Brazil’s Mainstream Banks Seen Weathering Crisis Better than Digital Rivals

Brazil’s large banks have a greater resilience than digital banks as they raise funds at a lower cost, do not need to invest so much in infrastructure, and are not so dependent on a single vertical

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July 18, 2022 | 04:25 PM

São Paulo — The macroeconomic scenario has become more challenging for Brazilian banks in this second half of the year in the face of increasingly consensual forecasts of a US recession, and the impact of the global cycle of high interest rates to contain spiraling inflation on capital flows to emerging countries, according to analysts and industry insiders consulted by Bloomberg Línea.

Quarterly balances released in recent days by US giants JPMorgan (JPM) and Morgan Stanley (MS) have been disappointing, and set off alarm bells in the market due to the reduction in profits and revenues reported in the second quarter. The harvest of results from Brazilian banks begins in the last week of July, and analysts cite default, revenue diversification and cost control as the main points to be observed by investors.

“Any analysis must consider the differences between Brazil and the US,” according to João Daronco, an analyst at Suno Research. “Brazil’s Central Bank started raising the Selic rate long before the Fed. We already have real interest rates, and this benefits Brazil, which could be the first to exit the cycle of rising rates. The climate of caution is greater in the second half of the year, and this may postpone investments,” he said.

And according to Victor Bueno, an analyst at Nord Research, “the large traditional banks, such as Itaú (ITUB4) and Bradesco (BBDC4), have a greater resilience than the digital banks in this new scenario, as they raise funds at a lower cost, do not need to invest so much in infrastructure, and are not so dependent on a single vertical, but the behavior of defaults is worrying”.


“It is still too early to recommend switching positions in bank stocks. The monetary tightening around the world reduces liquidity and increases the risk of defaults for banks, which lend less, but the latest balance sheets still show a solid sector, despite the uncertainties,” Bruno Tebaldi, from Nova Futura Investimentos, says.

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Credit quality

The worsening of credit quality is the main point to be observed in the banking sector’s second quarter financial results, according to analyst Pedro Leduc at Itaú BBA.

“We will avoid digital banks - Nubank (NU) and Banco Pan (BPAN4)- due to high retail credit concentration and funding costs,” Leduc wrote in a report to clients on Itaú BBA’s revised recommendations for the sector with the crop of second-quarter balance sheets.


Banco do Brasil (BBAS3) is the Itaú BBA analyst’s top choice for an “out-performing” recommendation: the bank cites its portfolio as less cyclical and with stronger net interest income trends. Among smaller institutions, he highlights Banco ABC (ABCB4) due to its earnings expansion and stable credit quality.

Daronco, of Suno Research, says that BB’s greater exposure to agribusiness credit helps to strengthen it in the face of a more negative macroeconomic scenario, considering the export profile of the sector, with revenues in foreign currency.

“Banks like BB and Itaú have a strong presence in agribusiness financing, a sector that can compensate when the rest of the domestic market goes bad. They are different from the digital neo-banks, which are very dependent on retail, on individuals,” he says.

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For Nord Research’s Victor Bueno, digital banks that have invested in diversifying their products and services offerings tend to be more protected from adversities in the macroeconomic environment, compared to neo-banks that rely on a smaller portfolio.


“Default should impact digital [banks] more than [mainstream] banks, which have a longer history with their clients and can better control the risk of granting credit, as well as compensating for eventual losses with other business verticals, such as insurance,” Bueno says.

Among the neobanks, he cites the example of Inter (INTR), which invests in the marketplace and has an expanding operation in the United States. For Bueno, Inter is more diversified than Nubank, whose revenue comes more from partnerships with credit card brands, and which make it dependent on the level of domestic consumption, and which is affected by inflation and high interest rates.

“Digital banks work mainly with clients with incomes of up to five minimum wages, a segment which has suffered a lot with inflation,” he says.


Tebaldi, of Nova Futura Investimentos, says on the other hand that, given the more restrictive scenario for fundraising and external financing of fintechs, digital banks must review their remuneration policies for services provided to customers, increase fees and reduce costs, as seen in recent months with the wave of staff cuts in the technology sector.

“It is very heavy investment to enter into the digital world and capture customers. Also, to work, the soul of the business is to invest in digital infrastructure and hire qualified staff. But now, with the cycle of high interest rates, loans have become more expensive, and liquidity has decreased. There is no longer that flood of money that there was in the first years of the pandemic,” Tebaldi says.

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IPOs and M&As

The slowdown in global growth, leading to a moderate or severe recessionary picture, warned of by Swiss bank Lombard Odier, tends to reduce the gains of investment banks with M&A operations and IPOs, according to Daronco.

“It is a difficult year for investment banks that are more exposed and dependent on this vertical, because the movement of M&As and the consolidation of sectors is already much lower. There is a very strong retraction in M&A and IPOs. Banks like BTG Pactual and BR Partners were very active in these operations,” he says.


Even with more clouds on the horizon, the Suno analyst expects the banking sector’s second quarter results to be in line with what was seen in the first quarter. “I don’t expect any big surprises in the balance sheets. I don’t believe that the balance sheets of US banks are an omen of disappointment for Brazilian financial institutions, which have Basel ratios that are still very healthy,” according to Tebaldi of Nova Futura Investimentos.

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Pix and the digital real

Innovations in the financial sector, such as the new Pix modalities (an instant payment system) and the digital real, may have accelerated launches in the face of the challenges of this new era of possible recession in the global economy, Tebaldi says

“New payment media technologies tend to move at a faster pace now, for banks and payment institutions to increase their market liquidity,” he says, in reference to Pix’s impact on retail transactions in an economy still marked by informality.


Brazil’s Central Bank’s latest forecast is that it will launch a digital real pilot project in the fourth quarter of this year. Banks also expect to launch Pix Crédito later this year.

Santander Brasil reports its second quarter results on July 28, before the Brazilian Stock Exchange opens.

Bradesco and Itaú will release their balance sheets on August 4 and 8, respectively, after the bourse’s close.


Banco do Brasil will announce its results on August 10.

Translated from the Portuguese by Adam Critchley