RIO DE JANEIRO, BRAZIL – It is no coincidence that in one year, and in the next, the government’s hunger for tax collection targets institutions to reinforce their own cash flow or to finance some benevolent package.
Next year should be no different because the profitability of banks increases.
“Financial institutions’ indicators are improving. And the idea is that returns will increase with the economic rebound prospects. Profits should increase with loans, although banks are more selective, and also with the intensification of cost reduction,” says Alexandre Albuquerque, vice president at Moody’s Investors Service, who sees no drama in tougher competition with tools being implemented, such as open banking.
Detailing a report on the outlook for large Brazilian retail banks, Albuquerque recalls that open banking was announced some time ago by the Central Bank (BC) and that banks are preparing for this new scenario of sharing customer data. “Banks see it as an opportunity and are not taking a defensive position towards it. On the contrary, big banks are now showing greater concern for customers and not just profitability.”
The expansion of fintechs, begun some 3 years ago, has also raised expectations with increased competition. However, fintechs have established themselves in niche markets, mainly as means of payment, Moody’s vice president says.
“There has been a decrease in banks’ earning margin from fees. But large retail banks live with lower revenue. The reduction in revenue does not threaten the sector, because institutions have a wide diversification of revenue sources. Therefore, large banks are able to adjust to market changes,” he asserts.
Alexandre Albuquerque states that big retail banks are not idle. On the contrary, they are highly focused on digitalization.
“They have all been creating something. Bradesco created Next, Itaú developed internal platforms. And it should also be noted that banks have different focuses on clients. The average spending rate of fintechs’ credit card customers, for example, is very low. Therefore, for the time being, large banks are not directly threatened because they offer customers complementary products, such as insurance and investments through assets.”
The credit rating agency’s report notes that Santander Brasil will continue to invest in its digital platform to expand its product offering to customers, a strategy the bank has followed in past quarters. The bank has been using its digital channels to offer loans to households and small and medium-sized businesses.
As a result, the bank has improved its recurring revenue origination in recent quarters, although in absolute terms it still remains below that of the other three banks.
Increased liquidity
Albuquerque says that 2 or 3 years ago higher interest rates helped large banks with alternative revenues. The drop in the SELIC rate to record lows has reduced this revenue, but interest rates are rising again, although far from double digits. And the liquidity available in the banking system is invested in government bonds.
Moody’s vice president explains that liquidity for precaution and security has increased in recent months, but much of this is due to precautionary measures adopted by the Central Bank last year, when some banks were not lending as much. “There has been a higher retention of liquidity, but we should return to levels similar to before the pandemic next year.”
Despite the improvement of indicators and the economic scenario – with economic recovery and more normalized production in 2022 – Moody’s sees the reduction of costs in large banks as an inescapable measure.
“The number of employees becomes a particular focus of attention, not least because of the digitalization process. Although there is a reduction in the number of employees and branches, the average cost per employee may even increase because there is a change in the profile of professionals. Digitalization is in the contact with clients and also in internal processes. Labor tends to be more specialized and sometimes more expensive,” says Albuquerque.
Moody’s signals that there is no widespread dismantling of branches. For the 4 largest retail banks – Itaú Unibanco, Bradesco, Santander and Banco do Brasil – maintaining branches is still essential in more remote areas and in underserved municipalities.
“With a greater insertion of technology, changes may occur, with a profile more suited to a new type of service [accelerated by the pandemic itself]. Branches can become service stations or become lighter.”
In its report, Moody’s assesses that to leverage gains in the next 12 to 18 months, Bradesco will be the institution presenting the greatest improvement in administrative cost control, due to a more mature integration process that goes beyond the reduction of operating expenses.
Banco do Brasil has already launched staff reduction programs earlier this year, the study points out.
Source: Exame