Brazilian Banks in the
Global Financial Arena
Franklin Santarelli, Managing Director
Maria Rita Goncalves, Senior Director
São Paulo, October 18th 2012
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends.
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Recent EM Banking Trends
Source: Fitch Ratings
FSU
MEA
MEA
CEE
SLV
FSU
LatAm
CRI
CEE
ASIA
Asia
MEX
NIC
CHL
PER
COL
AGR
HON
MEA
ASIA
BRA
FSU
CEE
MEX
SLV
4
FSU
HON
8
MEA
SLV
12
(%)
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
CHL
LatAm
BRA
CEE
PAN
Asia
NIC
FSU
GTM
MEA
Return on Average Assets
COL
Tier 1 Regulatory Capital Ratio
0
HON
Source: Fitch Ratings
Source: Fitch Ratings
(%)
16
LatAm
NIC
AA
VEN
AA-
CRI
A+
CEE
GTM
A
CHL
BB+ BBB- BBB BBB+ A-
Asia
CEE
BB
PER
MEX
PER
VEN
CRI ARG
B
B+ BB-
ARG
0
COL
GTM
VEN
20
MEX
SLV
40
CHL
BRA
FSU
BRA
CEE
60
FSU
PER
ASIA
80
PAN
100
MEA
COL
PAN
120
(%)
35
30
25
20
15
10
5
0
-5
-10
-15
ASIA
(%)
140
Real Loan Growth in 2010-2011
ARG
Banking Penetration (Loans to GDP)
Source: Fitch Ratings
www.fitchratings.com
10/5/12
3
Recent EM Banking Trends
Impaired Loans
Change in Impaired Loans Ratio
End 2011 vs. End 2010
Net Interest Margin Change in 2011
VEN
MEA
HON
ARG
LatAm
ASIA
NIC
GTM
CEE
SLV
CHL
FSU
Asia
COL
PAN
PER
CRI
MEX
BRA
FSU
Loan Impairment Charge/Average Gross Loans
Source: Fitch Ratings
ASIA
PAN
MEA
LatAm
CRI
CEE
ARG
CEE
CHL
NIC
Asia
FSU
COL
FSU
VEN
PER
HON
SLV
MEA
MEX
(%)
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
BRA
BRA
NIC
PER
FSU
LatAm
MEX
CHL
CEE
COL
MEA
Asia
Asia
CEE
GTM
CRI
FSU
HON
SLV
PAN
ARG
MEA
VEN
175
150
125
100
75
50
25
0
-25
-50
-75
-100
MEA
Source: Fitch Ratings
Source: Fitch Ratings
(bpts)
(bpts)
150
100
50
0
-50
-100
-150
-200
-250
CEE
PAN
ARG
VEN
PER
LatAm
GTM
COL
CRI
CEE
NIC
CHL
Asia
MEX
ASIA
HON
FSU
SLV
MEA
BRA
CEE
FSU
(%)
14
12
10
8
6
4
2
0
MEA
Source: Fitch Ratings
www.fitchratings.com
10/5/12
4
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Spanish Banks in Latin America: Not Likely to Retreat
If Loan Demand Persists, These Banks
Will Follow Domestic Competitors
•
•
•
•
•
•
•
Strong domestic franchise
Retail funded
Good capital base
Strong profitability
Appropriate regulatory ring fencing
VRs similar or better than their parents
Despite monetization of small share of
ownership – LATAM subs are still core to
parent strategy and profitability
• Contagion risk cannot be completely
ruled out
• Ratings will not be independent from
the parent
• Their domestic relevance increases the
chances of government support if it is
ever required
• Support Rating Floors assigned in 2012
www.fitchratings.com
Ratings of Spanish Banks’ LATAM
Subsidiaries
Bank
Country
IDR
VR
Outlook
Support
Rating
Floor
BBVA
Spain
BBB+
bbb+
Negative
BBB
Santander
Spain
BBB+
bbb+
Negative
BBB
BBVA
Argentina
B+
b+
Stable
–
Santander
Argentina
B+
b+
Stable
–
Santander
Brazil
BBB
bbb
Negative
BBB-
BBVA
Colombia
BBB
bbb-
Negative
–
Santander
Chile
A+
a+
Negative
A-
BBVA
Mexico
A-
a-
Negative
BBB-
Santander
Mexico
BBB+
bbb+
Negative
BBB-
BBVA
Peru
BBB+
bbb+
Negative
BBB-
BBVA
Venezuela
B+
b+
Negative
–
10/5/12
6
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Brazilian Banks and Global Banking Trends
Large Banks
Fitch Core Capital Ratio, 2011
Total Assets, 2011
(%)
18
(USD bn)
3.000
Bank of Tokyo
2.500
Bank of
America
ICBC
2.000
Bank of China
Citi
1.500
Banco do
Brasil
500
0
Wells Fargo
bb+ bbb- bbb bbb+
ITAU
Bradesco
8
2
a-
a
a+
aa-
aa
Banco do
Brasil
bb
bb+ bbb-
Citi
Bank of
Tokyo
ITAU
Bank of
America
BBVA
JPMorgan
Wells Fargo
Bradesco
Deutsche
Santander
(Spain)
bbb bbb+
a-
a
Agricole
a+
aa-
aa
Source: Fitch Ratings
Past Due Loans, 2011
Operating ROAA, 2011
(%)
(%)
3,0
7,0
Bancomer
2,5
ICBC
2,0
Bank of China
Santander
Brasil
BBVA
Bank of
America
bb
bb+ bbb- bbb bbb+
Source: Fitch Ratings
Wells Fargo
Bank of
America
5,0
4,0
Banamex
Santander
(Spain)
0,5
Santander
Brasil
6,0
ITAU
Bradesco
Banco do
Brasil
