The Economist

The EconomistAugust 4th 2018 33

1

B

RAZIL’S economic weather tends to-

wards extremes. During the 1980s and

early 1990s hyperinflation raged. From late

2014 to late 2016 GDPshrank by 7.7% its lon-

gest contraction ever. Conditions are now

enervatingly calm. GDPgrew by just 1% last

year and in June the central bank cut its

growth forecast for 2018 from 2.6% to 1.6%.

A truckers’ strike in May and uncertainty

about the outcome of elections in October

have curbed economic activity weakened

the currency and pushed up government-

bond yields.

Yet the country’s big private-sector

banks have prospered regardless. In the re-

cession neither Itaú Unibanco nor Bra-

desco the two biggest sawtheir return on

equity (RoE a measure of profitability) fall

below 15.9%. On July 30th Itaú reported net

income for the first half of 2018 of 12.5bn

reais ($3.3bn) and an RoEof 20.1%. A few

days earlier Bradesco and Santander the

local arm of a Spanish lender reported

RoEs in the high teens. Most European

banks are stuck in single digits. As the cen-

tral bank slashed its interest-rate target the

Selic from 14.25% in October 2016 to a re-

cord low of 6.5% in March this year some

analysts predicted a squeeze on profits. It

hasn’t happened yet.

The resilience of Brazil’s banks reveals

much about the way the economy func-

tions not all of it good. Back when inflation

was “1½% a day” says Candido Bracher

Itaú’s chief executive banks were forced to

become efficient at transferring and man-

age 20.5% for companies and 45.8% for

households. On personal loans credit

cards and overdrafts they run well into

three figures.

The banks insist that wide spreads re-

flect not a cosy oligopoly but the high risk

of default and the difficulty of pursuing

debtors through slow unsympathetic

courts. Regulation also plays a part: a ban

on overdraft fees inflates interest rates.

A recent study by the central bank sug-

gests that the banks have a case. It ascribes

37% of spreads to the cost of default 25% to

administrative costs 23% to taxes and only

15% to banks’ margins. Spreads have nar-

rowed as the Selic has declined. Yet the crit-

ics have a point too. Tony Volpon an econ-

omist atUBSand a former central banker

estimates that consumers pay around 20

percentage points more than they should

given the low Selic declining defaults and

banks’ RoEs. Big companies’ borrowing

costs by contrast seem “about right”.

That may be because corporations can

shop around more easily than individuals.

Years of high inflation have accustomed

Brazilian consumers by contrast to buying

goods in instalments with hefty borrow-

ing costs in effect built into prices.

Buying on credit is so dicey

Market forces and government actions are

making banking more competitive. En-

trants fired by digital technology and un-

encumbered by the costs of branch net-

works (including tight security) are trying

to upset the incumbents. Banco Inter may

clock up 1m customers for its fee-free ac-

count by September. Nubank has pushed

on from credit cards into savings. Creditas

is offering loans secured on houses and

cars at far lower rates than on unsecured

credit. (Most Brazilian homeowners ex-

plains Creditas’s boss Sergio Furio have

no mortgage giving them room to bor-

row.) Valor Econômico a newspaper has

aging money. Now they operate in a finan-

cial market riddled with other distortions.

Some hurt their profits; others puff them

up. Public-sector banks have a big and priv-

ileged role which both constrains their

private-sector competitors and shields

them from risks like some lending to the

government’s favoured sectors.

All of this means that lending especial-

ly to consumers and small firms is lower

and more expensive than it should be. Al-

though voters are worrying mainly about

corruption crime and unemployment the

winner of the presidential election will

have to consider how to make banking a

more normal business. Indeed that is al-

ready quietly happening.

The market’s most striking features are

the dominance of a few banks—strength-

ened in the past two years by the retreat of

America’s Citigroup which sold its con-

sumer business to Itaú and Britain’sHSBC

which sold to Bradesco—and the state’s im-

portance as both supplier and regulator of

credit. Three private-sector lenders and

three public ones—Banco do Brasil of

which the government owns 59% Caixa

Econômica Federal a savings bank and

BNDES a development bank—account for

82% of banking assets and 86% of loans.

Regulations steer almost half of loans to fa-

voured purposes funded by private sav-

ings and the state. Interest rates on ear-

marked lending average 8.9% according to

the central bank. On the unrestricted re-

mainder they can be sky-high. They aver-

Brazilian banks

In the doldrums with full sails

SÃO PAULO

The economy is sluggish but banks are highly profitable. A less distorted financial

system would boost growth without damaging the banks

The Americas

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