U.S. Markets open in 5 hrs 57 mins

An Economy on the Rocks? No Sweat for Brazil's Bust-Proof Banks

Mario Sergio Lima
1 / 2

An Economy on the Rocks? No Sweat for Brazil's Bust-Proof Banks

An Economy on the Rocks? No Sweat for Brazil's Bust-Proof Banks

(Bloomberg) -- Brazilian banks are showing their prowess in making money under any circumstance, with profits jumping even as Latin America’s largest economy fails to recover and unemployment remains stuck in the double digits.

The country’s four biggest publicly-traded banks - Itau Unibanco Holding SA, Banco Santander Brasil SA, Banco do Brasil SA and Banco Bradesco SA - completed their best quarter since 2015, according to data analysis firm Economatica. Their profits increased 17% yearly between January and March, a period marked by political turbulence, fizzling confidence and plunging growth expectations.

On top of that, they padded profits even as policy makers held the benchmark rate at a record low and forged ahead with efforts to lower banking spreads and boost competition. While the sector’s reputation for making money is already known, its recent success amid such a tough backdrop has caught the eye of central bank officials who wrote in a report that profitability has returned to levels seen before Brazil’s two-year recession.

"Banks will continue with high levels of profitability, and there’s room to grow," said Tatiana Brandt, a bank equity analyst at Eleven Financial Research. "We haven’t seen spreads fall, and banks are working with that. They are being successful with their portfolio mix and increase in services at a time of greater competition in Brazil."

High Spreads

Brazil’s average lending spreads, a term which refers to the difference between the deposit rate and the rate charged on loans, are the highest in the world after Madagascar, according to the World Bank. Banks have also cut costs by closing nearly 10% of brick-and-mortar branches since 2014, as well as by reducing expenses on bad loans.

Banks have further boosted their bottom lines by turning profits from treasury department operations such as currency and bond trading. The sector’s profits have also been helped by fees on services such as checking accounts and credit cards, an area which is more profitable than lending.

Those factors have helped to soften the blow from a combination of unemployment and underemployment that’s hit 25% of the workforce, as well as uncertainty over economic reforms that’s undercut corporate investments. Analysts have cut their 2019 growth forecasts for 12 straight weeks.

Still, both Santander Brasil’s and Banco do Brasil’s first quarter net incomes beat all estimates in Bloomberg surveys. Meanwhile, Bradesco posted double-digit increases in both loan growth and adjusted net income from a year ago, and Itau’s return on equity reached the highest since 2015.

Government Action

Their financial success shows that banks have become "detached" from a much weaker economy, said Andre Perfeito, chief economist at Necton. Brazil’s economy is expected to grow a mere 1.23% this year, little more than it did in 2018 and 2017. That disparity also raises chances of political pressures, particularly if popular discontent over a feeble recovery increases, he said.

Already, President Jair Bolsonaro’s informal request last month that Banco do Brasil lower its interest rates for the agriculture sector raised alarm bells among investors wary of government meddling. Government spokesman Otavio Rego Barros later said Bolsonaro will not intervene in the bank’s rate-setting policies.

The central bank has taken steps to reduce lending spreads, foment competition and create regulation for the fintech industry to grow in an agenda established under former bank President Ilan Goldfajn and continued under his successor, Roberto Campos Neto. In a congressional hearing this month, Campos Neto told lawmakers there’s still work to be done to bring down high banking costs.

"We have to attack the entire set of variables," he said. "With the lower key rate, we have started to see the problems that exist, and hence why it’s important to implement micro reforms."

(Adds latest forecast for Brazil’s 2019 growth in ninth paragraph.)

--With assistance from Felipe Marques, David Biller and Adriana Dupita (Economist).

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.