1,0
0,0
ICBC
Bank of China
4
Source: Fitch Ratings
1,5
Bancomer
6
BBVA
Santander
Bancomer
Brasil
Banamex
bb
12
10
Santander
(Spain)
1.000
14
Deutsche
Banamex
Santander
Brasil
16
Agricole
JPMorgan
3,0
JPMorgan
Deutsche
1,0
Agricole
0,0
a-
a
a+
aa-
aa
www.fitchratings.com
ITAU
BBVA Bradesco
Santander
(Spain)
bb
bb+ bbb-
JPMorgan
Deutsche
Banamex
Bank of China
ICBC
Source: Fitch Ratings
Agricole
Wells Fargo
Bancomer
Bank of
Tokyo
2,0
Bank of Tokyo
Citi
Banco do Brasil
Citigroup
bbb bbb+
a-
a
a+
aa-
aa
10/5/12
8
Brazilian Banks and Global Banking Trends
Large Banks – The Challenges Ahead
Asset Quality and Credit Costs
Capital and Liquidity
• Expansion into new market segments
and fast loan growth
• Liquidity is ample and generally not a concern
– but concentrated in government securities
• It comes with a cost
• Asset quality may settle at a new normal
• Lower spreads and higher credit costs
• Will reduce profitability, but how much?
• Credit risk tools will require fine tuning
• Loan loss reserves should be
preserved
• The effects of the last economic
recession of 2008 were diluted in less
than 3 quarters
• We need to see our ratings through the
cycle
www.fitchratings.com
• Funding mostly domestic
• Asset and Liability management become more
important due to growing tenors for loans
• It’s time to preserve capital
• Still better than other EMs and some DM Banks
• EM banks are expected to keep growing; DM
banks are deleveraging
• DM banks are raising capital fast
• Lower expected profits will reduce internal capital
generation
• Capital may become scarce the day you need it
the most
10/5/12
9
Brazilian Banks and Global Banking Trends
Medium-Size Banks
Operating ROAA, 2011
Loan to Deposits, 2011
(%)
350
ABC Brasil
S.A.
300
(%)
5
Daycoval
4
250
200
Industrial do
Brasil
150
100
0
Daycoval
Interacciones
Pine
Bajio
2
Ixe
Mifel
50
Mifel
0
b+
bb-
bb
bb+
bbb-
Pine
Industrial do
Brasil
1
Source: Fitch Ratings
b+
Bajio
Interacciones
Ixe
bb-
bb
bb+
bbb-
Source: Fitch Ratings
Total Assets, 2011
Fitch Core Capital Ratio, 2011
(%)
19
18
17
16
15
14
13
12
11
10
9
8
7
ABC Brasil
S.A.
3
(USD bn)
7
Industrial do
Brasil
Ixe
Interacciones
Pine
6
Daycoval
Bajio
Daycoval
ABC Brasil S.A.
5
Bajio
4
Pine
Interacciones
3
ABC Brasil
S.A.
Ixe
Source: Fitch Ratings
bb-
Industrial do
Brasil
1
Mifel
b+
Mifel
2
0
bb
bb+
bbb-
www.fitchratings.com
b+
Source: Fitch Ratings
bb-
bb
bb+
bbb-
10/5/12
10
Brazilian Banks and Global Banking Trends
Medium-Size Banks – The Challenges Ahead
Funding
Profitability
• It’s not all about Central Bank
measures: Cash reserve requirement
changes, DPGE and DPGE II
• Originate to sell model; it’s not as profitable as
it used to be
• Wholesale funding requires
conservative ALM and diversification
• Large banks have been expanding on the
“Consignado”, SMEs and other specialized
segments
• Higher refinancing risk due to its
concentrated funding – foreign funding
is more relevant than in large banks
• Expanding to new lines of unsecured
consumer lending doesn’t look like an
alternative for many players
• Funding profile must be appropriate
compared to its assets profile
• Retail deposits are not generally the
answer
www.fitchratings.com
• Technology and critical mass are required
• Lower asset expansion and pressures over
tariffs may limit further advances on efficiency
• Internal capital generation is key
10/5/12
11
Brazilian Banks and Global Banking Trends
Fitch Core Capital Ratio
State Ownership
PER
MEX
GTM
NIC
LatAm
COL
PAN
SLV
CEE
CHL
CEE
Asia
FSU
VEN
ASIA
BRA
FSU
CRI
(%)
80
70
60
50
40
30
20
10
0
(%)
17
16
15
14
13
12
11
10
9
8
7
6
5
4
Nacional
Financiera
BNDES
Bancomex
Sberbank of
Russia
ICBC
State Bank of
India
Bank of China
Banco del
Estado de
Chile
Banco do
Brasil
Caixa
NR
bb
bb+
bbb-
bbb
bbb+
Source: Fitch Ratings
Source: Fitch Ratings
Market Share of Five Largest Banks
Public-owned banks: friend or foe?
