick up as the recession and competitive pressures force more banks to fall by the wayside and increase pressure on the survivors to fight for market share.
The process will be only complete with the eventual sale of Banco do Brasil, the state-owned banking behemoth with $122.69bn in assets and 2,777 branches.
Although about one-fifth of Brazil's banks have either failed or been taken over since the introduction in July 1994 of the Real Plan, the Brazilian banking market is still highly fragmented.
The country still has more than 200 full service and commercial banks. Bradesco may have $58.5bn in assets and nearly 3,000 points of sale, but it has only 15 per cent of total deposits and 5 per cent of loans.
The ability to innovate and reap economies of scale is decisive. Fernando Sotelino, in charge of wholesale banking at Unibanco, the third-ranking bank that is itself vulnerable to acquisition, says: "There is extraordinary pressure for constructive competition, on products, price, service.
We are trying to innovate all the time, looking at what is going on at global level and what is happening in Brazil." Brazil's banks are in the forefront in developing internet-based services, telephone banking and ATM networks.
Geraldo Carbone, who runs BankBoston's Brazilian operation, argues that segmentation will allow smaller banks like his to flourish by concentrating on elite corporate and private clients. He says only 1 to 1.5 per cent of Brazilians earn more than $50,000 a year.
Banking in Brazil can only flourish in a more stable environment that fosters the emergence of a true mass market. Although the banking system's assets have doubled to $704.52bn since 1994, loans are equivalent to only 29 per cent of GDP and deposits 22 per cent.
Banks have earned returns on equity in excess of 10 per cent by lending to the public sector, not private sector borrowers. Banks only began tentatively rediscovering lending to companies and individuals after 1994.
But this year's financial crisis and the savage spike in interest rates has further postponed the day when Brazil's banks can offer mass market products.
r Geoghegan says: "There is a tremendous amount of money to be made in the retail market, but long-term financing requires long-term deposits and there is not much will to deposit now at rates that people want to borrow at."
Furthermore, Brazil still has a long way to go to create a healthy banking system. In a report, Bear Stearns says Brazilian banks are far less efficient than their peers in Argentina or Mexico.
Sophisticated but labour-intensive computer systems were designed to make money out of high inflation, not administer and control loan portfolios.
The "Millennium Bomb" could cause considerable disruption to the computer systems at many small and state-owned Brazilian banks. Concern over this problem means that the pace of acquisitions, particularly by foreign banks, is likely to slow until after 2000.
But Brazil's bankers are not complacent. They have learnt how to prosper amid chaos but realise that foreign banks have a more valuable skill - growing in a stable environment.
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