Rousseff’s Rate Cut Push Undermines Itau’s World-Beating
Brazil’s President Dilma Rousseff has settled on a crowd-pleasing target as part of her campaign to lower interest rates: some of the world’s most profitable banks.
In response to growth that slowed to 2.7 percent in Latin America’s biggest economy last year, Rousseff has turned up the pressure on private lenders to force them to lower what she called “unacceptable” rates of an average 44 percent on consumer loans. She’s also altered 150-year-old rules guaranteeing savers minimum returns to pave the way for the central bank to lower its benchmark rate to a record low.
The country’s biggest lenders, such as Itau Unibanco Holding SA (ITUB4), have responded by cutting some rates. While that may mollify Rousseff, the most popular leader in the Group of 20 nations, according to polls, it won’t help bank profits that are being compressed by a rise in delinquency rates and will decline further with lower returns from government bond holdings, according to Deutsche Bank AG and Credit Suisse Group AG. (CSGN) Brazil bank stocks have lost a sixth of their dollar value since April.
“Attacking the banks works everywhere,” Albert Fishlow, an author of several books on Brazil’s economy and a former top U.S. diplomat to Latin America, said in a phone interview from New York. “People are frustrated in Brazil with the failure of the economy to pick up.”
Labor Day Offensive
The focus on the banks comes as Rousseff struggles to invigorate an economy that grew last year less than Russia, India, China and most of Latin America. Besides cutting taxes on consumer goods and boosting low-cost lending by state-run banks, policy makers have cut their key rate by 3.5 percentage points since August. The president has repeatedly called on banks to join that effort by reducing what they charge for loans.
Her rhetoric reached a high point in a nationwide televised address to commemorate international Labor Day on May 1. She said it is “unacceptable that Brazil, which has one of the most solid and profitable financial systems, continues to have the highest interest rates in the world.” The $2.1 trillion economy will only be competitive when interest rates -- the second-highest in the G-20 when adjusted for inflation -- fall to global levels, she added.
Even as the benchmark Selic approached record lows, Brazilians paid an average of 3.8 percentage points more on consumer loans in March than they did in December 2010, according to central bank data.
Unanswered Phone Call
The Sao Paulo-based banking federation, known as Febraban, says charges for loans are still high because of delinquency rates, which have risen to 7.4 percent of consumer loans in March from 5.7 percent in December 2010. Lowering borrowing costs also depends on the government reducing taxes, reserve requirements and red tape, the group says.
While the fall of the Selic helps, credit expansion will be sustainable only when both lenders and borrowers feel optimistic about the economy, Febraban’s chief economist Rubens Sardenberg said in a report on May 7. “You can lead a horse to water, but you can’t make it drink,” he wrote.
Sardenberg’s comment angered Rousseff, who refused to take a phone call from Luiz Carlos Trabuco, chief executive officer of Banco Bradesco SA (BBDC4), according to a government official familiar with the episode. Instead, she sent Finance Minister Guido Mantega to demand a public apology from Febraban, said the official, who isn’t authorized to discuss the matter publicly.
The day after Sardenberg’s report was published, the group issued a statement saying his analysis doesn’t reflect its official position or that of its members. Bradesco and Febraban declined to comment on the matter, according to officials who could not be identified because of internal policy.
185% Interest Rates
Rousseff’s demand for lower bank spreads has resonated with the public, said Fishlow, who served as deputy U.S. assistant secretary of state for Latin America under President Jimmy Carter. Brazilian consumers pay an average of 185 percent a year on overdraft loans, while companies can pay as high as 107 percent on some credit lines.
Rousseff’s approval rating stands at 64 percent, the highest ever for a Brazilian president after a year and three months in office, according to a Datafolha poll of 2,588 people taken April 18-19, which had a margin of error of two percentage points.
The rates and fees charged by Brazil’s banks, along with the returns they have traditionally earned on bonds paying the benchmark rate, have put them among the world’s most profitable. The average return on equity for the country’s top lenders, a gauge of how well a company invests shareholder capital, was about 17.9 percent last year, data compiled by Bloomberg shows. That compares with 7.4 percent in the U.S. and 2.2 percent for the biggest banks in Europe.
Rousseff and Mantega stepped up their campaign in April by ordering state-owned banks to cut rates. Caixa Economica Federal, Brazil’s fifth-largest lender by assets, cut borrowing costs by as much as 88 percent on some credit lines. Caixa announced a new round of rate cuts today, including reductions on building and auto loans.
The big private banks followed suit. On April 18 Itau and Bradesco, respectively Brazil’s first and second-biggest lenders by market value, cut some targeted credit lines, with Itau’s rate on auto loans falling 8 percent to as low as 0.99 percent a month for some borrowers.
Itau is readying a new round of rate cuts, said CEO Roberto Setubal. “We revised our interest rates on loans, made adjustments, and we are competitive,” he said in an e-mailed statement. “We will continue adjusting as the Selic falls.”
Other analysts point to the Selic rate, which is expected to drop again by a half point to 8.5 percent at the policy meeting this month, as the main threat to returns. Credit Suisse said in a May 4 report that big banks could see earnings fall 3.3 percent after a year if the Selic declines to 7.5 percent.
Itau reduced its Selic forecast to 7.75 percent from 8.5 percent, according to a report released today. The bank also lowered its 2012 growth prediction for Brazil to 3.1 percent from 3.5 percent.
“This could undermine the health of the financial system and thus of Brazil’s ability to continue to weather an uncertain global environment,” Mario Pierry, an analyst at Deutsche Bank in Brazil, wrote in a May 4 report.
Itau has fallen 18 percent since the start of April, while Bradesco fell 8 percent. The benchmark Bovespa (IBOV) stock index fell 7 percent over the same period.
Consumers, who are already overstretched, may become even more leveraged if borrowing becomes less expensive, said Pierry.
Asset management fees, which accounted for 14 percent of banks’ 2011 pretax earnings, may also come under pressure, Marcelo Telles, chief finance analyst at Credit Suisse in Sao Paulo, said in a phone interview.
As the benchmark rate falls, investors will be tempted to shift money from fixed income funds into tax-free savings accounts. Telles estimates that banks will have to cut fees to between 0.5 percent and 1 percent from as high as the 5 percent they can currently earn to remain competitive.
Rousseff has tried to prevent any dumping of the bonds, the government’s main source of financing. This month she scrapped rules dating back to Pedro II’s monarchy 150 years ago that guarantee returns, currently 7.4 percent, on savings accounts. The new rules link the accounts to 70 percent of the Selic when the key rate falls to 8.5 percent or lower.
Still, in making way for lower rates, bankers fear she may be reviving another obstacle that has long plagued Brazil’s economy: high inflation. Economists forecast inflation of 5.12 percent this year and 5.56 percent in 2013, according to the most recent central bank weekly survey.
“Inflation could be re-ignited,” Pierry wrote in his report, adding that “we see several unwanted side effects to the banking sector from a sharp reduction in market rates and from forced reductions in credit spreads.”