Rivers of cash: Brazil's banks are bigger and more profitable but credit remains expensive and scarce.

President Luiz Inacio Lula da Silva irritated many Brazilians when, a few months ago, he called upon them to "get their butts up off their chairs" and look for banks offering lower interest rates. For Sao Paulo businessman Fabio Mazzon Sacheto, going to banks to ask for credit a year ago was like trying to squeeze blood from a stone. All he wanted was to borrow US$300,000 to expand his cosmetics business, Florus Brasil, and start exporting.

After visiting several banks, both public and private, Sacheto finally succumbed to a reality that must be hard for Lula to grasp. "The cheapest money, from the Banco Nacional de Desenvolvimento Economico e Social (BNDES), is nearly impossible to get because the requirements and guarantees are absurd. Even for banks themselves, the cost of financing can border on 50% per year," says Sacheto, referring to BNDES, the state-owned bank.

Sacheto instead made a quite common choice among Brazil's 5.5 million small business owners by deciding to dig into his own pockets to fund his expansion plan. He invested $350,000 in his plant, which produces lipsticks, hair products and body lotions. "The company is growing slowly for lack of financing, not for lack of demand," he says.

Historically, obtaining credit in Brazil has never been easy, especially for small and medium-sized businesses, which are rarely fortified by the kind of balance sheets and guarantees lenders demand. Brazilians hoped that the government's inflation control scheme, known as the Real Plan, would change all that. In fact, the banking system has changed a lot since 1994. The country experienced a huge wave of privatizations, mergers, acquisitions and interventions that transformed the profile of financial institutions, which are today more segmented by market and are more specialized.

Traditional banks like Nacional and Bamerindus disappeared, while what emerged simultaneously were names like Votorantim and foreign banks like Santander, ABN AMRO and HSBC. Consolidation lowered the number of banks to 162 from 246, according to data from Brazil's Federation of Banks, Febraban. And, unlike what happened in Mexico, where foreign names lead the banking system, Brazil's private-sector national banks--Bradesco, Itau, Unibanco and Safra--grew and became stronger participants in the market.

In an era of superbanks, nevertheless, the transformation hasn't yet filtered down to the availability of credit, which remains expensive and scarce. The credit to-gross-domestic-product ratio is 26.7% in Brazil versus 68% in Chile, 75% in the United States, and 120% in England and Japan. "The biggest problems are interest rates and banking spreads. The two together make Brazil's credit the most expensive in the world," says Paulo Skaf, president of the Silo Paulo state industrial federation, known as FIESP.

For Febraban, there's no way around it. "Credit is expensive because the base lending rate and taxes are very high," says Roberto Luis Troster, Febraban's chief economist. "The profit margin for banks is very low at 7.5%" says Troster. His own studies show that even if banks charged nothing for their services the cost of credit would still come to 29.4% on taxes alone. Serious problems. Poor credit access could mean serious problems for Brazil's economy; says Jose Luiz Acar, vice president of Bradesco, the nation's largest private bank. Banks know that credit growth is important. Recently; Bradesco, Itau, Unibanco, HSBC and Citibank, among others, established or bought financing operations, even acquired the loan portfolios of smaller banks specialized in consumer financing.

U.K. global bank HSBC, which considers Brazil one of four priority nations for investment between 2004 and 2008--alongside Mexico, China and India--has its eye on expanding credit for growth. "The bank wants to double in size over the next three years and credit will have a fundamental role," says HSBC spokesman Antonio Carlos Seidl.

Although some analysts believe that the banking market is settling down in Brazil, Erivelto Rodrigues, president of the Austin Rating, a credit-classification agency; says the sector will continue to shrink and that, by 2007, at least 85% of all assets will be in the hands of Brazil's 10 largest banks, compared with 75% today. By comparison, in Mexico today, following consolidation, the 10 largest banks hold 94% of the market. "That's the case with Citibank and HSBC, which should enter firmly into retail banking," he says.

MARGARIDA O. PFEIFER * SAO PAULO

BANK ON IT
Brazil's banks battle for slices
of a growing pie.

                2003   2004

Top 10 banks          $405.7
total                 $483.7

Source: Austin Asis

Note: Table made from bar graph.