atans1

Not HoHoHo’s kind of banks

In Banks on 19/08/2015 at 1:42 pm

BRAZIL BANKS BOOM IN GOOD TIMES AND BAD Although Brazil’s economy has been bumped by the ups and downs of global commodity prices and the manufacturing sector has stagnated, the nation’sbanking industry has been making impressive gains, Dan Horch writes in DealBook. The combined annual profits of Brazil’s four biggest banks have grown more than 850 percent to just more than $20 billion, from $2.1 billion, in the 12 years of Workers’ Party rule.

Brazil’s largest and third-largest banks, Banco do Brasil and Caixa Econômica Federal, do not even have profit as their sole mandate. The government controls both and obliges them to engage in less profitable operations as a public service.

The two giant private sector banks, Itaú and Bradesco, consistently earnreturns on equity – a measure of how much a company can earn out of each dollar invested – of about 20 percent. Big banks in the United States usually manage only about half as much.

The banks face little competition. A banking crisis in the 1990s threatened scores of financial institutions with insolvency and the authorities have encouraged a string of mergers and acquisitions. The four biggest banks have more than 70 percent of the banking system’s total assets. Bradesco’s deal to acquire HSBC’s operations in Brazil for $5.2 billion will bringalmost 75 percent of total assets under the control of the top four banks – near the maximum that the central bank established in 2012.

They have been helped by government policies and economic trends. Interest rates are high: In the free credit market, which excludes government subsidized loans for housing and infrastructure, Brazilian consumers pay on average 58.6 percent interest, and businesses pay 27.5 percent to borrow money.

A history of high inflation, sharp currency fluctuations and large government budget deficits makes it expensive for the government to borrow money. The central bank’s basic rate, which it pays on the local equivalent of Treasury bills, is 14.25 percent.

The average spread – the difference between what banks pay to gain access to capital and what they charge to lend it out – is 30.7 percent in the free credit market.

Not all of that is profit. Taxes and regulatory cost are high and about to get higher – the government just announced a plan to further increase taxes on bank profits. Default is also a serious risk. Nearly 56 million Brazilians, more than a quarter of the country’s population, have missed enough debt payments to be on the blacklist of Serasa Experian, a credit reporting bureau. The spreads are easily wide enough to compensate for that.

When times are bad, the banks can also get support from the government. The Treasury sells bonds that protect investors against inflation, as certain United States Treasury bonds do. It also offers bonds that increase their payouts when interest rates rise or the currency devalues.

When banks sense a deterioration in the economy, they can scale back on loans and move toward these government-backed investments. As a result, the recent inflation of nearly 9 percent, the plunging currency and the rise in interest rates have all helped bolster bottom lines at banks. As Luiz Fernando de Paula, an economics professor at Rio de Janeiro State University, says, “The government pays the price instead.”

NYT Dealbook

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