Clothes don’t cover Haiti’s problems

The country’s poverty is in marked contrast to the relative affluence of its neighbours. It needs access to finance beyond disaster relief. But can banks make a business case for a nation in such poor repair?

It’s an understatement to say that the island of Hispaniola in the Caribbean is one of contrasts.

The land mass contains two countries – the Dominican Republic and Haiti. The former has been one of the fastest growing economies in Latin America for 20 years – GDP growth averaged around 5% during that period – and it has a strong business and finance community.

The international investment community has followed its international bond deals down in yields, out in tenors and even into local currency-denominated transactions.

Meanwhile, Haiti is the poorest country in the western hemisphere. Per capita GDP is $1,800 (the Dominican Republic’s is $17,000), putting the country 213th in the world, according to US government statistics. Some 60% of the populations lives under the poverty line, while 40% are unemployed. Remittances are worth 25% of the country’s $20 billion GDP. Haiti has always been poor.

A dysfunctional political system has stood in the way of any economic and physical development. In addition to the man-made problems there have also been natural disasters.

In 2010, an earthquake killed an estimated 300,000 people and wrecked the capital and many other towns – leaving 1.5 million of the 10 million population homeless. Six years later, Hurricane Matthew – the fiercest Caribbean storm in a decade – made landfall in Haiti with 140 mile-an-hour winds. It affected more than two million Haitians and almost destroyed the country’s subsistence agriculture and basic infrastructure.

Given the continually dire situation in Haiti, most of the international financial community’s engagement with the country has been in the form of relief: after the 2010 earthquake, creditor countries wrote off the country’s debt. Unfortunately the financial breathing space was squandered – debt is again approaching $3 billion, much owed to Venezuela through the Petrocaribe oil programme (and of which up to $2 billion has disappeared).

For the full stor visit Euromoney’s website

https://www.euromoney.com/article/b1h2sd5w65nzsk/clothes-dont-cover-haitis-problems

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Latin America’s best bank 2019: Santander Brasil

Despite the headwinds for region’s banks, there were some outstanding performances that demonstrate what can be achieved without macroeconomic support. The best example of this was Santander Brasil, Latin America’s best bank.

The success of Santander Brasil’s chief executive, Sergio Rial, since joining in September 2015 has been such that, following Santander’s abortive attempt to hire UBS’s Andrea Orcel to be its group chief executive at the beginning of this year, there were strong rumours that the bank would appoint Rial to the position.

That it didn’t is probably more in recognition that it would just be creating a very large Rial-shaped hole in what it is now its most profitable market – generating 26% of Santander’s total earnings. So instead Santander created for him the position of chief executive of all of its south American business.

Sergio Rial Santander Brasil’s results in 2018 were truly historic. The bank broke the stranglehold that Itaú and Bradesco have held over the country’s privately owned banking sector. It pushed Bradesco into third place by return on equity.  Santander Brasil hit ROE of 21.1% in the fourth quarter of 2018, with a net profit of R$12.4 billion ($3.2 billion). Net interest income was R$42 billion in 2018, up by 12.5% in the year, compared with Itaú’s rise of 0.8% and Bradesco’s 0.3%.

Little wonder his peers have nothing but words of praise at the scale and speed of the accomplishment – the bank’s ROE was just 12.1% at the end of 2014. Its stock price has tripled since 2016, and in 2018 alone the shares appreciated 25.8% and the bank’s market value reached R$159.5 billion.

When speaking at the announcement of the fourth-quarter 2018 results Rial said that it is time to move beyond Santander Brasil’s transformation narrative to one of continued, solid growth based on service quality.

For the full awards list visit Euromoney’s website

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First-skirmishes-in-brazilian-fintech-war

The phony war has been long, but the first real battle has now begun in Brazil’s fintech space.

The growth of fintechs in Brazil has been closely monitored by market participants for years. The narrative is well established: the high adoption of digital technologies (71% of the population has a smart phone) in the huge, entrepreneurial economy has led to a wave of fintech innovation.

According to a recent report by McKinsey & Company, there are now around 400 fintechs operating in Brazil which are growing at a compound annual growth rate of 96%. However, to date the growth has been largely alongside that of the banks.

These incumbents have responded to the appearance of the fintechs by adopting a mixture of digital innovation of their own, buying or working closely with fintechs to lessen competitive dynamics, and at times simply ignoring those niches where the nibbling away of profit margins barely registered on the broader profitability of the bank’s operations as a whole. That uneasy truce is over.

In April the first real shots in the war were fired by the banks. And it is no surprise who the first target is: the payment fintechs, which represent 20% of the total.

