SAO PAULO (Reuters) - President Dilma Rousseff's government has pulled out all the stops to persuade Brazilian banks to lend more - pushing interest rates to an all-time low, leaning on state-run lenders, and even publicly shaming the industry for its high profits.
Yet banks have generally gone in a different direction, slashing costs as a way to protect their bottom lines from Rousseff's offensive.
Many private-sector banks are cutting jobs and outsourcing services as profitability falls to multi-year lows. Even some state-run banks have indicated they may follow suit. Credit growth, meanwhile, has remained stagnant.
"The sector is naturally focusing on efficiency as part of a 'new normal' - banks in Brazil are changing dramatically," Marcial Portela Álvarez, chief executive of Banco Santander Brasil SA (SANB11.SA), said at a recent event. "Cost efficiency is at the core of those changes."
Bank sector austerity has stung Latin America's largest economy. Activity in the financial sector shrank 1.3 percent in the third quarter as banks adjusted to the changes Rousseff has imposed since April.
Bank struggles were a drag on gross domestic product, which grew just 0.6 percent in the third quarter, less than half the pace analysts had expected. That put Brazil on track for second straight year of below-trend growth.
Government officials describe the problems as a painful but necessary transition after years in which they say banks got far too fat because of the highest interest rates among the world's top 20 economies. Banks' return on equity, a gauge of how much a bank earns per dollar of shareholder money invested, surpassed those of other sectors by a large margin in the past decade.
For years, bankers paid little attention to efficiency since borrowers were charged average annual lending rates above 40 percent and government debt yielded fabulous returns.
Banks in Brazil face high overhead largely due to the low average maturity of their loan books, rigid labor costs and high taxes.
As a result, they lagged global peers in cost efficiency. Expenses in Brazil represented 6 percent of assets last year, compared with 3 percent in the United States and 1.5 percent in Europe, according to Goldman Sachs Group Inc estimates.
But recent data suggests the status quo is starting to change.
SPLIT BETWEEN PRIVATE AND PUBLIC BANKS?
Itaú Unibanco Holding SA (ITUB4.SA) and Banco Bradesco SA (BBDC4.SA), Brazil's largest private sector lenders, have reduced payroll in the past year even as they added branches. So far Itaú has been the only lender among Brazil's top five banks that trimmed sales, administrative and general expenses over the past 12 months.
Bradesco's opening of 1,000 branch openings in the last six months of 2011 has had a limited impact on expense growth. In fact, expense per branch fell thanks to massive investment in information technology, data by Thomson Reuters showed.
In terms of outsourcing, Bradesco has averted boosting its payroll by hiring contractors to sell insurance and other fee-related services and run the bank's service call centers.
At the same time, record defaults prompted non-government banks to put the brakes on credit origination this year. They grew their loan books 0.2 percent in both September and October, much less than the average jump of 2 percent at state-run banks over the same period.
In recent days, executives at government-controlled Banco do Brasil SA (BBAS3.SA) and Caixa Econômica Federal SA CEF.UL have endorsed ways to make operations more efficient. But some investors are taking those statements with a grain of salt, believing state banks are more vulnerable to government pressure to retain staff and aggressively seek market share gains.
Eleven of the 18 analysts covering Itaú have a "buy"-like recommendation on the stock on optimism over the bank's efficiency push. In contrast, the 10 "hold"- and "sell"-like ratings in a sample of 19 ratings for Banco do Brasil were critical of the bank's lack of cost-cutting prowess.
Banco do Brasil, the nation's largest lender by assets, may decide not to replace some of as many as 16,000 employees nearing retirement, a senior executive said last month. At the end of September, the Brasilia-based bank employed close to 114,500 people.
Payroll represents the heaviest expense for banks after unions bargained for wage hikes that topped inflation for years, according to Carlos Macedo, a senior analyst with Goldman Sachs Group Inc.
Like Itaú has done for years, Banco do Brasil may unveil targets for expense growth and efficiency for the first time next year, Sandro Kohler, senior vice president for risk and compliance, told Reuters. The lower the efficiency ratio, which measures expenses as a share of revenue, the more cost-efficient a bank is.
Mortgage lender Caixa hired advisors to help fine-tune its lending practices, Chief Financial Officer Marcio Percival told Reuters. Caixa will spend 700 million reais ($333 million) this year to ease technology gaps that lead to higher expenses.
"There's a long learning curve ahead of us," Percival said, adding that even job reductions are being considered. "You have to understand that it is not easy firing people."
In contrast to Bradesco and Itaú, Caixa's expenses per branch are the highest for Brazil's top five banks, revenue generation per employee lags behind that of rivals and it has twice as many employees per branch than the combined average of Itaú, Banco do Brasil and Bradesco.
With demand for credit likely to sag again in 2013, both private- and public-sector banks will increasingly rely on cost-cutting to meet profit goals, Credit Suisse Group analyst Marcelo Telles recently said.
($1 = 2.10 Brazilian reais)
(Editing by Kieran Murray and David Gregorio)
Trending On Reuters
India's parliament began debating the goods and service tax (GST) on Friday that seeks to transform the country into a common market, but experts said compromises made to enlist the support of states risked diluting the impact of the biggest tax reform in decades. Article
India to host Afghan leader, seeks to regain ground lost to China, Pakistan Full Article