Pandemic has slashed banks’ profitability, but Brazil’s Central Bank sees improvement in 2021

RIO DE JANEIRO, BRAZIL – The Covid-19 pandemic has cut banks’ profitability in 2020 to its lowest in at least 10 years by forcing institutions to increase their expenses with provisions against default, the Central Bank (BC) pointed out on Monday, stressing that despite the increased uncertainties, the outlook is for improvement this year.

“The drop in profitability was widespread, affecting banks of different types of control, size and activity segment,” the Central Bank said in its Banking Economy Report released on Monday.

In December 2020, the banking system’s return on equity (ROE) stood at 11.5%, the lowest since official Central Bank records started in December 2010. The year before, the Central Bank had reported an ROE of 16.5% for December 2019.

In 2020, banks’ expenses for Allowance for Loan Losses jumped 30% over 2019 and service revenues slowed with lower economic activity, growing 2.3% after a 6.7% rise the previous year.

According to the BC, private banks’ profitability, institutions that had the most expressive increase in expenses with provisions, fell more than that of public banks in the period. In a comparison that considers the size of the banks, the drop was similar between large and medium-sized banks – traditionally more profitable – and small and micro banks.

For 2021, the Central Bank expects a recovery in profitability, despite what it pointed out as an “increase in uncertainty resulting from the pandemic,” which will continue to be the indicator’s main risk factor.

“The reinforcement of provisions made in 2020 reduces the need for new provisions in significant amounts, and the resumption of economic activity contributes to the growth and quality of credit, in addition to favoring the demand for banking services,” said the Central Bank.

Concentration

The report pointed to a reduction in the concentration of the National Financial System and said that the decline in the market share of Banco do Brasil, Caixa Econômica Federal (Brazil’s savings bank) and the BNDES (National Bank for Economic and Social Development) from 2019 was an “important” factor in this process.

The five largest banks – Itaú, Bradesco, Santander, Banco do Brasil, and Caixa – accounted for 77.6% of the financial system’s total assets in December 2020, down from 81% a year before.

The concentration of total deposits in these institutions fell to 79.1%, from 83.4% in December 2019, while in credit it fell to 81.8% from 83.7%.

Commenting on the reduction in concentration seen since 2018, the BC pointed out that it occurred “despite the fact that, during this period, there were eleven mergers or acquisitions involving financial institutions, with the acquisition of 49.9% of XP Investimentos by Itaú-Unibanco being the most important case.”

The Central Bank also drew attention to the reduction in the market share of public banks such as Banco do Brasil, Caixa Econômica Federal and BNDES, from 41.3% of total assets in 2018 to 37.5% in 2020, pointing out that this downtrend was partly due to an increase in the share of institutions that are not among the five largest, “which contributes to an increase in competitive conditions.”