Banks: with crisis abroad, Brazilians can grow – 03/19/2023 – Market
The Brazilian banking system is recognized as a global reference for solidity in the sector. This image has been tested in recent days, with the crises faced by medium-sized banks in the United States, and by the European giant Credit Suisse. In addition to passing the test, the international crisis could open up good opportunities for local giants, according to specialists.
The week between March 13th and 17th was quite turbulent for the global financial system. In the United States, there was the bankruptcy of Signature Bank and SVB (Silicon Valley Bank), bankruptcies comparable only to those registered in 2008, even when dealing with medium-sized institutions in the country.
To avoid another crash, 11 major US banks came together to inject nearly $30 billion of capital into First Republic Bank.
In Europe, the crisis is even more worrying. Credit Suisse, one of the largest banks on the continent, needed help from the central bank of Switzerland, which provided a line of US$ 54 billion to the institution.
Meanwhile, in Brazil, the banks were virtually unharmed in all the news. The performance of the shares serves as a parameter for this conclusion.
Since closing on March 10th, the shares of Banco do Brasil, Bradesco, Itaú Unibanco and Santander Brasil have fallen below 4%, in the worst case scenario. Lows greatly boosted by the performances this Friday (17), a day of global pessimism in the markets.
In the same period, Credit Suisse shares traded on the Zurich Stock Exchange fell more than 25%. Even after recovering part of the losses on Thursday (16), when it rose almost 20%.
First Republic shares, traded in New York, are down nearly 70% for the week. After rising nearly 10% on Thursday following the bank bailout announcement, the stock dropped nearly 30% again on Friday.
But distrust also infected other major American and European banks. Santander is a curious case. While the Units of the Brazilian subsidiary retreated 3.71% in the week, the parent stock, traded in Madrid, retreated more than 12%.
The also Swiss UBS, the French BNP Paribas, the German Deutsche Bank and the British Barclays accumulated losses of at least 10% in their market values.
This Friday, after the closing of the markets, the news emerged that UBS is in negotiations to buy part or all of Credit Suisse.
The boards of directors of Switzerland’s two biggest banks will meet separately at the weekend to discuss Europe’s most significant bank merger since the 2008 financial crisis, according to sources interviewed by the Financial Times.
Among the American giants, the damage was less. Even so, the falls were more intense than those registered by Brazilians.
The worst performer was Citigroup, which fell more than 8%. Goldman Sachs, JPMorgan and Morgan Stanley were down close to 6% for the week.
Opportunities that open up
For experts who closely follow the banking sector in Brazil and around the world, the crisis opens up the chance for greater internationalization of local banks. Even for those outside the circle of the five giants.
“In the short term, bank prices abroad will become cheaper. In the last 24 hours, I’ve already heard many conversations in the market about this. I believe that some movements may happen”, says Eduardo Centola, executive director and partner of Banco Master.
Master himself is close to setting foot in Europe. In 2022, the bank closed the acquisition of 100% of BNI, from Portugal. To be completed, the operation needs the approval of the Central Bank of Brazil and the European authorities.
Centola claims that even the corporate structure of banks abroad facilitates the entry of Brazilian capital. “In most cases, the capital is quite dispersed. When you buy a stake of 10% to 15%, in practice, you act as a controller. You will have most seats on the board, for example”.
Alexandre Espirito Santo, chief economist at Órama Investimentos, also believes that it can increase the attention of Brazilian banks to markets abroad. “I think it’s very reasonable. It’s not necessarily what will happen. But in addition to being solid, the banks here are profitable, so it becomes something possible.”
Another characteristic of the Brazilian market that may begin to be noticed abroad is its concentration. Espírito Santo recalls that the banking segment in the United States is still quite fragmented.
“In the 2008 crisis, more than a thousand banks went bankrupt there. Even so, around 30% of deposits are in the hands of smaller banks”, says the economist at Órama.
What are the causes of the crisis?
In the United States, the reason for the failure of medium-sized banks, such as SVB, is basically the recent rise in interest rates in the country, and the impact of this movement on the banks’ balance sheets.
Centola, from Banco Master, explains that SVB had long-term US Treasury bonds in its portfolio. As interest rates rise, these bonds lose their value. And banks need to mark these securities to market, that is, update this loss in value of the securities in their results.
“If the bank held this bond until maturity, it would not have any problem. But when this loss of value on the balance sheet was noticed by the market, many customers rushed to withdraw their funds from the SVB. The bank had to sell its bonds with depreciated values . This created a liquidity crunch,” says Centola.
In an analysis on the subject, Bruce Barbosa, founder of Nord Research, says that “any trading desk intern” would realize that the SVB would have problems with its resource allocation strategy. “Since the 1980s there has not been such a big squeeze on interest rates in the United States. The banks are not knowing how to deal with it”, says Barbosa.
Credit Suisse’s case is different, says Centola. “They have one more image problem, after so many scandals and losses since last year. Customers and the market no longer feel safe in the bank”.
To ensure that SVB and Signature Bank customers would run out of funds, the Fed made $25 billion available for this purpose. This type of help raises questions even among market agents.
For Espírito Santo, from Órama, this movement by central banks carries the concept of “moral risk”. “The bank does a lot of silly things, and ends up being ‘rewarded’ with a salvation. The point is that central banks and governments need to make choices. If the banks start to fail, the real economy collapses.”
He says that the biggest risk of a bank failing is the ripple effect it will have on companies, with a lack of resources to pay employees and suppliers.
For Centola, on this point, Brazil also has a mechanism that should be a global reference. “The FGC (Credit Guarantee Fund) is set up by the banks themselves, and guarantees deposits of up to R$250,000. The big problem is when a central bank wants to guarantee all deposits. Then the system believes it can run any type of risk , which will be saved”, says the Master’s partner.
The model for supporting First Republic Bank is as close to ideal as possible, says Centola. “I also believe that it is necessary to have some kind of counterpart when a bank is assisted”. In this sense, the FRC announced this Friday the suspension of dividend payments, which dropped the bank’s shares.