Fitch: Top Brazil Banks Will Keep Adapting to Preserve Earnings
OREANDA-NEWS. Brazil's three largest private sector banks will focus on tighter cost controls, enhanced cross-selling initiatives and increased fee income to manage the challenging economic environment in Brazil, Fitch Ratings says. We expect this pressure to remain on the banks through second-half 2017.
The biggest private-sector Brazilian banks have mostly exhausted the strategies they used to manage 2015's downturn, including repricing their loan portfolios, improving collateral coverage and reducing exposure to lower credit borrowers while expanding their excess loan loss reserves.
In 2016 the challenge will be to offset lower business volumes, to absorb expected rise in retail lending delinquencies and the prospect of an unprecedented rise in corporate credit defaults. Their strategies will be focused on stringent cost control and a seeking a rapid expansion of fee income and other noncredit revenues. The main generators of fee income are often account service fees and credit card fees. Itau Unibanco's 2016 guidance for its credit portfolio growth ranged between -0.5% and 4.5%, while fees and commissions ranged between 6% and 9%. Banco Bradesco's guidance was in the same range.
The continued recession has intensified asset quality concerns for both corporate and retail portfolios, and Fitch expects the banks to limit their exposure in these areas. Loan growth in 2016 should be close to, or below, inflation, according to the banks management teams. Loan growth at Brazilian private banks had been in the lower teens from 2011 to 2014.To mitigate the impact of lower net interest income on profitability, banks will concentrate on cutting noninterest expenses and boosting fee income and other noncredit revenues. Cost-cutting initiatives vary from bank to bank but usually include laying off middle management executives, reducing bonuses, downsizing business units (particularly investment and corporate banking, equities sales and brokerage) and renegotiating office rents and service contracts.
Increased cross-selling to existing clients rather than acquiring new ones has been one of the most common strategies to raise revenue and contain credit costs. Fee income from retail banking, brokerage, asset management, credit cards and insurance operations may help retain profitability. Investing in IT, focusing on digital banking and expanding each bank's foothold in the credit card business aim to leverage the importance of noncredit revenues and expand profitability per client. Digital banking would lower overall fixed costs while overhead should decline as the traditional model of physical branches is eventually eclipsed by digital platforms.
Brazil's largest banks will likely continue to pursue business segments with reasonably positive profits amid the economic crisis and to adapt their business models to the challenging scenario. Itau Unibanco's acquisition of Recovery, a leading loan recovery company previously owned by BTG Pactual, is one example of this strategy. With this acquisition, Itau may improve its own loan recovery performance while also leveraging Recovery's expertise with loan recovery services and acquiring written-off and nonperforming loan portfolios, which could boost profits from higher-than-average recovery success.
These strategies' effectiveness will be tempered by how well they complement the banks' business models and commercial strategies and how the banks manage adjustments to their cost structures.
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