New rules on loan portability came into effect in Brazil in May, clarifying the basis on which consumers can transfer outstanding loans between banks to obtain better financing.
Ceres Lisboa, senior credit officer at Moody’s, believes the move is credit negative for the banks. In a report, Lisboa says the Brazilian banks will face increasing competition, particularly on low-margin residential loans.
“Banks will face increasing pressure on the spreads, particularly on the already competitive mortgage business,” says the report, which argues that the new rules will increase competition on more secure funding products, such as payroll loans and mortgages, which have been the main target of Bradesco, Itaú Unibanco, Santander and Banco do Brasil in recent years.
For example, banks have been increasing their mortgage books at annual rates of 30% or more – well above the system’s average loan growth of 16% in 2013.
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| Sergio Furio, founder and chief executive of BankFacil |
However, the new rules aren’t likely to lead to a very big increase in competition, according to Sergio Furio, founder and chief executive of BankFacil, a financial services start-up that helps consumers searching for financial products.
The rules set compensation fees for banks to pay when they take over an existing loan (portability has been allowed in Brazil since 2006 but until these new rules clarified the process, very little was undertaken as it was difficult to do). These fees – R$300 ($135) for payroll loans, R$800 for car loans and R$3,000 for mortgages – also come with restrictions: the new bank cannot extend the loan’s maturity, or increase its value or price.
So without the flexibility to change the financing terms, incurring the fees for acquiring the loan, reduces the impetus for taking existing loans from competitors.
According to Furio, the rules were actually aimed at decreasing portability in the payroll loan sectors – with many loans being switched between banks on an annual basis and lessening the stability and the profitability of this segment.
The R$3,000 fee for mortgage portability applies in the first year of the residential loan – reducing in size in relation to the remaining tenor, and therefore older products might be more interesting for portability for banks and consumers alike.
However, Furio says that the inability of the new bank to increase the tenor or size of the mortgage is potentially punitive to clients. He points to the example of an individual who has a mix of mortgage and personal loan debt, who, because of the higher interest on the latter, would be better served in increasing the size of the mortgage debt, eliminating the personal loan, and thus paying a lower total interest rate on the same debt.
Even without restrictions, portability would only really be attractive to banks seeking to win business in collateralized loans (cars, mortgages) or payroll loans, which are typically the least risky unsecured consumer-finance segment. These products already have lower financing costs, with credit cards and bank loans paying much higher rates of interest.
To stimulate competition in these areas, Brazil would need to create a positive credit rating agency (there is an agency that banks can use to check for negative credit issues), to enable banks to assess correctly the risk of provision of credit to new clients.
Furio argues that, currently, the largest banks have big proprietary databases that cover up to 50 million individuals. The benefits of a new, positive agency would be far outweighed by the potential loss of their current clients to competitors – particularly if this market information was able to be used to reinvigorate the mid-tier banking segment in Brazil.
Progress on the development of this agency has been glacially slow. Furio also warns that the central bank is in danger of regulating away new sources of competition to the incumbent market leaders.
“There are about 10 serious payment companies now operating in Brazil and they are being taken as a serious threat by the large banks,” says Furio. “Companies like Moip and Paypal aren’t banks, but because they are processing payments are – and should be – regulated. But the burden that the central bank places on new entrants is close to being prohibitive in terms of compliance costs.”
Despite the concentration of Brazil’s consumer banking industry in the hands of a few very large players, technology is offering the potential for new competition. For example, Banco Original, which is part of the same organization as the large protein company JBS, is believed to be developing as a purely digital bank offering financial products without any branches.
Brazil’s large banks all operate extensive branch networks, but have had lower growth in recent years: after years of 20%+ portfolio growth, the banks are expanding at more sober rates. Bradesco’s total loans grew by 10.1% in the past 12 months, while Itaú Unibanco grew its loan portfolio by 9.9% and Santander by 5.8%
The public banks are growing more aggressively, acting in part as a macro-prudential tool of government to support anaemic consumer consumption. Banco do Brasil’s total loans grew 20.4% in the past 12 months and Caixa grew loans by 36.8%.
Also, while the reduction in the Selic rate was having a negative impact on the banks’ net interest margins, the focus of Brazil’s banks has increasingly been on costs rather than revenue growth, with banks attempting to move transactions to digital channels and reduce the average headcount in branches.
“Everyone is now focusing on efficiency and on finding better ways of operating,” says Furio. “Banks are investing in technology and digitalization and that’s not a trend that is going to stop.”
