Banco Bonsucesso SA, the Brazilian bank that specializes in paycheck-deductible loans, is expanding into credit cards as bigger banks seek a greater share of the payroll-lending market.
Banco Bonsucesso, the nation’s 65th-biggest lender by assets, increased its portfolio of payroll-deductible credit cards by 44 percent to 346 million reais ($171 million) in the 12 months through June, according to the Belo Horizonte, Brazil-based lender’s second-quarter earnings report. That compares with a 19 percent expansion to 1.89 billion reais for total loans.
Consolidation in Brazil’s $147.5 billion payroll-lending market is fueling concern that Bonsucesso’s profit margins will be squeezed amid rising competition from larger rivals with cheaper funding costs. Banco BMG SA, one of Brazil’s largest payroll lenders, formed a partnership with Itau Unibanco Holding SA last month, and regulators are looking for a buyer for Banco Cruzeiro do Sul SA after it was seized by the central bank in June for accounting fraud. Banco BTG Pactual SA agreed to buy a controlling stake in Banco Panamericano SA in February 2011.
“It’s a reality that the large banks are investing and getting a piece of this market,” Juliana Pentagna Guimaraes, head of investor relations at Bonsucesso, said in a telephone interview. “Credit cards are the future of payroll lending to make money for mid-tier banks.”
Mid-sized banks in Brazil are those with less than 2.2 billion reais in capital.
The state consumer agency of Minas Gerais suspended lending by 10 banks, including Bonsucesso, after consumers complained of firms making it difficult to pre-pay debts and transfer loans from one bank to another, according to a statement on the agency’s website yesterday.
Bonsucesso was “unfairly” included in the list and will take judicial measures have the decision reversed, a press official, who asked not to be identified in accordance with internal policy, said in an e-mail.
In payroll lending, known in Portuguese as “consignado,” banks deduct loan payments directly from employment and pension checks before consumers see their money. Payroll-deductible credit cards allow banks to retain clients while reducing the need to increase long-term funding, said Renato Martins Oliva, head of the country’s association for small- and mid-size banks.
“After the customer gets the card, he can have a direct relationship with the bank,” Oliva said in a telephone interview. “While a regular payroll loan requires funding of about 28 months, payroll-deductible credit cards require 12-month funding.”
Payroll-deductible credit cards are more profitable than loans because the bank can charge higher interest rates, while taking the same credit risk, Guimaraes said. The bank often signs contracts with states and municipalities to issue credit cards to public employees, eliminating fees to intermediaries, she said.
“With higher average rates, no middleman and controlled defaults, these credit cards may have a bigger contribution to the bank’s margins,” said Luis Miguel Santacreu, an analyst at Sao Paulo-based Austin Rating. “But it’s important to remember that it’s still not a big part of the bank.”
Payroll loans have lower default rates than regular lending because of the consignment allowing banks to tap customers’ paycheck, Oliva said. Payroll-deductible credit cards have similar default rates, he said.
Bonsucesso’s delinquency rate for loans overdue more than 90 days was 4 percent at the end of the second quarter, up from 3.9 percent in the three previous months and 3.2 percent a year earlier, according to its earnings statement. The rate for payroll-deductible credit cards more than doubled to 3.4 percent from 1.4 percent a year earlier.
Brazil’s mid-tier banks received another blow in June when regulators seized payroll lender Cruzeiro do Sul, further tightening long-term funding. The action came 17 months after Brazil’s privately owned deposit-insurance fund, known as the FGC, bailed out Panamericano, with a market value of about 2.8 billion reais, amid a fraud investigation by the central bank. Regulators liquidated Banco Morada SA in April 2011 after finding “serious financial violations” at the Rio de Janeiro-based firm.
Moody’s Investors Service downgraded Bonsucesso’s long-term global local and foreign currency deposit ratings to B1 from Ba3 in April, while maintaining a negative outlook. The ratings firm said the lender’s “business model remains under pressure because of increasing competition within the niche segment of payroll lending, and challenging funding conditions.”
Banco BMG is the only mid-size Brazilian bank to sell bonds overseas this year, raising $150 million in March. That compares with $2.35 billion issued by the industry last year and $4.68 billion in 2010, according to data compiled by Bloomberg.
Bonsucesso’s “challenges in terms of profitability, funding and capital are significant,” Alexandre Albuquerque, an analyst at Moody’s in Sao Paulo, said in a telephone interview. “We are still waiting to see the results of the bank’s effort to increase this credit card product on its portfolio.”
The bank’s net income fell 17 percent to 20.4 million reais in the second quarter from a year earlier, according to its earnings statement. Its Basel II ratio declined to 15.3 percent in June from 17.6 percent a year earlier, compared with an 11 percent ratio required by central bank.
The bank’s biggest need is to increase its portfolio of loans and spur growth, Austin Rating’s Santacreu said.
“A partner for Bonsucesso is more than welcome and necessary,” Santacreu said. “The bank would be able to continue growing if it finds a partner.”
Bonsucesso canceled plans to sell shares in an initial public offering in July 2008. Guimaraes said the bank hasn’t seen an opportunity for a merger or partnership, though one makes sense.
“The shareholders never closed the door,” she said. “They are willing to hear and that could add value to the bank.”