Payment services were always likely to the first theatre of Brazil’s fintech war. After all, it’s an area that has been ripe – and successful – for fintechs. Some of Brazil’s first ‘unicorns’ have come from innovators in the payment sector, with PagSeguro and Stone both valued at more than $1 billion dollars and having already completed successful IPOs on North American stock exchanges.

Payments are capital-light and profitable. Well, they were profitable. Even before the developments of April (which I will come to shortly), competition was depressing profitability. Cielo – the payments company of Banco do Brasil and Bradesco – recently announced a 45% fall in its profit for the first quarter of the year (and a 25% fall compared to the fourth quarter of 2018), and blamed the intensity of the competition in its operating environment as the leading cause.

So, while competition has been ramping up over the past year it has recently sparked into fire. Getnet, Santander’s merchant card payments product, announced a reduction in its receivables advance rate to 2%, and harmonized credit and debit charges. The industry average had been around 4.5% so this was an aggressive cut. Safra has also cut its rate (to 2.99%) on its SafraPay card. However, Itaú has upped that ante – zeroing the rate on its Rede card system from May, for both new and existing customers with annual sales of up to R$30 million.

For the full article visit Euromoney’s website 

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First skirmishes in Brazilian fintech war

The growth of fintechs in Brazil has been closely monitored by market participants for years.

The narrative is well established: the high adoption of digital technologies (71% of the population has a smart phone) in the huge, entrepreneurial economy has led to a wave of fintech innovation.

According to a recent report by McKinsey & Company, there are now around 400 fintechs operating in Brazil which are growing at a compound annual growth rate of 96%.

However, to date the growth has been largely alongside that of the banks. These incumbents have responded to the appearance of the fintechs by adopting a mixture of digital innovation of their own, buying or working closely with fintechs to lessen competitive dynamics, and at times simply ignoring those niches where the nibbling away of profit margins barely registered on the broader profitability of the bank’s operations as a whole.

That uneasy truce is over.

In April the first real shots in the war were fired by the banks. And it is no surprise who the first target is: the payment fintechs, which represent 20% of the total.

Payment services were always likely to the first theatre of Brazil’s fintech war. After all, it’s an area that has been ripe – and successful – for fintechs. Some of Brazil’s first ‘unicorns’ have come from innovators in the payment sector, with PagSeguro and Stone both valued at more than $1 billion dollars and having already completed successful IPOs on North American stock exchanges.

Payments are capital-light and profitable. Well, they were profitable. Even before the developments of April (which I will come to shortly), competition was depressing profitability. Cielo – the payments company of Banco do Brasil and Bradesco – recently announced a 45% fall in its profit for the first quarter of the year (and a 25% fall compared to the fourth quarter of 2018), and blamed the intensity of the competition in its operating environment as the leading cause. So, while competition has been ramping up over the past year it has recently sparked into fire. Getnet, Santander’s merchant card payments product, announced a reduction in its receivables advance rate to 2%, and harmonized credit and debit charges. The industry average had been around 4.5% so this was an aggressive cut. Safra has also cut its rate (to 2.99%) on its SafraPay card. However, Itaú has upped that ante – zeroing the rate on its Rede card system from May, for both new and existing customers with annual sales of up to R$30 million.

For the full article visit Euromoney Magazine

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Santander’s second LatAm engine

While profits in the UK slipped by 13% in the first three months of the year, the bank beat estimates thanks largely to the Brazilian bank’s latest blockbuster result.

In the third quarter, Santander’s Brazilian business grew earnings by 20% year-over-year to reach R$3.1 billion and it is now the biggest individual contributor to Santander’s profits.

The rise of Santander Brasil is now well known. It can be traced to the appointment of its CEO Sergio Rial in September 2015 and Euromoney was one of the first to recognise Rial’s turnaround when we named the bank as the best bank in Brazil in July 2017.

The reasons for this were clear to us: between the first quarters of 2016 and 2017, the bank increased its customer base by half a million, to 3.7 million, and increased fees by 24.3%, revenues by 16.7%, net income by 37.3% and lowered non-performing loans by 40 basis points to 2.9%.

Digital transformation has been at the heart of the turnaround strategy and it helped to lower the bank’s efficiency ratio to 44.9% from 50.3% in just one year, and its return on equity (ROE) leapt to 15.9% from 12.6%.

The bank’s momentum hasn’t faltered since this point. Santander has enjoyed 19 quarters of sequential earnings-per-share growth – an incredible achievement for any bank, but for one competing against two dominant players in a country suffering its worst recession it is a truly phenomenal result.

Santander has overtaken Bradesco to enjoy the second-best ROE in the country and is likely to reach Rial’s unofficial guidance of R$12 billion for 2018, announced at the bank’s 2017 year-end party – a projection that was met with more than a dash of sceptism in the market. The price of this success is elevated expectations.

