After the Americanas accounting fraud, which led banks to provision the retailer’s billion-dollar debts, the sector now faces a new dilemma: how to profit from low income.
Even with the drop in defaults among Brazilians in the second half of 2023, mass retail still brings losses to Santander and a very high cost to Bradesco, which recorded a drop in annual profit. Both increased lending above the market during the pandemic, which weighed on balance sheets for last year.
Itaú Unibanco and Banco do Brasil demonstrated that they have credit models that are more suited to the scenario of a decline in Brazilian purchasing power and high interest rates. Furthermore, both have other support pillars, such as agribusiness in the case of BB and high income in Itaú.
“Among the large banks, Bradesco and Santander were the most exposed to loans for retail and low- and medium-income segments”, says a report from the risk rating agency Moody’s.
Data released by the Central Bank last Tuesday (6) shows that the default rate on household loans decreased for the seventh consecutive month in December, to 3.7% from a peak of 4.3% in May 2023.
“The steady decline indicates that more cautious loan origination standards
of banks since mid-2022 are paying off, as, for example, for Itaú”, say Moody’s analysts.
Bank of Brazil
In 2023, Banco do Brasil increased credit granting by 10%, increasing its expanded portfolio to R$1.1 trillion, and saw the result grow to the same extent.
Recurring net profit (which excludes extraordinary items) grew 11% and totaled R$35.56 billion last year, a nominal historical record for the century-old institution, now chaired by Tarciana Medeiros.
BB’s ROE (return on equity, which measures the profitability of the operation) improved from 21.1% to 21.6%, from one year to the next, even with an increase in bad debt and expenses.
In relation to default, the rate for accounts more than 90 days late, which was 2.51% at the end of 2022, rose to 2.92% last December, in a constant increase every quarter. Despite still being below the market average, BB is going in the opposite direction.
In this case, the fault was not with the low-income segment, but with small and large companies that led the bank to almost double its PDD (provision against doubtful payers), to R$30.5 billion.
For Leonardo Piovesan, CNPI and fundamental analyst at Quantzed, the higher provisioning is “very high” and unexpected. “It could be related to agribusiness, which is in a very difficult scenario.”
According to Goldman Sachs, a worse-than-expected harvest in an El Niño year is one of the biggest risks for the bank, which has agriculture as one of its pillars.
After a dramatic 2022, which led to a change in command, 2023 pointed out that the bank’s problem is not so simple to solve.
Bradesco earned R$16.297 billion in 2023, 21.2% less than in 2022, when the company’s result had already shrunk 21%, to R$20.7 billion.
The ROE was 10% at the end of 2023, 3 percentage points below that recorded at the end of 2022 and the worst since at least 2007, the initial year of the historical series made available by the bank — the ideal ROE for investors is around 20 %.
The institution still suffers from the inadequate increase in loans during the pandemic and the high default rates that followed, with the rapid rise in interest rates.
Now, the focus of the new president, Marcelo Noronha, is to restructure the operation, with a lower appetite for risk, cost reduction and investment in high income. For analysts, the reorganization is not expected to show results anytime soon.
With the largest share of the high-income public in the market and a more advanced technological transition, Itaú had the highest profit among its peers in 2023, with an ROE of 21%, an annual increase of 0.6 percentage points. It was R$35.618 billion, 15.7% more than that recorded in 2022.
The rise in earnings came from credit cards and the investment and insurance arms.
Furthermore, the bank maintained the quality of its credit portfolio, which took default rates to 2.8%, the lowest in the last five quarters. Despite the healthy numbers, the bank does not intend to accelerate the granting of credit, says Milton Maluhy Filho, CEO of Itaú since 2021.
Among the four largest banks listed on the Brazilian Stock Exchange, Itaú was the only one that promised to launch its superapp by the end of March.
According to Goldman Sachs, among the biggest risks for the bank are operations in Colombia and Chile, which are not producing good profitability. In 2023, Itaú sold its Argentine arm with a loss of R$1.2 billion.
Like Bradesco, Santander Brasil still suffers from the large granting of credit during the pandemic. The bank had a profit of R$9.383 billion and an ROE of 11.8% in 2023, a drop of 27.7% compared to 2022, when the ROE was 16.3%.
XP Investimentos classified the bank’s 2023 as “a year to forget”.
The worsening of the result is due to the 7.7% increase in the provision against defaults, to R$29 billion. Part of this number is due to Americanas, of which the bank is one of the largest creditors.
Also under new management, Santander is now seeking to make its mass retail operations profitable. To do this, it will reduce the available credit card lines and invest in the interface of its application, making the product offering simpler and more accessible.
Mario Leão, president of the institution, sees a path for the bank to grow in its investment offer, especially in high income, where Santander should focus its efforts this year.