* Recurring profit slumps 8.5 pct to 1.5 bln reais
* Portela sees changes in sector within two years
* Profitability to hinge on efficiency, not revenue
By Guillermo Parra-Bernal
SAO PAULO, Oct 25 Brazil's banking sector will
undergo profound changes over the next two years as government
efforts to keep interest rates at record lows translate into
lower credit costs and more competition, the head of the
nation's largest foreign lender said on Thursday.
Banks in Brazil, which have for years charged some of the
world's highest lending rates and fees for services, will at
some point come to terms with a new reality in which their
pricing power will remain under frequent scrutiny, said Marcial
Portela Álvarez, chief executive of Banco Santander Brasil SA.
Government pressure on banks to cut rates and boost access
to credit is being overshadowed by a change in the mindset of
consumers and corporations, which are demanding better service
and lower prices, he said. Brazilian lenders have entered a new
phase in which profitability will be linked more to cost
efficiency than interest income.
"Brazil changed. This is not a government issue, it is
Brazilians urging banks to normalize the cost of credit,"
Portela said at a news conference to discuss third-quarter
earnings. "These changes will take place in Brazil within the
next two years, not the 15 years they took in other nations."
The imminence of a "new normal" for Brazilian lenders marked
by tougher oversight, margin compression, and lower profits has
weighed on shares in the sector this year. The Bovespa stock
exchange's financial sector index has shed 11 percent
since April, when President Dilma Rousseff began a crusade to
force banks to cut lending rates.
Borrowers in Latin America's No. 1 economy recently listed
interest rates for the first time as the main consideration
before taking out a loan, signaling that behavioral changes in
the credit market are taking place faster than previously
Rates replaced loan maturities early this year as the
foremost issue in borrowers' minds when requesting a loan,
according to a poll by credit recovery company NovaQuest. For
years, clients have used maturities, not the cost of credit, as
a key tool to calculate their monthly debt-servicing costs.
Quarterly results for Brazil's top three private sector
banks, which were unveiled this week, have reinforced the view
among investors that profits at the nation's lenders are
sinking. Return on equity, the industry's most widely followed
gauge of profitability, is expected to tumble further in coming
Santander Brasil reported an 8.5 percent decline
in third-quarter profit, after rising delinquencies forced
management to boost bad loan provisions. Recurring net income,
or profit excluding one-off items, fell to 1.501 billion reais
($743 million) from 1.643 billion reais in the third quarter of
However, recurring profit rose 2.5 percent from the second
quarter as a jump in fee income and a 30 percent cut in bad loan
provisions helped offset the impact of higher operating expenses
and plummeting revenue. Investors in Brazil follow
quarter-on-quarter results more closely than annual comparisons.
Previously, Itaú Unibanco Holding SA and Banco
Bradesco SA reported disappointing third-quarter
results. Executives at Itaú told investors on Wednesday that
expense and provision cuts should help mitigate a decline in
profitability as government pressure on the industry weighs on
the lender's ability to generate revenue.
DOWNGRADE IN ESTIMATES?
Units of Santander Brasil, a blend of the bank's common and
preferred stock, were up 0.3 percent on Thursday as global
risk-taking gained traction. Thursday's gains, which bucked a
run of seven straight daily declines, came even after some
analysts said flagging profits may lead to a cut in earnings
"Sluggish results continue to weigh on the stock and
compromise the bank's guidance, in our view. After the third
quarter of 2012, we see 5 percent to 10 percent downside risks
to our 2013 forecasts," said Jorg Friedemann, an analyst at Bank
of America Merrill Lynch in São Paulo.
Weaker earnings at Santander Brasil contributed to a tumble
in third-quarter profit at parent company Banco Santander SA
on Thursday. The Spanish behemoth has weathered a
banking crisis at home better than rivals because it makes most
of its profits elsewhere - half of earnings come from Latin
Portela said the situation facing Santander Brasil's parent
in its home market "will have no impact at all" on earnings. The
unit remitted 2 billion reais in dividends to Banco Santander
this year, down from 2.4 billion reais a year ago, Chief
Financial Officer Carlos López Galán said.
Return on equity sank at Santander Brasil to 11.7 percent
from 14 percent a year earlier. ROE, as the indicator is known,
was 11.5 percent in the second quarter
Unlike its counterparts in Brazil, Santander Brasil suffered
a deterioration in asset quality in the quarter as more
consumers and companies fell behind on their loan installments.
Loans in arrears for 90 days or more, the benchmark for
delinquencies, rose to the equivalent of 5.1 percent of its loan
book, compared with 4.9 percent in the second quarter.