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

Posted in Lifestyle Blog | Leave a comment

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

Posted in Blog | Tagged , , , | Leave a comment

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

Posted in Blog | Tagged , , , , , , , | Leave a comment

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:
Visit for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.

Posted in Blog | Tagged , , , | Leave a comment

Argentina’s banks face strategy dilemma

The slow pace of Argentina’s fiscal reform programme finally caught up with its government last week and, compounded by an error in monetary strategy at the end of last year and a deteriorating risk environment for emerging markets, the country is firmly into emergency reaction mode.

Meanwhile, the banks that had been changing their funding mix and business strategy to anticipate economic growth and credit demand face tough operational questions: do they continue with their path to normalization or hunker down and see how long and fierce the storm will prove to be – and what damage it will do?

There are three main impacts to the banking sector from the recent economic drama in Argentina, which saw the central bank intervene three times and increase its policy rate by 1,250 basis points in three inter-meeting decisions to 40%. This was an attempt to stop a run on its currency – the peso fell by 12% last week – and prevent the central bank burning through billions of dollars of FX reserves to fight the peso’s depreciation – followed by the politically risky decision to negotiate a line of credit from the IMF.

The first impact is short term, mixed and related to the new reality of the financial system. The banks should benefit from the higher interest rates through higher net interest margins (NIMs), according to UBS financial analyst Frederic de Mariz. He thinks the recent fallout to Argentine banks’ valuations – Argentine bank ADRs have suffered – leads to a buying opportunity as “higher rates will impact NIMs positively, via higher securities income.

“We currently expect NIM to compress from 10.7% in 2017 to 10.6% in 2018, and now we see upside risk to 2018.” De Mariz estimates that every 50bp increase in NIM would translate into about 9% in earnings per share.

The Argentine central bank (BCRA) also moved to cut the permitted level of foreign currency held as part of banks’ tier-1 capital, from 30% to 10%. However, despite the short deadline for compliance (May 7), a report from BTG Pactual said that the impact on the private banks would be minimal.

“According to February data, only public banks were close to the 30% limit (at 29%) as private banks were around 2%,” it states, although that low figure could have increased if banks had increased their hard currency positions since March.

Rating agency Moody’s believes the main financial impact will be negative, with higher interest rates hurting the system’s delinquency ratios.

“The rate of non-performing loans was a low 1.6% of gross loans as of year-end 2017,” it states. “However, with interest payments on variable-rate loans [which on average constitute roughly one third of banks’ portfolios] set to increase by nearly 50%, we expect impaired loans to increase.”

For the full article visit


Posted in Blog | Tagged , , , , , | Leave a comment

Interview: Niall Ferguson

Niall Ferguson has a call in a little over half an hour, he warns, after the introductions are done. He needs to call his immigration lawyer ahead of a naturalization examination he faces in the US on his return. As a professional historian at Stanford, he points out, it would be more than a little embarrassing if he failed to answer questions on the US constitution, for example.

“I know about the first and second amendments for obvious reasons, but I need to find out what the third one is,” he says, presumably joking. (Or perhaps not: Euromoney checked it later and it places restrictions on the quartering of soldiers in private homes without the owner’s consent, forbidding the practice in peacetime.)

Niall Ferguson Ferguson is in São Paulo in early April to deliver a keynote speech to Itaú’s annual MacroVision conference, which in 2018 has the theme of technology. Ferguson delivers a talk derived from the content of his new book ‘The Square and the Tower’, which, among other things, deals with the role of social media and the various models of interaction of these technologies with those who hold the power in nation states.

Whoever at Itaú invited Ferguson to address the conference couldn’t possibly have known that he would be speaking on the same day that Mark Zuckerberg faced questions from a panel of US senators.

His speech focuses on the US, Europe and China. Afterwards a Q&A session saw the historian pulled a little off his main theme; there was a question about Brexit and one about the Brazilian elections.

On the latter, Ferguson predicts that the use of social media will favour right-wing candidate Jair Bolsonaro, who has most followers. This goes against the local consensus that TV time and the machinery of the big parties’ local networks will still be more decisive than social media, given the relatively low influence of the internet across the country.

Mostly, however, he sticks to the US, China and Europe.

Euromoney meets with Ferguson later that day, a little uncertain about Ferguson’s range of knowledge and experience of Latin America. Such concerns were laid quickly to rest with Ferguson’s response to the opening question, which picked up on a point that he had made in his speech about the relative speeds of adoption of mobile payments in Asia (and China in particular) compared with the US. Could emerging markets in Latin America reach Asian levels of near-universal adoption of new payment technologies?

His answer revealed that he is on the board of directors of Argentinian financial technology firm Ualá, which already has 130,000 users of its mobile app that links to a pre-paid MasterCard, enabling payments and building credit histories for the large unbanked population in Argentina.

The reason, he says, that the US has been slow to adopt mobile payment apps is that the US system was good enough not to need urgent replacement, whereas in many emerging markets – and Asia is leading the way – the banking systems have evolved leaving large sections of the population behind.

He points out to another specific example of M-Pesa in Kenya.

