Bank profits grind down as bankruptcies jump in Brazil

The recent slew of Brazilian bank results doesn’t make for light reading.

Valor newspaper reports that profits at the large banks fell by more than 9% in the last quarter year-on-year. What’s been going wrong? One of the principal villains in the piece has been bankruptcy, especially of individuals. It is estimated that bankruptcies swallowed 31.3% of margins in Q4 ’11 against 20.1% in the same period last year.

Brazilians have been continuing on their spending spree, mostly on foreign goods (cheaper and better quality than their local equivalents) and local services. Continued tight labour markets and the 14% jump in the minimum salary, which is often used as a benchmark for other workers, at the start of the year are allowing Brazilians to splurge. Brazilian ‘live for today’ culture is geared towards spending and the entrance of a new profile of lower income consumer seems keen to enjoy its new spending prowess.

There’s been a touch of arrogance from Brazilian bankers regarding the rapid growth of credit. Much of what they point out is true: that credit in Brazil is growing from a low base, that credit to GDP remains low and the Central Bank hawkish. But the rush to capture market share and the nefarious role of the public banks, which are pushed by the government to step in to the breach as soon as the economy turns down, is leading many to question the sustainability of the credit rush. Fusty public bank Caixa Economica Federal, mostly a mortgage lender, stepped up lending by a huge 42% in the last quarter while overall portfolios at the top five banks were up 21.3%.

If private banks continue to emphasize domestic market share and the government leans on public banks to pump money into credit as a counter-cyclical policy, the credit boom is likely to wreak havoc to banks’ balance sheets and the wider economy alike.

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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