Small banks: evolve or die

What do the twists and turns of the Central Bank's attempts to flog Banco Cruzeiro do Sul, tell us about the health of Brazil's mid- and small banks? The news is not altogether encouraging for those Brazilians banks that want to go it alone.

Cruzeiro is the fourth intervention in the small- and mid-sized sector after fraud was unearthed. Not entirely surprisingly, that has torpedoed foreign investors confidence in the sector.

International bond markets, a key source of funding given Brazil's sky high rates, have shut down for smaller banks, forcing them to rely heavily on a Central Bank programme of guarantees, which has just been massively extended and indefinitely even though it was dreamed up originally as a temporary boon.

Credit, the core business of this sector, is much tougher. The Brazilian consumer is starting to look tipsy, if not outright loaded, when total liabilities are considered as a percentage of salary. Larger banks are showing the power of low costs of capital and efficiencies to be gained from scale while public sector banks are being leaned on to lower rates. All that comes as the economy proves sluggish.

Salvation may lie with take-overs from larger domestic and foreign banks, especially those looking for a Brazilian banking license. Banco BMG has just signed a deal with giant Banco Itaú that secures its future. Indusval is being reinvigorated with a deal with private equity house Warburg Pincus, new management and a focus on more exciting parts of the economy, such as agrobusiness. Other small banks may survive as shareholders pump in more money and retrench.

Still, the number of banks in Brazil is likely to drop further, a worrying phenomenon for a banking sector that is already one of the most concentrated in the world. There will be likely be fewer than 100 banks within at most 10 years. Today, there are 137.

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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