(%)
100
• Counter-cyclical economic tools
MEA
FSU
Asia
CEE
LatAm
80
• Its performance is sound, but its capital not
as much
60
40
• Caixa ALM mismatch is a concern
20
ARG
PAN
VEN
COL
BRA
MEX
CRI
HON
CHL
ASIA
CEE
FSU
GTM
SLV
PER
NIC
• Their preponderance in the system will remain
MEA
0
Source: Fitch Ratings
www.fitchratings.com
10/5/12
12
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Brazil: How to Live with Lower Interest Rates
Brazil’s Net Interest Margin
Brazil’s Largest Banks
Brazil's Net Interest Margin Ratio
Itau Unibanco Holdings
Caixa
(%)
12
(%)
9
Banco Bradesco
Banco do Brasil
Peru
El Salvador
6
Mexico
Colombia
9
6
Chile
3
3
0
2006
2007
2008
2009
2010
2011
2Q12
Source: Fitch Ratings
0
2006
2008
2010
2Q12
Source: Fitch Ratings
It’s not about the absolute interest rates; it’s about the relative spread!
• Chilean or Panamanian spreads?
• Brazilian interest rates are high; but its NIM is well within the EM average
• Lending rates are coming down; deposits rates too
• Income diversification and efficiency will help but up to a point
• Operating ROAA above 2% would be rare
www.fitchratings.com
10/5/12
14
Brazil: How to Live with Lower Interest Rates
Loan Growth
Loan Loss Prov./Oper. Profits Before Taxes
Total Loan Growth (Lhs)
Consumer Loans (Lhs)
(%)
40
Corporate Loans (Lhs)
GDP Growth (Rhs)
(%)
7
35
(%)
80
70
60
30
5
25
20
3
15
10
1
50
40
30
20
10
5
0
-1
2006
2007
2008
2009
2010
2011
0
jun.12
Source: Fitch Ratings
2006
2007
2008
2009
2010
2011
jun.12
Source: Fitch Ratings
Credit cost is the key for future profitability:
• Higher volumes, fees and lower credit costs may compensate for lower interest rates
• But unsecured non-corporate loans are the new gold and come with a cost
• Lower interest rates may benefit good loan underwriting
• Expected rebound on economic activity may help current trends; loans clean-up, too
• The new run-rate of credit costs is still to be seen and thus, final pricing of loans
• The banking industry so far behaving within trends of previous negative economic cycles
www.fitchratings.com
10/5/12
15
Brazil: How to Live with Lower Interest Rates
Operating ROAA
Market Share of Brazilian Banks, 2011 Assets
(%)
2,5
Other, 22%
Banco do
Brasil
18%
2,0
Santander
Brasil
8.5%
ITAU
16%
1,5
Bradesco,
13%
1,0
2007
2008
2009
2010
2011
Source: Fitch Ratings
BNDES,
12%
Caixa
10%
Source: Fitch Ratings
Tier 1 Capital Ratio
Save in the good times!
(%)
16
• Brazil’s loan growth may slow down; but it will
remain stronger than DM and many EM’s
15
• Loan expansion, with lower profits requires
strong capital
14
13
• This is the time to boost capitalization
12
• A market of significantly important banks, hence
their capital base must have some cushion
11
10
2006
2007
2008
2009
2010
2011
jun.12
Source: Fitch Ratings
www.fitchratings.com
10/5/12
16
Agenda
Recent EM Banking Trends
Spanish Banks in LATAM: Not Likely to
Retreat
Brazilian Banks in the Context of Global
Banking Trends
Brazil: How to Live with Lower Interest
Rates
Final Remarks
Final Remarks
• Brazilian banks have been resilient to different economic cycles
• Expansion into new market segments demands adjustments on credit risk tools; results may/will
differ from the past
• Credit costs are the most important variable to follow: loan seasoning, economic activity levels,
household debt and unemployment trends will be key
• Spreads must be aligned with the incurred risk
• Exuberant high profitability ratios are not part of the most likely scenario; however, examples like
Mexico, Chile and Panama prove that a system can be profitable with lower spreads
• Don’t wait until tomorrow to boost/preserve your capital base; it may be too late!
• Medium-size banks will need to reinvent themselves again to preserve their position in the market –
many of them can do it; others cannot
www.fitchratings.com
10/5/12
18
Disclaimer
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Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
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address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
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agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
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LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
www.fitchratings.com
10/5/12
19
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