Brazil’s fast-growing middle class is driving demand for home loans and credit in Brazil. Maryrose Fison investigates how this expanding demographic group is helping retail banks weather a period of tough macro-prudential fiscal measures



The sight of seasonal labourers walking alongside Brazil’s Translitorânea Highway wasn’t uncommon a decade ago.

The Pan-American artery linking impoverished towns in the northeast with affluent cities in the south formed the most direct route towards work and a wage for the millions that were struggling to survive above the poverty line.

But today the BR101, as the motorway is officially known, looks different. Its lanes have been widened to cope with an increase in vehicles. Traffic jams clog the run-up to intersections at rush hour and the long lines of men that once snaked behind the hard shoulder have disappeared.

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Flexible bank loans and cheaper cars have made auto-ownership a reality for millions.

Sergio Brazil

The transformation of Brazil’s infrastructure system is symbolic of the economic boom that engulfed the country between 2002 and 2010 and directly ties into the retail banking sector.

The increasing availability of credit combined with a thriving manufacturing sector and export industry underpinned record growth in 2010 when GDP rose 7.5%.

While output has slowed in recent years, the retail banking sector has been leading the charge in responding to rising demand from consumers for mortgages and more accessible banking services.

Testament to this trend in the volume of short and loan term loans issued to consumers this year is the volume of mortgages issued to Brazilians this year. In August, the volume of mortgages reached BRL8.25bn ($4bn), 24% more than in July and 4.9% more than the corresponding month in 2011, according to the National Association of Mortgages and Savings, Abecip.

Revenue from loans at Brazil’s top ten banks rose from $50,920,301 thousand in June 2009 to $1,380,720 thousand in June 2012, according the Central Bank of Brazil database.

As infrastructure projects have made cut-off parts of the country more accessible, basic banking services such as deposit and cash withdrawal services have become more commonplace in more rural areas.

The number of Automatic Telling Machine (ATM) terminals in Brazil rose from 134,457 in 2004 to 165,567 in 2009, marking a 19% increase. The North experienced the greatest growth, with a 12.6% increase in concentration of ATM machines over this period.


Distribution of banks

Brazil’s banking sector is dominated by ten key players. In order of size, starting with the largest in terms of the total value of assets, these are: Banco do Brasil, Itau-Unibanco, Banco Bradesco, BNDES, Caixa Ecônomica Federal (CEF), Santander Brasil, HSBC, Voratorium, Safra and BTG Pactual. (See Table 2: Top Ten banks based on total value of assets 2012).

While interest rates have historically been high, over the past six years the government has steadily reduced them bringing the current Selic (interest) rate to 7.5% in October, down from 16.5% in March 2006.

Brazil table1

Sergio Furio, founder and chief executive officer at, an online consumer finance portal, told Retail Banker International that this had provided stability to the banking system but not without a cost.

"Brazil’s traditionally high interest rates created a banking system with high prices, extraordinarily wide interest margins for lending and a consumer not willing to move away from the poupança [a popular kind of savings deposit account]," he said.

"On the lending side, the lower interest rates have made it quite obvious that banks were charging extremely high prices for lending."

Going forwards, he said that retail banks would have to readjust to a "new normal" characterised by increasing competition, contracting profit margins and a constant need for efficiency.

"Significantly lower prices will require significant readjustment of business models.
This year, the government started a battle against excessive banking prices with Banco do Brasil and Caixa leading the interest rate reduction for credit cards and loans.

Brazil table2

Itau-Unibanco, Banco Bradesco and the rest of the private banks had no choice but to follow the trend or suffer significant market share reductions plus reputational damage," he added.

"Far from isolated, lower pricing is here to stay. Government and recently revived competition are making consumers much more price conscious," he added.

Declines in profit margins seen earlier this year at three of Brazil’s largest banks can be partly attributed to the fall in Selic rates.

Net interest margins fell from 11.1% to 6.1% at Itau-Unibanco, from 8.9% to 5.6% at Banco Bradesco and from 7.9% to 4.8% at Banco do Brasil between the first quarter of 2006 and the first quarter of 2012, according to a study published by investment firm PIMCO attributing the source of its data to Morgan Stanley.

Commenting on the study’s findings, Masha Gordon, executive vice president at PIMCO, pointed to the fall in Selic rates.

"Brazilian banks have seen their profitability decline for the past several years but the state-owned banks have begun to accelerate the trend by becoming increasingly aggressive in providing credit at lower interest rates," she stated. "As the Selic has come down, so too have interest margins."

Brazil table3

Yet the findings were not altogether bleak. In spite of macro-prudential fiscal measures hitting margins, demand for many banking products remained buoyant over the same period.

Consumer loans grew 20-to-25%, deposits grew 15-to-20% and the loan-to-deposit ratio remained below 10%.

To offset the downside affects of government growth incentives, banks have remained bullish in their outlook for the future and have developed original growth strategies for the coming years.

