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Local banks' stranglehold on the Brazilian market is coming under threat from acquisition-hungry international banks and investors.
With consumer lending at all-time highs and set to grow more, Brazil's biggest banks are enjoying a heyday of growth and stability. But competition from mid-size banks-backed by strong foreign investment-is putting pressure on all parts of the banking spectrum to expand domestically and build international partnerships. Foreign participation in a series of mid-size banking IPOs last year shows the desire of international investors to take a piece of the Brazilian market. But with asset prices soaring and unclear signals from the government on increasing foreign competition, partnership with domestic banks may be the best way for international investors to enter Brazilian banking.
The Brazilian banking market is awash with growth. Credit has been expanding by more than 20% a year over the past few years. In particular, escalation in consumer lending has been boosted by historically low interest rates and the development of new products under an improved institutional framework. With strong domestic demand and stable labor markets, this expansion looks set to continue, which should drive continued organic growth and M&A within the Brazilian banking sector.
The big story in Brazilian banking, though, is the sizable growth seen in payroll loan products. This has driven not just organic expansion but also both domestic and international M&A. Tamara Berenholc, associate director in financial service ratings at Standard & Poor's, says, "When you look at growth in individual lending in Brazil, it really came in two major sectors: secure lending for auto loans and payroll discount lending."
IPOs Draw Foreign Investment
The technology and market share for payroll lending was dominated by some of the mid-size banks in Brazil, which has led to an interesting dynamic as this market grew over the past few years. The mid-size banks have the skill set and infrastructure to manage this growth but lack the balance sheet to back expansion. As a result, large domestic Brazilian banks, Brazilian subsidiaries of foreign banks and some large foreign banks themselves have all set up agreements with the smaller banks in the payroll discount lending market. It has also driven much foreign investment in the Brazilian market over the past year.
"Foreign banks...