Are Brazilian Banks Approaching a Credit Boom?
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Brazilian banks have been left out of the international bank rally over the past few months. The reason? Brazilian bureaucrats united over aggressive interest rate cuts, which have taken away Brazilian banks’ biggest cash cow -- exorbitant consumer interest rates -- just as default rates started rising. But new documents from the government reveal that a new credit expansion based on quality instead of quantity could be just around the corner. Should you buy now?
A Bad Year
Brazilian bank stocks have had a bad year. Banco Itau (NYSE: ITUB) is down 21% year-to-date, while competitors Banco Santander Brasil (NYSE: BSBR) and Banco Bradesco (NYSE: BBD) are down 12% and 5% year-to-date respectively. In contrast, Santander Brasil’s parent company Santander Group is up 2% for the year and Citigroup has clocked a surprising 40% gain. Brazilian banks’ dismal performance comes from President Dilma Rousseff and the Brazilian Central Bank, which has cut the interest rate to historic lows as the former ordered banks to trim spreads proportionately. The government operates two commercial banks, Banco do Brasil and Caixa Economica, and repeatedly cut consumer lending rates at both to force the publicly-traded banks to lower their rates. Further depressing banks’ share prices, Brazil has slowed to 1.4% growth this year and consumer defaults on loans and credit cards are rising. The interest rate cuts are an appropriate long-term adjustment -- Brazil still has some of the highest interest rates in the world – but for short-term, it means bad stock performance.
Credit Card Ratings
Just how high are Brazil’s consumer interest rates? A staggering 323% on average for credit cards, according to Businessweek. However, Businessweek reports that the rates and how banks apply them are about to change, due to a new law. President Rousseff signed a law that allows credit rating companies to collect enough individual data to generate credit ratings. The law will have two very important impacts on how Brazilian banks give out consumer credit: first, banks can now distinguish between customers with different levels of risk and charge the risky ones just as much or more, and second, in every country to pass a ratings law, credit cards have grown by about 50%.
Brazilian banks are at multiyear lows and they are about to see a massive credit expansion, so now is the time to buy up, right? Perhaps. Different banks are in different positions. Itau specializes in consumer credit and would likely see the biggest increase in customers amongst the publicly-traded banks. However, Itau also carries a higher consumer default rate than Santander Brasil. Santander Brasil accepts lower-risk customers, meaning that it may be able to snag new ones provided better credit information, but will probably see less expansion than Itau or Bradesco. Then there are the state-run banks, which have been luring individual customers away from commercial banks with aggressively lower rates. Finally, strikes by bank workers demanding higher pay and an administration determined to keep rates low for at least another year despite rising inflation make the credit rating law one piece of good news in a very uncertain sector.
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