Major Brazilian banks will have to cut spending more, according to Moody’s

RIO DE JANEIRO, BRAZIL – Major Brazilian banks will have to accelerate the pace of spending cuts this year to cope with tight financial margins, according to an analysis by Moody’s.

The rating agency points out that the economic recovery should support revenues and the decline in bad debt provisions will boost profits. However, given historically low-interest rates and increasing competition, cost control will be essential.

“Stronger business volumes should boost origination, and interest rate developments should support margins. However, funding costs will rise along with the prime rate, so margin improvement is likely to be modest. Banks also have a large volume of fixed-rate loans in their portfolios, making it difficult to reprice loans quickly and pass on higher rates to borrowers,” Moody’s said in a report.

The average net margin for large banks was 4.88% in March, compared with a level of 7.47% at the end of 2016. “While we expect margins to increase in the coming months, they will likely remain below pre-2016 levels.”

According to the agency, many of the cost-cutting measures in the past have been in the area of administrative expenses, staff reductions, and branch closures, and that is expected to continue over the next 12 to 18 months.

“We expect the biggest improvement in administrative expenses to come from Bradesco, thanks to a more mature integration process of recent acquisitions, as well as management’s focus on reducing operating costs.”

Moody’s pointed out that all banks are focusing on optimizing service points. However, while Bradesco, Itaú and Banco do Brasil have reduced the number of their branches, Santander has expanded its presence in several regions to capture new business opportunities.

If, on the one hand, technology and the strong migration to digital service channels due to the coronavirus pandemic have helped banks reduce costs, on the other hand, they need to invest in modernization, also to compete with new entrants.

“The expansion of technology departments has also led to the hiring of more employees with more sophisticated skills, requiring higher starting salaries and thus increasing the cost of talent acquisition,” the report explains.

Moody’s also says the full implementation of Open Banking, expected in December, will increase banks’ efforts to maintain lasting relationships with customers and keep them from seeking out competitors that offer lower prices and better service.

The agency points out that large banks have a fairly diversified business, which ensures the stability of fee income, even with stronger competition in some segments.

“The deepening of Brazilian capital markets has the potential to increase fee income generation from investment banking activities, especially for Bradesco and Itaú, which have a consolidated position in this segment. BB has also taken steps to strengthen its participation through a strategic partnership with UBS.”

Source: Valor