Brazil's Banks Discover A Profit Machine: Making Loans

In the days of wildly rising Brazilian prices, inflation was a banker's best friend. Brazilian banks got nearly half their revenues from the "float," funneling funds from customers' checking accounts into government paper paying interest rates of more than 40% per month. But the days of easy money are over, brought to a halt by President Fernando Henrique Cardoso's currency stabilization plan. It has slashed monthly inflation to 1% and chopped banks' gains from the float to only 2.9% of revenues, from 40% just two years ago (chart).

Taming inflation has touched off a revolution in how Brazil's banks operate. Many banks now find themselves in the curious position of having to increase lending to bolster profits. Banco Bradesco, Brazil's biggest privately owned commercial bank, nearly doubled its loans outstanding, to $12.8 billion at the end of June, up from $6.6 billion a year earlier. Banks "can now get back to one of the major functions of a banking system--providing credit," says former Finance Minister Marclio Marques Moreira, a senior adviser to Merrill Lynch & Co.

SHUTTING DOWN. At the same time, the search for revenue is spurring banks to offer new products, from investment funds to computerized home banking and personal shopping services. "To survive and succeed, the banks are going to have to reinvent themselves--and many are," says Ira A. Jackson, senior vice president for external affairs at Bank of Boston, whose Brazilian branch ranks No.15 among the country's commercial banks.

For Brazil's economy, a successful overhaul of the banks is critical to sustaining the country's three-year growth surge, which is expected to boost gross domestic product by 5.5% this year. Banks will have to play a key role in mobilizing savings--which are still a modest 20% of GDP, compared with 25% in Chile--and channeling investments into productive sectors of the economy.

Not all banks are ready for the tougher environment. Some that became overdependent on float gains have shut down. But Brazil's top commercial banks are making a smooth transition.

Take Unibanco, the fifth-largest private commercial bank with $14.1 billion in assets. It upped its lending and fees after revenues from playing the float fell from 49% of total revenues in 1993 to just 1.1% in the first half of this year. Despite that plunge, net income of $75 million in the first half was not far off the $82 million posted in the same period of 1994. Moreover, "we now have more investment banking and asset management opportunities," says Executive Vice-President Fernando Sotelino.

Lower inflation is encouraging middle- and upper-income Brazilians to use more credit and make longer-term investments. To attract their reals--Brazil's new currency--Unibanco has introduced such products as fixed-income and equity funds for investing at home and abroad and such services as personalized financial software for affluent clientes exclusivos.

TWICE A DAY. Banco 1, a Unibanco subsidiary opened in late July, emulates Domino's Pizza in upscale personal finance. In a hurry to get a few hundred dollars out of your account? Phone, fax, or E-mail Banco 1, and a courier will deliver the cash within 90 minutes, whether you're at home or at the shopping mall. Banco 1 even offers to set up floral arrangements and travel packages for clients. "Our strategy is that the customer should never have to leave his home or his desk," says Chief Executive Jose Ricardo Quintana.

Although inflation offered easy profits from the float, it also forced Unibanco and others to become agile money managers. To keep pace with rampant inflation, banks developed computer systems that enable them to clear checks twice daily. "A bank in Brazil has to be at the top of its game and have state-of-the-art technology," says Bank of Boston's Jackson. "If you think this is a backwater, you'll be left behind." Now, banks are finding new ways to cash in on their technology. Unibanco is selling home software and computer packages in a joint venture with Microsoft Corp. and Compaq Computer Corp. Microsoft Chairman William H. Gates III plugs Unibanco in Brazilian TV commercials. By emphasizing home banking and automatic teller machines, Unibanco has raised its customer base to 900,000 depositors, up from 500,000 in 1990.

Banco Bamerindus, No.3 among privately owned banks with assets of $17 billion, is chasing customers with a mobile automatic teller machine. Its ATM van will be on call, Bamerindus says, to travel to street fairs and workplaces.

Heavyweight Bradesco, with $28.1 billion in assets, has also come up with new ways of snaring clients. To ease the scarcity of mortgage money, Bradesco in late September announced a system of "linked savings" accounts. Customers who agree to make time deposits with minimum maturities of 36 months get a commitment from the bank to finance 50% of the price of a house or other real estate for up to 10 years.

For some banks, though, the loss of inflationary revenue has spelled ruin. In August, Brazil's central bank took over the country's oldest and eighth-largest private bank, Banco Economico, after it defaulted on loans. The central bank also has taken over the state-run banks of So Paulo and Rio de Janeiro, long used by state governments to finance deficit spending. Of Brazil's 230 banks, many of the smaller ones are likely to close over the next five years, says Jose Garca-Cantera, Latin American banking analyst at Salomon Brothers Inc. in New York. But there's little risk to the banking system, says Garca-Cantera, because the big banks have good liquidity, asset quality, and coverage of nonperforming loans.

However, tougher competition from private banks seems likely to diminish the role of giant Banco do Brasil, with $85 billion in assets and 3,100 branches. A 51% stake is held by the federal government, with 49% of shares publicly owned and traded. The government funnels credit to groups such as farmers by subsidizing interest rates on the bank's loans to those sectors. "As the economy develops, you don't need that kind of bank," says Garca-Cantera. Already, Banco do Brasil's assets have fallen, from $103 billion at the end of 1993.

Meanwhile, the top privately owned banks also are using their financial expertise and resources to profit from nonfinancial investments. Unibanco has the franchise to develop Blockbuster Videos Inc. stores in Brazil. Bradesco recently announced a venture with AT&T and Brazilian media giant O Globo to invest around $1 billion over five years in cellular phones and other telecom services. And Banco ItaPound , the No.2 privately owned bank with $20 billion in assets, is taking its Brazilian knowhow to neighboring Argentina, where it plans to set up more than 35 branches.

For a preview of how low inflation will transform banking, Brazilians can look to Argentina. Loans by large private banks there quadrupled in two years after Argentina stopped hyperinflation with its 1991 stability plan.

For the fittest Brazilian banks, that's good news.