As interest rates fall, spreads and profits are coming under pressure
For now, subdued global demand means that inflation is unlikely to slip its leash. But in the longer term the government will have to rein in public spending and push through difficult reforms if it wants Brazil to grow faster than 3-4% a year without fuelling inflation. Recent moves to cut payroll taxes, limit public-sector pay rises, reduce energy costs and improve a woeful transport infrastructure should help to raise this distinctly modest economic speed limit. They have also convinced many that the president, Dilma Rousseff, will do whatever it takes to save the bank from having to hike again.
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Permanently lower interest rates would be the most positive economic development in Brazil since hyperinflation was vanquished almost 20 years ago, says Enestor dos Santos of BBVA, a Spanish bank active in the region. Firms would invest more—and making a decent return would mean funding productive projects, not just parking cash in government bonds.
Returns to lender
But some industries will see profits fall. When investors realised that electricity firms would have to accept much lower returns from early next year, or else be ineligible to rebid for concessions that run out between 2015 and 2017, share prices slumped. Masha Gordon of PIMCO, a fund manager, praises the government for blocking its ears to vested interests and calling time on Brazil’s “free lunch”. Toll-road and energy concessionaires who signed deals when rates were much higher benefited hugely as they fell, she points out, leaving some low-risk projects earning real returns approaching 20%. That could hardly be expected to last.
But it is banks that will have to do most to adapt to Brazil’s new low-interest environment, says Ms Gordon. Their net interest margins have been falling for years as the rates they charge on loans fall in line with the policy rate, and the room to cut the rates they offer on deposits reduces. That has eaten into returns (see chart). The pressure on profits has built recently as the government has pushed banks to pass on lower rates to customers, faster.
The two big state-controlled banks, Caixa Econômica Federal and Banco do Brasil, have slashed rates at the government’s behest. Private banks have had to follow suit or lose market share. According to Anefac, an accountants’ trade body, the average rate paid by Brazilian retail borrowers in September fell below 100% for the first time. Rates for business loans are also at an all-time low—48% a year.
By Brazilian standards such rates may be low; by international ones, they are eye-watering. The biggest reason, says Sergio Furio of bankFacil, a start-up that offers consumer-finance information online, is the inefficiency of Brazilian banks. Although their revenues per employee are broadly in line with other large economies, their low productivity is masked by very high prices. They need twice as many staff to generate the same volumes as banks in Europe or America, he points out—but are still profitable because margins are two or three times as high, too.
“Brazilian banks have been relying on the last gasp of outrageous interest rates,” says Mr Furio. Instead they should be trying to become more efficient and to attract a better class of customer. High-cost loans put off numerate, well-heeled types who could be relied on to repay them. That adverse selection means rates must be pushed up even higher to cover frequent defaults. BankFacil hopes to make money by breaking this cycle, referring newly educated, creditworthy users to financial institutions which can then charge them less.
The highest interest rates of all are on credit cards, which in Brazil are mostly used to buy goods in “interest-free” instalments. Retailers offer self-financed payment plans over up to 18 months. They hide their own financing costs inside the sticker price and only request payment from the customer’s card issuer month by month. Banks make little money from this peculiar “credit on credit”, which makes up 70% of total credit-card loans in Brazil. Only when a cardholder misses a payment does the card issuer finally get to charge interest. But the chance of default among such late payers is a hefty 28%, meaning rates must be astronomical if banks are to make a profit at all.
Last month Itaú Unibanco, Brazil’s largest privately controlled bank, let it be known that it would like to put an end to credit cards being used this way. But the government worries that Brazilian consumers are so used to paying for everything from clothes to white goods to cars in supposedly interest-free instalments that they might then stop spending altogether, nipping a nascent recovery in the bud. Any move will have to be gradual.
