Brazil’s banks have shrugged off the country’s recession—for now

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IT LOOKS like a bad joke: the world’s fastest man promoting a bank in the world’s fastest-shrinking big economy. Yet the use of Usain Bolt’s image on posters for Banco Original, a five-year-old Brazilian bank, is apt in a way. In 2015 Original raced ahead at a clip worthy of Mr Bolt: profits increased by half compared with the previous year, to 111m reais ($30m). Its loan book grew by two-thirds, to 4.25 billion reais, even as Brazil’s economy shrivelled by 3.8%.

Original’s lightning loan-growth stands out. Demand for credit has sagged as the worst recession since the 1930s deprives Brazilian businesses of customers and workers of income or, worse, jobs. With non-performing loans (NPLs) on the rise, banks think twice before lending. After a decade of expansion, outstanding credit barely budged last year; in real (ie, inflation-adjusted) terms it contracted.

But look at Brazilian banks’ bottom lines, and most, like Original, have had a remarkably good crisis so far. Out of 180-odd institutions monitored by the central bank only 25, most of them small, posted losses in 2015. In the year to September the banking sector as a whole (excluding state-owned development banks) raked in net profits of 85 billion reais, up from 66 billion reais in 2014 (see chart 1). Return on equity averaged 15%, down from more than 20% in the mid-2000s, when Brazil prospered on the back of a commodity boom, but better than in the preceding couple of years.

This seems to fly in the face of financial aerodynamics, much as Mr Bolt’s towering figure (too tall for a sprinter, apparently) defies physics on the track. Part of the explanation is that lower loan volumes have been offset by higher interest margins (the difference between the rates banks pay on deposits and those they charge on loans). These have jumped as the central bank has lifted its benchmark SELIC rate by seven percentage points since 2013, to 14.25%, in an effort to curb inflation, currently around 10%. The average price of credit hit a high of 32% a year in October. As rich-world banks bewail negative rates, their Brazilian peers enjoy real returns of around 5% on government bonds, which make up a quarter of their assets, according to José Perez-Gorozpe of Standard & Poor’s, a rating agency.

But Brazilian bankers have been sensible as well as lucky. The industry drew the right lessons from a formative crisis in 1995-98, says Ivan de Souza of Strategy&, a consultancy. Back then distressed loans from failing institutions, many of them state-owned, were hived off into a government-run bad bank and the good bits sold to stronger private-sector rivals. The cleansed system that emerged was more concentrated: today the five biggest banks account for three-quarters of all loans. It was also more conservative, partly because banks must set aside hefty provisions for delinquent loans (at present, 180% of their value). When the global financial crisis struck, only one big lender, Unibanco, got into trouble, from trading losses. (It subsequently merged with a competitor, Itaú, creating Latin America’s biggest bank by market capitalisation.)

In the aftermath of that crisis Brazil’s left-wing government kept subsidised credit flowing through its two retail giants, Banco do Brasil and Caixa Econômica Federal, and the national development bank, BNDES. Rather than compete on price, rivals in the private sector focused on their own asset quality. When car loans began to sour in 2011, hinting at trouble ahead, they shifted towards less risky borrowers and safer assets, such as mortgages (nearly all for first homes, with loan-to-value ratios below 60%) and payroll loans (serviced directly from salaries, predominantly of unsackable public-sector employees). To preserve profits, the private sector let the state-owned banks chip away at its market share, which declined from two-thirds in 2008 to just 45% last year.

Meanwhile banks are putting more emphasis on less volatile, fee-based services, such as insurance and credit cards. A host of measures from voluntary redundancies to sharing ATMs has helped to contain costs. Heavy investment in technology—22 billion reais in 2014 alone—has shunted more than half of transactions online. This is reducing banks’ dependence on costly branches, which are required by law to employ at least two armed guards: last year the sector spent 9 billion reais just on physical security. Banco Original dispenses with bricks and mortar altogether, plumping instead for a digital-only service.

Relative prudence and decent management will, observers agree, help Brazil avert a banking crisis of the sort that befell other struggling economies (think Spain or Greece). Fewer than ten tiddlers have folded—chiefly as a result of fraud. Roughly 70% of loans are funded with deposits. The likelihood of a run on these is a very low: high inflation makes mattress-stuffing costly for Brazilian savers, who also cannot easily invest abroad. The system’s overall capital buffer, currently 15.8% of risk-weighted assets, is well clear of the 11% regulatory minimum.

Most private-sector banks are on course to meet the stricter “Basel 3” capital standards, which come into full effect in 2019. Public ones will have a harder time. They generate half the earnings of Itaú and Bradesco from comparable risk-weighted assets, since they charge lower interest rates (admittedly, their NPLs are also lower, since cheap loans are easier to service). They, too, have begun reining in credit (see chart 2). Nonetheless, J.P. Morgan, an investment bank, reckons that Banco do Brasil (BB), Caixa and BNDES will need to raise 56 billion reais, or 0.9% of GDP, of extra capital.

With a budget deficit of 10.7% of GDP, the government cannot afford to recapitalise the state-owned banks. That makes President Dilma Rousseff’s recent noises about getting BNDES to pump out more subsidised credit all the more alarming. The idea appeals to her left-wing base, whose support she needs to fend off looming impeachment by Congress (over, of all things, failing to make certain payments to state-owned banks on time). Most economists think earmarked loans merely crowd out private investment and force the SELIC much higher than it need be, since the benchmark rate only affects unsubsidised credit, currently just half of the total.

At least Caixa and BB are undertaking (timid) capital-preserving measures. In March BB decided to return just 25% of profits to shareholders, instead of the usual 40%. On March 24th Caixa raised the interest rate it charges on mortgages. There is talk of spinning off its insurance business.

Profits are expected to dip across the industry this year. Natalia Corfield of J.P. Morgan warns that with GDP doomed to shrink by another 4% or so in 2016, delinquent loans will take more than the usual 11-17 months to reach a peak, requiring more costly provisions for longer. With the exception of Bradesco, whose pending acquisition of HSBC’s Brazilian retail business may cut the combined entity’s costs by 30%, banks will struggle to find more savings. And with no more rate hikes on the horizon, interest margins will remain flat at best. Even Brazil’s well-run lenders cannot defy the laws of finance for ever.