By Dimitra DeFotis • May 1, 2017 12:18 p.m. ET
Of late, the issue for branches is damage: protests in Brazil against austerity resulted in shattered bank windows. Moody’s Financial Services noted last week that Brazil bank Itau has closed 10% of its branch network in the last three years, and Banco Bradesco plans to shut branches after buying HSBC’s Brazilian operations. Even government-owned Banco do Brasil, which is limited in the partnerships it can form externally, also closed branches over the past two years.
Moody’s concluded in a report that “established leaders that will dictate the scope of changes in the industry,” and Ceres Lisboa, a senior vice president at Moody’s, notes that digital banking is a welcome way for banks to cut costs because Brazil’s economy is still weak after a protracted recession. Our conclusion: for the boisterous Brazilian FinTech startup community, mergers and acquisitions are likely for the winners. Moody’s adds, from its press release:
“The number of Fintech startups in Brazil surged in recent years, making it the largest financial technology market in Latin America. However, many of these startups are focused exclusively on either payment services or asset management, and only 2% offer multiple services … The nation’s largest banks, led by Itau Unibanco S.A. (Ba2 stable, ba2), Banco do Brasil S.A. (Ba2 stable, ba2) and Banco Bradesco S.A. (Ba2 stable, ba2), have accelerated their digital banking services to increase efficiency and appeal to millennial customers, a growing segment of the population with distinct preferences.
… closing branches, banks cut personnel, maintenance, materials, transport and security expenses, which account for about two thirds of total administrative expenses in the banking system. These expenditure savings have in turn helped the banks to afford the significant investment in IT required to develop and roll out their new digital strategies, which, we estimate, have totaled as much as BRL5 billion ($1.6 billion) per year …”
Moody’s notes digital strategies are varied:
” … Itau and Banco do Brasil have moved quickly to bring their customers onto digital platforms enabling employees to handle more clients. Itau has also focused on leveraging Big Data to improve underwriting and increase cross selling, while actively building relationships with fintech companies and startups, through an incubator it established to keep it plugged into new technological developments with a modest investment. Bradesco, as well as offering digital service to its existing customers, also intends to launch a fully digital banking unit later this year that will run in parallel with its bricks-and-mortar bank and that it hopes will appear to a new, younger clientele …”
Itau shares are up 20% this year in U.S. trading, and Banco Bradesco stock is up 15%. The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up 12% so far in 2016, while the iShares MSCI Emerging Markets ETF (EEM) is up 15% in the same period.
See all our recent free Barron’s posts on Brazil.