Regina Araújo, one of Brazil’s army of domestic servants, has just bought a cordless telephone and answering machine from Casas Bahia, a big high street retailer.
She takes the sales slip from her handbag to show the price: R$169.90 ($95). Or, that’s what she would have paid up front. Instead, she chose to pay 10 monthly instalments of R$40.15 each.
“I know,” she says, as if doing the maths for the first time. “For us [people on low incomes], it’s impossible buy anything up front. But the instalments fit our pockets.”
For Brazilians, high interest rates are a fact of life. According to the central bank, the average overdraft rate charged by high street banks in May, for example, was 161 per cent a year.
The average annual interest rate paid by individuals was 41.5 per cent. For companies it was 27 per cent. Both figures are artificially low, distorted by subsidised credit in the corporate sector and by new forms of secured lending available to only some consumers.
So it is hardly surprising that Brazil’s banks are among the most profitable in the world. Return on equity – a standard measure of profitability – at Unibanco, Latin America’s biggest bank, will be about 25 per cent this year, according to a recent study by Roberto Attuch and colleagues at Barclays Capital. Other big banks are not far behind.
Such earnings have been a big pull for investors. Last year, Santander of Spain floated Santander Brasil, its Brazilian unit, raising $7bn in the world’s biggest initial public offering of the year. Its ROE trails that of its Brazilian competitors, Mr Attuch says, simply because it has yet to put that capital intake to work.
“Margins are high in the retail sector because there is not much competition,” Mr Attuch says. Account holders take little notice of what their banks charge, paying more attention to convenience and standards of service, he says, although even these factors would have to be compelling to make them change banks.
With little pressure to reduce margins, other analysts say, private-sector banks tend to use the big public-sector banks – made less efficient partly because they often lend according to government policy rather than market imperatives – as their benchmark.
Luis Catão, economist at the Inter-American Development Bank, says one reason consumers accept expensive credit is because it is so scarce. “People didn’t used to be able to borrow at all,” he says. “Effectively, interest rates were infinite. Anything below that induces you to borrow.”
Under the high inflation that dogged Brazil until the late 1990s, banks preferred to lend to the government – a low-risk, high-return investment – rather than consumers and businesses. Credit has expanded in recent years but is still equal to only about 45 per cent of gross domestic product, much less than in other big economies.
One problem is the lack of any positive data on people’s credit history. Only bad payers have a history; in the absence of data, good payers are treated as being just as risky.
This in part explains why small changes in the central bank’s overnight rate – currently 10.25 per cent a year– have a big knock-on effect on market lending rates. Banks still often prefer smaller but safer returns from the government. If the overnight rate goes up a little, banks will charge a lot more to take the additional risk of consumer credit.
This is one reason why spreads – the difference between funding and lending rates – are so high. There are others: reserve requirements (the share of deposits banks must park at the central bank) are very high at almost 30 per cent, and a lot of lending is directed by law to low-return sectors.
But recent developments show that spreads do come down when conditions are right. Since 2004, loans have been permitted in which instalments are deducted from borrowers’ pay before they receive it.
With a reduced risk of default, such loans cost an average rate of 27 per cent a year in May – compared with nearly 57 per cent for other forms of consumer credit – and accounted for 60 per cent of all personal lending, up from 53 per cent in December 2008. Yet access to such credit is still much easier for public sector workers, who take 86 per cent of loans, because they are less likely to lose their jobs than private sector workers.
Even so, Mr Attuch says this is part of a broader shift from unsecured to secured lending that will help drive down rates across the credit industry. For this and other reasons he thinks that, in spite of their attractive margins, banks face little risk of being undercut by lending from other institutions.
If anything, it is banks that are expanding into new areas. Casas Bahia – where Ms Araújo bought her telephone – used to finance its sales with its own capital. Since 2004 it has handed such operations over to Bradesco, Brazil’s second-biggest private-sector bank.