Banking In Brazil

GLOBAL FINANCE: What has been the recent performance of the Brazilian banking system and its leading players?

JEAN PHILIPPE LEROY: It is performing well. For the past 12 years we have been in transition. We moved from a period of hyperinflation, where banks had a return on equity of around 10% to 15%. There were concerns in the market and among analysts about how sustainable this market would be once we did not have floating gains any more, but since the implementation of the "real plan" in the middle of 1994, the Brazilian banks have been very efficient. They moved comfortably from a market with very high inflation rates to low inflation rates. Profitability moved back in the second half of the 1990s closer to 20% and since 2000 has been moving higher than the 20% mark.

On one hand we have better performance because banks are beginning to be more like banks-lending money to people, to companies. On the other hand, fees in general were rising and efficiency improving. Cost increases have been very close to inflation while gross revenues have been twice, three times or sometimes even more as a multiple of inflation.

Bradesco has seen excellent opportunities for acquisitions. In the past 40 years it acquired more than 50 banks, but over the past eight years acquired more than 22 banks or asset management companies. We saw opportunities to move more into different sectors we thought would make strategic sense.

Over the past three years, however, we have been reducing the number of acquisitions to concentrate our efforts on reducing costs. The profitability of the bank is now higher than the 30% mark, which has been adding a lot of value to our company. The stock performance has been very good, returning more than 120% last year.

GF: The banking systems of Latin America's two leading economies, Brazil and Mexico, are very different in terms of foreign ownership. How did this come about?

LEROY: Brazil is the only country in Latin America where the leading players are local. If we look at the 10 largest banks in Brazil in terms of assets, seven are Brazilian and three are foreign. Why is Brazil different? First of all because of its size. We have a country with a territory almost 90% the size of the United States, so the costs related to implement a retail bank in Brazil are high. It is thought that it costs roughly $1 billion to $2 billion to build every 1% market share. You must have at least 5% to be considered a national player so you need $10 billion of investment; there are few companies that commit to invest so much capital in a single country.

GF: Brazil has a number of strong local financial institutions. How do they differentiate themselves to their corporate and individual customers?