At the end of April the Copom, Brazil’s monetary policy committee, announced it was raising the country’s benchmark interest rate to 9.5 percent from a historic low of 8.75 percent, where it had sat for the previous nine months. The increase means Brazil stays top of the league table of countries with the highest real interest rates, now 4.5 percent a year. Meanwhile most of the countries in the rest of the world, still trying to cope with the massive effects of the international financial crisis, have their base interest rates close to zero. The decision to raise Brazilian interest rates reflects fears that, as the country recovers from just less than positive growth in 2009, of the danger of inflation.
Just three days earlier a leading Brazilian banker, predicting the rise in interest rates, had also forecast that Brazil’s economy will grow between 6.4 percent and 7 percent this year. This is more than the International Monetary Fund is forecasting: the IMF in April said it believes Brazil will grow 5.5 percent in 2010 boosted by strong domestic demand and investments in the private sector. However, this figure is almost a whole percentage point more than the IMF’s previous forecast for Brazilian growth, made in January. It is also a figure that the world’s maturer economies, hit hard by the financial crisis of 2008/09, must dream of.
Certainly the future continues to look bright for Brazil, a country with a huge labour force, abundant natural resources, and, since the economic reforms brought in by its then Minister of Finance, Fernando Henrique Cardoso, in 1994, a promising environment for foreign investment. The requirement to keep inflation under control in recent years meant that Brazil avoided the flood of cheap credit that led to the sub-prime crisis in the United States. What this does mean, however, is that with interest rates still, by Brazilian standards, lower than in the past, and with Brazilian households comparatively unleveraged compared to their European and American counterparts, banks in the country are looking to increase the sums they are lending out, countering the fall in income from lower interest rates.
March saw a leap of 17 percent in loans by Brazilian banks as the country’s economy accelerated, with the loans powered by subordinate bond sales as banks look to lift their credit levels while staying within regulatory limits. The attention overseas investors are paying Brazil has been reflected in demand for the country’s currency, with the real rising 9 percent against the US dollar between February and April, the best performance of any of the leading Latin American currencies.
For a country that has, depending on how you define it, either the eight or ninth largest economy in the world, and the second largest in the Americas after the United States, Brazil has a surprisingly large percentage of its population without access to any banking facilities, at some 40 million people out of a population of 192 million. This is where banks such as Banco BMG, one of Brazil’s leading regional banking operators, have a competitive advantage, since it has products that fit better the needs of much of the bulk of the country’s population than many of its rivals.
The privately owned Banco BMG, one of the top 25 banks in Brazil, was formed in 1930 as Banco de Credito Predial in Brazil’s third largest city, Belo Horizonte, the state capital of Minas Gerais. Six years later, after changing its name to Banco de Minas Gerais, the company began to diversify into areas such as property, manufacturing, service industries and agriculture, and today Banco BMG is the banking division of BMG Group.
Its speciality is what are known as “paycheque deductible” credit operations, where low-risk and highly liquid payroll loans are made that have the repayments taken automatically and directly from salaries or, in the case of people receiving benefits from the Brazilian Institute of Social Security (INSS), their social security or pension payments. Paycheque deductible loans are ideal for that one fifth of Brazilians who do not have bank accounts, and are the fastest-growing form of consumer credit in the country, rising from 21 percent of total consumer credit in 2005 to just under 30 percent by the middle of 2009, according to figures from the Central Bank.
Banco BMG makes pay cheque deductible loans to public sector employees and civil servants from municipal, state and federal governments and military personnel, and also, though to an increasingly smaller extent, employees of private sector companies. The bank pioneered payroll deductible loans to public sector employees, beginning in 1998, and has stayed the market leader in the segment, with an 18 percent share in Brazil’s consigned credit sector, and a 10 percent share in the total credit market. Since September 2004 around 22 million INSS retirees and pensioners have also been able to take advantage of Banco BMG payroll deductible loans.
To service these loans, the bank has a large and loyal network of third-party correspondents and proprietary sales points, with its non-branch-based agency operating structure – the bank has only 12 actual branches – providing enviable business flexibility. BMG thinks its way of working is unique, operating through “correspondents”, typically retail shops, which use agents to target workers and retirees by visiting schools, hospitals and places of work. BMG’s chief executive, Ricardo Gelbaum, was quoted last year as declaring:
“We have a proactive, agent-based model while the national banks have a reactive, branch-based model.” Banco BMG also offers employees in private and public companies the BMG Card, and, for INSS beneficiaries, the BMG MasterCard.
In October last year, despite what were described at the time as “challenging” conditions, Banco BMG successfully sold $300m in Tier-2 bonds. The BMG was one of the pioneer in the market for subordinated debt. The Ba3/B issue, managed by Morgan Stanley, Santander, BTG Pactual and UBS, was priced at 98.15 with a 9.950 percent coupon to yield 10.25 percent. Banco BMG said it planned to use the proceeds for general corporate purposes, including increasing the size of its loan portfolio and to boosting its reference capital.
The company’s results for the first quarter of this year showed net income up more than three and a half times on the same quarter in 2009 to R$150.6m ($87.1m), thanks in large part to the rebounding Brazilian economy and higher credit availability. This was a drop of a third from the last quarter of 2009, however, a fall caused by, among other reasons, an increase in financial intermediation expenses. All the same, the return on average equity (ROAE) was 28.4 percent, 2.4 percentage points higher than the previous quarter. The total credit portfolio grew 35.8 percent over the previous 12 months to reach R$20.2bn at the end of March, with personal credit being the main driver of growth. The own credit and leasing portfolios on March 31 totalled R$7.2bn, 60.4 percent up year-on-year, mainly driven by the increase in loans to individuals. Total assets rose to R$9.9bn, just over 40 percent up on the first quarter of 2009.
The president of BMG, Ricardo Guimarães, believes that the strategy is the main reason for keeping the financial institution as the current leader of the national credit. He recalls that the payroll loans reached only 40 percent of market potential and BMG can further improve your results. Guimaraes remember that Banco BMG’s 80th birthday on July 31 with satisfactory results throughout its history.
Analysts have been predicting that the bank may sell more subordinated debt this year, although Mr. Gelbaum told Bloomberg at the beginning of May that while Banco BMG was “always looking at alternatives” in the market, it has made no plans “at the moment”. Late last year he told another journalist that as local financial markets recuperate, BMG was looking at all possibilities for fund raising, from debentures to an IPO. Raising funds would not only be useful for providing more money for loans to customers: observers believe that a booming Brazilian banking market is likely to see continuing consolidation, and there could be good opportunities for an operator nimble enough to seize them.
Certainly the rapidly rising Brazilian economy means it is increasingly a good time to be a lender: the buoyant labour market and income growth led to a 6.7 percent drop in consumer default in the first quarter of this year compared to the first quarter of 2009, according to the credit rating company Serasa Experian, while for just the months of March 2009 and 2010, the decline in the default rate was even steeper, at 9.1 percent. For an operator like Banco BMG, servicing just those people likely to benefit most from the booming Brazilian economy, the ordinary workers, things can only get better.
