Oct. 19 (Bloomberg) -- Brazil’s push to drive down consumer borrowing costs is eroding the value of its biggest banks.
Itau Unibanco Holding SA, Brazil’s largest bank by market value, is trading at 9 times its estimated earnings for the next 12 months, the cheapest relative to the Bovespa index since December 2009 and down from 10.96 times a month ago. The country’s three other biggest lenders -- Banco Bradesco SA, state-controlled Banco do Brasil SA and Banco Santander Brasil SA -- have also fallen to their lowest versus the benchmark in at least a year, data compiled by Bloomberg show.
Analysts have been trimming earnings estimates for Brazilian banks amid government pressure to cut consumer credit costs as the central bank lowers benchmark rates to record lows. President Dilma Rousseff said last month that doing so would reduce their profits to “civil levels.” Banco do Brasil and state-run Caixa Economica Federal have led the way with lower rates and fees, prompting private banks to follow suit.
“The times of very high returns are over,” Gustavo Schroden, an analyst at BES Securities, said in a telephone interview from Sao Paulo. “The strategy to use state-controlled banks to force the others to reduce interest rates and service fees seems natural and will not change. This fiercer competition is part of the scenario for financial institutions from now on.”
Itau declined 1.1 percent to 29.50 reais at the close of trading today in Sao Paulo. Bradesco slid 0.3 percent to 32.35 reais, while Banco do Brasil dropped 0.9 percent to 22.70 reais and Santander retreated 1.8 percent to 14.63 reais.
Itau Shares Fall
Itau has fallen 13 percent this year as the Sao Paulo-based bank cut its average monthly interest rate on consumer loans to 3.38 percent earlier in October from 4.2 percent in December, 2011. On Oct. 17, the bank also announced it would reduce some service fees by as much as 33 percent. Osasco, Brazil-based Bradesco reduced its monthly average rate from 5.15 percent to 3.83 percent. Banco do Brasil has dropped 4.2 percent, while the Bovespa index is up 3.8 percent.
“Itau is focused on improving its efficiency by cutting costs and increasing revenues,” the bank’s press office said in an e-mailed response to questions. “With this new scenario of lower profitability, Itau is seeking to raise its income with services and non-banking financial products, like insurance.”
Bradesco declined to comment. Banco do Brasil and Caixa didn’t respond to e-mails and phone calls seeking comment.
Brazilian consumers paid an average of 35.6 percent on loans annually in August, down from 46.2 percent a year earlier, according to data compiled by the central bank. That’s the lowest since at least 1994, when the monetary authority began monitoring the figure. Consumer rates in the U.S. declined to 8.06 percent in August from 11.39 percent a year earlier, according to Bankrate.com.
It may be premature to reduce earnings forecasts because lending growth will likely offset falling profits caused by lower interest rates on loans, said Luis Miguel Santacreu, an analyst at Brazilian rating company Austin Rating.
“It seems too early to make such a negative forecast for Brazilian banks,” Santacreu said in a phone interview from Sao Paulo. “These financial institutions are very well capitalized and there is a lot of room for credit to expand, comparing the country’s total financing portfolio with the world average. Banks could compensate for a decline in revenue in the short term with a growing loans portfolio.”
Domestic credit provided by Brazilian banks amounted to 98.3 percent of the country’s gross domestic product in 2011, compared with a global average of 163.5 percent, according to the World Bank.
Banco do Brasil’s lending growth is outpacing Itau and Bradesco. The bank increased its outstanding loans to 508.2 billion reais in the second quarter, up 20 percent from a year earlier, according to a regulatory filing. That compares with a 15 percent gain for Itau and a 14 percent rise for Bradesco.
Lending in Brazil has surged 67 percent since 2009, data compiled by the central bank show. Expanding credit pushed the default rate to the highest in almost three years, sapping consumer demand and threatening to saddle banks with bigger losses as overburdened consumers take on more debt.
Banco do Brasil and Caixa, both based in Brasilia, have been lowering interest rates and service fees since August 2011, when the central bank started cutting the Selic rate. Policy makers have since reduced the benchmark by 525 basis points, the most among Group of 20 nations, to a record 7.25 percent. Rousseff has compelled state-run lenders to cut borrowing costs as part of an effort to boost growth that includes tax cuts.
The average return on equity for Brazil’s biggest banks, which fell to 18.2 percent last year from a 2005 peak of about 30 percent, will decline to 16.2 percent this year and 16 percent in 2013, Philip Finch, a strategist at UBS AG in London, wrote in an Oct. 11 note to clients. The average return on equity is a measure of how efficiently companies generate income.
“We view ongoing lending rate reductions instigated by state-controlled banks as structural in nature with an additional cyclical component, and do not expect lending rates to return to former levels once GDP growth recovers,” Finch wrote. UBS lowered its earnings-per-share estimates by an average of 11 percent for 2012 and 16 percent for 2013 for the Brazilian banks it covers.
Caixa, Banco do Brasil, Bradesco and Itau said last month that they’re cutting credit card rates, with Banco do Brasil lowering some by as much as half. The state-controlled banks also reduced fees on banking services this month. The reductions make it “increasingly difficult for the banks to compensate for revenue losses on credit card rates,” Rafael Ferraz and Francisco Kops, analysts at Banco J. Safra in Sao Paulo, wrote in a note to clients on Oct. 1.
Credit cards account for about 10 percent of total loans for Itau, compared with 7.1 percent at Banco Santander Brasil SA, 6.6 percent at Bradesco and 3 percent at Banco do Brasil, according to a Sept. 25 report by Deutsche Bank AG.
“The rate cuts are definitely not positive for the banks,” said Schroden at BES Securities. “After looking at earnings results in the following quarters, we’ll see how the banks adjust their strategies and which stocks remain good investment opportunities.”
To contact the editor responsible for this story: David Papadopoulos at email@example.com