The good news is that Brazilian banks have lots of fat to cut before they reach the bone. They have also acquired plenty of new customers during the past decade, says Franklin Santarelli of Fitch Ratings, an expensive process that should reap rewards during the next one. Brazil is “just moving into the mainstream,” says Ceres Lisboa of Moody’s, another ratings agency. Its banks, like those elsewhere, have to work out how to make money with lower margins and higher volumes.
Permanently lower interest rates would be the most positive economic development in Brazil since hyperinflation was vanquished almost 20 years ago, says Enestor dos Santos of BBVA, a Spanish bank active in the region. Firms would invest more—and making a decent return would mean funding productive projects, not just parking cash in government bonds.
Returns to lender
But some industries will see profits fall. When investors realised that electricity firms would have to accept much lower returns from early next year, or else be ineligible to rebid for concessions that run out between 2015 and 2017, share prices slumped. Masha Gordon of PIMCO, a fund manager, praises the government for blocking its ears to vested interests and calling time on Brazil’s “free lunch”. Toll-road and energy concessionaires who signed deals when rates were much higher benefited hugely as they fell, she points out, leaving some low-risk projects earning real returns approaching 20%. That could hardly be expected to last.
But it is banks that will have to do most to adapt to Brazil’s new low-interest environment, says Ms Gordon. Their net interest margins have been falling for years as the rates they charge on loans fall in line with the policy rate, and the room to cut the rates they offer on deposits reduces. That has eaten into returns (see chart). The pressure on profits has built recently as the government has pushed banks to pass on lower rates to customers, faster.
The two big state-controlled banks, Caixa Econômica Federal and Banco do Brasil, have slashed rates at the government’s behest. Private banks have had to follow suit or lose market share. According to Anefac, an accountants’ trade body, the average rate paid by Brazilian retail borrowers in September fell below 100% for the first time. Rates for business loans are also at an all-time low—48% a year.
By Brazilian standards such rates may be low; by international ones, they are eye-watering. The biggest reason, says Sergio Furio of bankFacil, a start-up that offers consumer-finance information online, is the inefficiency of Brazilian banks. Although their revenues per employee are broadly in line with other large economies, their low productivity is masked by very high prices. They need twice as many staff to generate the same volumes as banks in Europe or America, he points out—but are still profitable because margins are two or three times as high, too.
“Brazilian banks have been relying on the last gasp of outrageous interest rates,” says Mr Furio. Instead they should be trying to become more efficient and to attract a better class of customer. High-cost loans put off numerate, well-heeled types who could be relied on to repay them. That adverse selection means rates must be pushed up even higher to cover frequent defaults. BankFacil hopes to make money by breaking this cycle, referring newly educated, creditworthy users to financial institutions which can then charge them less.
The highest interest rates of all are on credit cards, which in Brazil are mostly used to buy goods in “interest-free” instalments. Retailers offer self-financed payment plans over up to 18 months. They hide their own financing costs inside the sticker price and only request payment from the customer’s card issuer month by month. Banks make little money from this peculiar “credit on credit”, which makes up 70% of total credit-card loans in Brazil. Only when a cardholder misses a payment does the card issuer finally get to charge interest. But the chance of default among such late payers is a hefty 28%, meaning rates must be astronomical if banks are to make a profit at all.
Last month Itaú Unibanco, Brazil’s largest privately controlled bank, let it be known that it would like to put an end to credit cards being used this way. But the government worries that Brazilian consumers are so used to paying for everything from clothes to white goods to cars in supposedly interest-free instalments that they might then stop spending altogether, nipping a nascent recovery in the bud. Any move will have to be gradual.
The good news is that Brazilian banks have lots of fat to cut before they reach the bone. They have also acquired plenty of new customers during the past decade, says Franklin Santarelli of Fitch Ratings, an expensive process that should reap rewards during the next one. Brazil is “just moving into the mainstream,” says Ceres Lisboa of Moody’s, another ratings agency. Its banks, like those elsewhere, have to work out how to make money with lower margins and higher volumes.
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