Rial gave guidance that the bank’s bottom-line growth will be “well in the double-digits” in local terms for the coming quarters, and pointed to a continuation of net interest margin (NIM) expansion – albeit at a slower pace as the mix effect from large corporates to consumer lending decreases in intensity.

However, a BTG Pactual analyst wrote a report with the words ‘losing stamina’ in the headline.

For the full article visit Euromoney’s website

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Will Argentina take all of its bitter medicine?

Argentina’s central bank says it knows it needs to restore credibility, but if the recession persists and with elections next year, could the BCRA use the embedded flexibility in the IMF’s  new monetary system to – again – ease too soon?

Gradualism is dead in Argentina.

In its place a new strategy has been devised to tackle the country’s monetary and fiscal challenges. It has just begun to be implemented.

But it is going to be a strong, inflation-fighting medicine with many serious and unavoidable side effects and a level of toxicity that may kill the administration’s ability to govern.

The most obvious side effect will be a deep recession, already underway and that is expected to be lead to a contraction of around -2.5% this year. It will also drag on and likely lead to negative growth in 2019 – a presidential election year.

Meanwhile the country’s banking sector is back in the survival stance it adopted under the previous president, Cristina Kirchner.  As the recession hits and interest rates rise above 70%, the demand for credit has evaporated, with the exception of the distressed and the desperate. Everyone is monitoring asset quality, which has begun to deteriorate and carries the threat of much worse.

For the full story visit Euromoney.com

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Bolsonaro’s Trumpian Pact

The Brazilian markets have been soaring in recent weeks as it became increasingly likely that Jair Bolsonaro would become Brazil’s next president. The real has been rallying; so too has the Bovespa.

Now that Jair Bolsonaro’s victory as president has been confirmed, there is almost certainly more upside to come as the markets get even further ahead of themselves. Brazilian payments system Stone’s IPO, which caught the wave of positive sentiment about Brazil in the run-up to Bolsonaro’s win on 28 October to list on the Nasdaq on 25 October, has already broken the country’s IPO drought. Other equity transactions will surely follow swiftly, and a solid pipeline of international bond deals from Brazilian international issuance is also expected before the end of the year.

These should perform well: there has been relatively little Latin American deal volume this year and any ‘Bolsonaro bounce’ could be quite large. But those investors who are readying to invest in Bolsanoro’s Brazil would do well to think deeply about exactly what type of country they might be jumping into.

There has been much debate about which other world leader Brazil’s new president most closely resembles. During the campaign Bolsonaro’s erratic rhetoric on law and order was probably most comparable to the president of the Philippines, Rodrigo Duterte. But a more powerful comparison, in terms of trying to predict how Bolsonaro’s administration will evolve, is with US president Donald Trump. Because, just like Trump, behind the populist wave that swept Bolsonaro to power are two divergent power bases. Trump’s early administration combined a nationalistic, protectionist faction led by Steve Bannon, with a globalist-leaning, economically orthodox group, most obviously personified by ex-Goldman Sach’s Gary Cohn.

Bolsonaro’s nationalistic advisers – with a pronounced leading towards protectionism – are the group of current and retired generals, called the Brasilia Group. Meanwhile, Paulo Guedes, a founding partner of the investment bank that became BTG Pactual (and which liked to invite comparisons with Goldman), was brought into the campaign to be his finance minister-in-waiting to provide economic and financial credibility. Just as Trump’s administration suffered at times from irreconcilable tensions – and conflict – between adopting market-friendly approaches and implementing protectionist polices, so too will Bolsonaro’s.

It’s also clear that Bolsonaro is personally more politically in tune with his generals than with Guedes. His voting record as Congressman over 27 years has consistently been anti-privatisation and against social security reform. His recent convergence to Guedes’ prescription of widespread privatizations, social security reform and other economic liberalization was already appearing to wane during the election campaign (as candidate Bolsonaro squashed Guedes’ suggestion of an introduction of a financial transaction tax and the possible full privatisation of Petrobras).

Bolsonaro’s choice of Hamilton Mourão to be his vice-president is further proof that his natural base will be with the generals. And whereas Trump felt the need to tread a fine line on withdrawal from international alliances, Bolsonaro has already committed to a quick withdrawal from the Paris climate agreement and has even suggested leaving the United Nations.

How will the military faction in Bolsonaro’s administration view the selling of Eletrobras, the electricity company? Or Petrobras’ distribution network of energy pipelines? Or handing other infrastructure – ports, airports and railways – to foreign ownership?

And yet it is on Guedes that the international markets have fixated.

Full article: https://www.euromoney.com/article/b1bk4lnxhxf2kk/bolsonaros-trumpian-pact?copyrightInfo=true
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