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.