But in Brazil – which, with other BRIC members
Russia, India and China, epitomised the rampant economic successes
of the past seven years (the term BRIC was coined by Goldman Sachs
back in 2001) – consumer debt levels have remained low.

Alberto Borges Matias, an expert in the
banking sector at INEPAD, a business school in the city of Ribeirão
Preto, told RBI that the total volume of loans still
stands at 42 percent of Brazilian GDP, far lower than ratios in
developed countries. In some segments the potential for growth
remains very strong: consumer finance amounts to 12.5 percent of
GDP; mortgage loans, 5 percent.

The total volume of loans in Brazil grew by 31
percent in 2008. Bradesco, which for most of the year was the
largest privately-owned bank in the country before Banco Itaú and
Unibanco merged in November, posted a 33.4 percent increase in
loans to BRL215.3 billion ($96.2 billion). The Brazilian subsidiary
of HSBC reported a 27 percent increase, while Santander said its
loans increased 24.5 percent year-on-year.

“Credit operations played a decisive role in
the record results we achieved last year,” said a spokesperson for
HSBC Brasil. According to Austin Rating, a ratings agency, profits
were up by an average of 7.8 percent for all Brazilian banks in
2008, a year in which Brazil’s GDP increased by 5.1 percent.

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The best performer was state-owned Banco do
Brasil. It recorded net income of BRL8.8 billion in 2008, 74
percent up year-on-year. Return on equity was 32.5 percent compared
to 22.5 percent in 2007. The performance in the fourth quarter was,
given the wider global economic collapse in the period,
surprisingly strong: net income of BRL2.9 billion, 142 percent
higher than Q407.

Banco do Brasil said that, in terms of
deposits, it had benefitted from a “flight to quality” and a
“vigorous” growth in fundings both via its branch network and from
disgruntled customers of other banks. Its loan portfolio reached
BRL224.8 billion at year-end, up 39.9 percent year-on-year and 11.2
percent in the fourth quarter.

Its consumer loan portfolio grew 52.5 percent
in the 12 month period, and 12.4 percent in the quarterly
comparison, to BRL48.8 billion. The main highlights were payroll
loans and vehicle loans, up on an annual basis 48.4 percent and
120.7 percent, respectively.

“With a balance of BRL17.63 billion at the end
of the quarter, payroll loans consolidated their position as the
key loan product for individuals,” said the bank in a
statement.

Still, despite low levels of underlying debt,
Brazilian banks have nonetheless been gripped by fears of loan
defaults. In the fourth quarter last year they cut credit lines and
increased provisions for riskier loans as the effects of the global
crisis hit the Brazilian economy.

GDP growth forecasts have been downgraded by
most analysts to between 0 percent and 1.5 percent. The gloomier of
them forecasting that the country will face a recession over the
course of the year.

Increased provisions by 48.4%

Austin Rating analysed the results
of 20 banks and concluded that, together, they increased provisions
by 48.4 percent at the end of 2008. The five biggest – Itaú
Unibanco, Banco do Brasil, Bradesco, Caixa Econômica Federal and
Santander – boosted their balance sheets by BRL7 billion. But
experts believe that Brazil’s own credit crunch is unlikely to last
long, at least compared to the situation in countries like America
and the UK.

“Brazilian banks don’t have a liquidity
problem. They stopped lending for fear of what can happen to the
economy,” Matias said. “Credit was the main factor behind the
performance of Brazilian banks in 2008 and it will be the same case
again this year.”

Bradesco has forecast that its credit
portfolio will rise by up to 17 percent in 2009, as long as the
economy grows a modest 1.5 percent.

Payday loans are expected to be the star
performers, with volumes up between 18 percent and 27 percent.
Credit cards should finish the year up by 20 percent and car loans
by up to 16 percent.

The Brazilian government has turned to the
state-owned giants – Banco do Brasil, Caixa Econômica Federal and
BNDES – to unlock the credit markets, stepping in to provide loans
to industries like agribusiness and the export sector. Banco do
Brazil has also been authorised to purchase loan portfolios from
smaller banks who could struggle if default rates rocketed.

As a result, Banco do Brasil’s credit
portfolio is 13 percent higher in the first quarter than in the
same period of 2008, added Matias.

Brazilian banks’ profits have also been
boosted by the high fees they charge from their clients, he said.
According to Austin Rating, charges for banking services account
for 26 percent of the banks’ results and increased 7.6 percent in
2008.

An inability to shop
around

One criticism made against banks in
Brazil is that they have benefitted from general consumer inability
to shop around for the most competitive banking services.

“For a long time, banks have had privileged
growth strategies like the acquisition of companies’ payrolls,
which guaranteed them a large number of nearly captive customers,”
said Sandro Cimatti, a partner at São Paulo-based consultants CVA
Solutions.

Cimatti points out that competition in the
retail banking market could change in the near future due to recent
regulation that allows employees of a company to choose the bank
where their wages are paid. It may also become easier for them to
compare fees charged by different banks, as they are now required
to use standard names to describe their products.

“Brazilian bank account holders traditionally
don’t have many incentives or the will to switch banks,” Cimatti
told RBI. “But it is getting easier for them to shop
around.”

Ricardo Coelho, a consultant who has worked
for more than 30 years in the retail banking market in Brazil, says
that Brazil’s middle class as well as small businesses were the
main drivers of growth for Brazil’s banks in 2008, not only as
takers of loans but also as payers of most of the fees.

“They either have a ‘paternal’ dependency
towards the bank that gives them credit or they can almost never
get the benefit of fee exemptions,” he said, adding that these
clients are often enticed to buy products and services that they do
not have much use for.

Consolidation has reduced
competition

Abrupt consolidation in the
industry has already decreased the number of banks open for
consumers to shop among.

Santander’s acquisition of ABN AMRO’s Banco
Real at the end of 2007 to form, with its established local
subsidiary Banespa, the country’s fourth-largest bank by assets, as
well as fears over loan defaults in the fourth quarter of 2008,
resulted in a number of transformative deals in the country as
banks jostled to maintain market shares.

Banco Itaú and Unibanco’s merger in November
to form the largest commercial bank (see RBI 602) was
quickly countered by Banco do Brasil’s acquisition of Banco Nossa
Caixa as well as a 50 percent stake in Banco Votorantim. Banco do
Brasil says that the two deals will bring total assets up to BRL611
billion, deposits to BRL315 billion, checking accounts to 56
million and branches to 5,018.

Together, Itaú and Unibanco will have an
estimated 36 percent share of the total revenues in the credit card
business in Brazil.

The only major bank not to be involved in a
major deal was Bradesco. The group says that it will push for a
primarily organic growth strategy though it adds that “certain
institutions, which will be susceptible to acquisition, could
present niche opportunities, namely in consumer financing, credit
cards and investment banking”.

Overall, Bradesco remains sanguine on the
Brazilian market, despite the wider economic shudders. It has
rolled out a retail banking campaign which aims to position it as
the “first-choice bank” in the minds of consumers, especially low-
and mid-income ones, exploiting to the full its vast distribution
network (which, if you include branches, ATMs, post office outlets
and retail chains, it puts at 63,000 customer ‘touch points’).

It is also putting extra focus on credit
cards, pensions and insurance products as it looks to up its
cross-sell ratio from 4.7 products per checking account customer to
5.0 by the end of 2009.