Brazil banks

As investors scramble to make sense of the sell-off in emerging markets in the past few days, they will be keen to spot any signs of external vulnerability. One item worth looking at is the amount of lending by foreign banks into emerging economies.

Brazil is a case in point. Its external liabilities to global banks have almost quadrupled over the past decade, from about $50bn in 2005 to almost $200bn last year, according to the Bank for International Settlements.

Source: BIS

How worrying is this? 

HSBC’s Latin American woes just show no sign of letting up.

While strong performances from the bank’s two biggest markets – Hong Kong and the UK – helped boost overall pre-tax profit by 30 per cent during the third quarter, business in Latin America posted another quarter of double digit decline as bad loans from Mexico and Brazil continue to mount. 

Given all the concern over government intervention in Brazil’s economy recently, the following piece of news came as a pleasant surprise on Friday morning.

The Brazilian government has raised the maximum stake that foreign investors can hold in the country’s largest state-controlled bank, Banco do Brasil, to 30 per cent from 20 per cent previously. The limit was last raised from 12.5 percent in September 2009. 

The OECD has one key piece of advice for Brazil’s government when it comes to monetary policy: let the central bank do its job.

While praising Brazil for reducing poverty and inequality, the OECD said in its report on Tuesday that the country must build confidence in its macroeconomic policies by tightening monetary policy and improving the credibility of the central bank. 

The answer is a resounding yes if comments this week from Itaú Unibanco and Banco Santander are to be believed.

Itaú, which ranks as Brazil’s largest bank by market value, said on Tuesday that loans in arrears for more than 90 days, a benchmark for delinquencies, fell to 4.2 per cent of its loan book during the first six month of this year. That’s down from the 5.2 per cent reported at the end of the first half last year and is the lowest level since the bank in its current form was created in a merger about four years ago. 

A report in Valor Econômico on Thursday makes joyous reading for the bankers of struggling tycoon Eike Batista and represents the portents of doom for original holders of his international bonds.

Apparently, Batista and BTG Pactual, the Brazilian investment bank controlled by Andre Esteves, have cooked up a restructuring plan in which the billionaire will reduce his stakes in his more valuable companies to become a minority shareholder. 

No rest for Brazil’s biggest bank, Itaú Unibanco, it seems.

The lender announced late on Monday its $307m acquisition of a 51 per cent stake in Chilean retailer Cencosud’s credit card business in Chile and Argentina. 

Citigroup has sold its Brazilian consumer finance units to local bank Itaú-Unibanco for R$2.77bn, as the US lender looks to withdraw from part of the country’s fiercely competitive retail banking market.

 

If there is one thing that investors are worried about when it comes to Brazil, it is how far the country’s consumer credit boom of the past decade still has to run.

Not too much further, say critics, who point to a rise in average household expenditure on servicing debt. And indeed, private sector credit has doubled over the past decade.

But Data Popular, a research firm, has come up with a startling finding that could give hope that Brazil’s credit binge can continue – without degenerating into a bubble. Apparently, 55m Brazilians – or 40 per cent of the country’s population – don’t have a bank account

Spain’s two leading lenders, Banco Santander and Banco Bilbao Vizcaya Argentaria, have long looked to Latin America for growth – and more recently to repair troubled balance sheets at home.

But while Santander has hitched its fortunes on Brazil — now its biggest market, accounting for 26 per cent of group profits last year — BBVA has focused on building up its operations in Mexico. Just last month it announced plans to funnel $3.5bn into its Mexico business over the next three years, and the country last year accounted for more than one-third of its global profits. 

If anyone was worried by Moody’s downgrade of BNDES and Caixa Econômica, the banks themselves seemed unruffled.

 

Is the Brazilian government robbing Peter to pay Paul?

That may sound a bit harsh but it is what Moody’s seems to suggest with its downgrade of BNDES and Caixa Econômica on Thursday. 

Another foreign bank is looking to exit at least part of its business in Latin America – this time Citi with its Brazil credit card division.

Brazilian newspaper Valor Econômico reports that the local branch of Santander and domestic institution Bradesco are interested in the division, called Credicard. The group is said to be looking to sell the card unit and its consumer finance division, Credicard Financiamentos, for R$1bn and R$1.5bn in time to clock the sale in its first quarter results. 

On the homepage of Banco do Brasil, Brazil’s largest bank, you can take out a loan to buy a car, renovate your house or buy electronics and home appliances. Indeed, never before in Brazil has it been so easy to borrow money from a bank. Record-low interest rates are expected to make things even more attractive for borrowers.

Tipping things even further in favour of borrowers is a push by President Dilma Rousseff to encourage banks, all of them but especially those controlled by the government like Banco do Brasil, to reduce borrowing costs to further fuel lending and get the economy moving. 

The BNDES, Brazil’s government-owned development bank, lent more than it set out to last year, as loan requests and loans approved reached “levels without precedent in the history of Brazil”, as the bank itself put it.

Its triumphal tone will grate with those who believe the BNDES should be shrinking, not expanding. This applies even to Luciano Coutinho, the bank’s president, who told the FT two years ago the BNDES should be “crowding in” the private sector – rather than, as it is often accused of doing, crowding it out.