Omar Barretto, a press officer at Banco do Brasil, told Retail Banker International that the bank’s goal for the year ahead was to become a benchmark for the industry as well as increase its efficiency.

"We want to be a reference for banking customers in quality, costs of banking services, accessibility and convenience. With that we will be able to strengthen our client base and business generation, increasing our earnings potential," he said.

To achieve this, the bank will use a relationship model for individual customers and companies known internally as the Banco do Brasil 2.0 Programme for Retail Transformation.

"It has the main objective of increasing Banco do Brasil’s operational efficiency through modernisation with a focus on client services," Barretto said.

In the future, he added that the bank had plans to enhance its product and service offerings by expanding its proposition to a wide range of consumer finance needs.

"Banco do Brasil is looking for the diversification of business segments such as insurance, pension plans and savings bonds, credit cards and capital markets to amplify the source of revenue."

Brazil table4

The nexus between Brazil’s retail banking sector and demand for more accessible and flexible products reflects a deeper development in Brazil’s demography.

In August 2011, the number of middle class Brazilians (defined as citizens who have a combined family income worth between BRL$1,000 and BRL$ 4,000) exceeded 50% making the middle class the majority sector of the population for the very first time.

Some 63% of the group comprises families with one or two children and 90% live in urban areas.

The rapid rise in income levels can be explained by several factors. A pioneering government welfare programme known as the Bolsas Familia (family grant) succeeded in lifting 20m people – a tenth of Brazil’s total population – out of abject poverty over the past decade.

The combination of vast natural resources and a profitable manufacturing industry resulted in an increase in jobs, particularly at car plants, resulting in Brazil overtaking Germany as the world’s fourth largest producer of cars in 2009.

The discovery of oil reserves off the coast of Rio and a strong commodity export industry further buoyed individual wealth. Beef, pork and sugar exports currently account for 40%, 15% and 60% of the global market respectively.

With a burgeoning middle class, rising income levels and lower unemployment, demand for mortgage products is expected to continue rising.

To tap into the increasing middle class as well as under-banked communities living in more remote parts of the country, retail banks have begun to expand their geographical footprint, opening more branches outside major cities.


River banks

One of the most innovative branch expansion initiatives to date is Banco Bradesco’s floating bank. To reach those cut off from towns in the forested northwest, it built a bank on a boat which sails up and down the Amazon’s tributaries enabling locals to open accounts and borrow money.

On the technology front, Bradesco has developed its mobile banking services to enable its customers to apply for and receive loans over an iPhone. It has also installed biometric sensors at its ATM machines, eradicating the need for customers to recall six-digit pin codes when withdrawing or depositing cash. The sophisticated sensor is able to identify customers based on the contours, shape and temperature of their palm on a touch pad.

Other stalwarts in the industry have made strides in reaching out to underbanked populations. According to its second quarter 2012 results, Santander Brasil has opened 100 new branches over the past 12 in line with a strategy to intensify relations with customers through improving infrastructure.

Its expanded credit portfolio grew 18% in 12 months and 4% per cent in the second quarter. Net interest income rose 20% over 12 months and net fees grew 2%.

Brazil table5

The value of loans and credits at the end of the second quarter were $95,637m, 18% more than at the end of the second quarter 2011. Total assets rose 0.4% over the same period from $188,602m to $189,426m and customer funds under management rose 2.4% from $162,248 in Q2 2011 to $166,069m in Q2 2012.

Nevertheless, the bank posted attributable profit of €1.15bn, 16.6% less than in the first half of 2011.

In spite of increases in product sales, the falling Selic rate and resulting lower margins seen at some banks are likely to precipitate a debate about the sustainability of Brazil’s prevalent banking model.

Furio anticipates that ongoing downward pressure on profit margins combined with a saturation of traditional bank channels will require an optimisation of customer acquisition costs.

Brazil table6

"Branches are too expensive for a customer that requires less and less human interaction," he said. "The branch model in future will need to be smaller with fourto- six employers rather than 10-to15. Mailing and telemarketing, once a very effective channel to grow credit cards and personal loans, are getting more and more saturated with conversion rates below 1%."

"The online channel is still treated by institutions more as an operational channel with wire transfer and invoice payments than a marketing platform. With upcoming reduction in revenues, banks will need to become more efficient in the way they acquire customers. They will need to migrate from mailing and telemarketing to online customer acquisition."

With greater competition, banks are likely to start looking at ways to minimise costs without compromising on quality and service standards. Furio believes that lower margins will shift the focus within banks to achieving operational excellence.

"As well as the need to reduce customer acquisition cost, lower revenues will come with a need to optimise the back-end of financial institutions. Lean banking programmes will need to be implemented and this goes well beyond IT investment. It represents a completely new way of managing banks internally.

"Every aspect of the organisation needs to be measured and assigned to an owner. The objective will be making financial institutions more efficient by reducing processing time, transportation costs, unnecessary personnel or duplicated processes."