“Any system of electronic, digital banking that lowers the entry barrier [for individuals] is likely to take off faster in emerging markets than in developed markets. We see this very clearly in Asia today, with Alibaba and Wechat; in different ways, these create very attractive and effective payment platforms that most Chinese people use. Even beggars take money on smartphones,” he says.

As an interviewee, then, Ferguson has range. And if the sheer breadth of his argument seems implausible, he peppers it with personal experience to back up the expansive oratory. In January he was in Hangzhou meeting the people from what he calls “financial Alibaba”, and he believes their technology is attractive to deploy in other emerging markets, in large part because it is a benefit to the many small businesses in these countries that are not being well served by the traditional banks.

“I think this is a huge deal,” he says, “and it gives China a large edge in EM. And that’s already becoming apparent in India and parts of southeast Asia.”

He says Chinese companies have been quick to partner with local fintech startups to enable these domestic firms to scale up effectively.

“This is happening in India and then these markets get drawn into the Chinese fintech empire,” he says, which could end up being a problem.

“The obvious unintended consequence of getting involved in Chinese platforms is that there is just no data privacy at all,” he adds.

Unfortunately for Silicon Valley companies, the recent Facebook data scandals have weakened their ability to contrast themselves favourably in terms of privacy: “But there is still a counter argument to be made that, ultimately, the US will do better than China on this front – though we are not there yet. As long as the platforms that the US produce are less effective for e-commerce then China is likely to win this global competition.”

However, presumably Ferguson will be wary of Ualá getting involved with any Chinese partner. “You have to look very carefully about what you are getting involved with,” he says.

For the full article visit

Posted in Blog | Tagged , , , , , , , , , , | Leave a comment

Argentina: Two confessions

I am going to confess an unpopular opinion: I am getting worried about Argentina.­

I am also going to confess to embarrassing naivety: I have been testing my hypothesis with the wrong bankers.

But first, my concerns about Argentina. The mess up in monetary policy at the end of last year and the beginning of this one saw a delicate communications challenge around the changes to the central bank’s targets trampled on by the clumsy and damaging decision to accompany this policy change with two 75 basis point cuts to interest rates.

The central bank was beginning to get some traction in its very difficult and long job of bringing inflation down in a country that is synonymous with the phrase ‘unanchored expectations’.

As night follows day, inflation – and expectations of future inflation – have turned reversed and are now rising. At the very least, the authorities have wasted precious time in getting inflation down to levels where the private sector sees exchange rates and interest rates at stable levels – where investments make financial sense.

Credibility, as the maxim goes, is hard to win and easy to lose. Argentina just lost a big chunk of credibility.

There are persistent rumours at home and abroad that the mistake was the result of a fight between economy minister Nicolás Dujovne, who wanted to provide some monetary relief in a bid to drive economic growth above 3%, and the central bank governor Federico Sturzenegger.

If true, the loser wasn’t really Sturzenegger, it was Dujovne’s economy and the country’s population that must, soon enough, restart its painful fight against inflation. Because how can you lower inflation without hiking interest rates? Where’s a case study economy that managed to lower persistent double-digit inflation at the same time as increasing GDP growth? If there is one, I’d love to see it.

Just a cursory look across Argentina’s border to Brazil shows that there are no short cuts. There, the central bank increased interest rates, pushing a slowing economy into a deep recession. Pain followed – most notably high unemployment. But the central bank sat on those high interest rates until inflation collapsed. That is what Argentina needed – and needs – to do. You can’t get back on the path of reform that they were on.

Contrarians might argue that president Mauricio Macri’s economic model requires 3% growth to boost government revenues to finance and make possible the gradual fiscal adjustment. In turn, that fiscal adjustment will help monetary policy, which was doing most of the work (and capping growth). Also, this model needs a stable exchange rate to give stability for foreign investment and to help with inflation. But of all these interacting forces inflation is the most important. Without low and controlled inflation, you cannot achieve a stable currency.

So, recently I have been asking senior bankers about their views on the potential importance of Argentina’s monetary misstep. To me, it seemed like a genuinely big mistake and one that makes an already perilously narrow path to orthodoxy razor thin. Wouldn’t resurgent inflation delay investment? Without GDP growth of 3% – and it is still below this crucial level – isn’t there a risk of dangerous fiscal imbalance? And for how long can they finance this fiscal shortfall in foreign currency? If investors lose patience – maybe they start to fear repayment problems, should the Argentine peso collapse and leave their large dollar external debt commitments exposed – what happens to the currency? And then inflation? And then what, ultimately?

But the bankers all say that they can’t see this ending badly. And that’s when my naivety hit me – I had been speaking almost exclusively to capital markets bankers and economists. The latter are usually centrists and consensualists, and the former are making so much money from selling Argentine debt to international investors that they don’t want to see any problems. And even if they do, they certainly won’t articulate them to the press, on or off the record. This gravy train could still have years to run. A recent phrase used by Paul Krugman about the US Republican party, “motivated gullibility”, came to mind.

But talk to traders, and the conversation has a starker quality. ‘No way out’ Like me, some can’t see a way that Argentina can finesse its way out of this. Interest rates will have to go up again – and stay up until they actually manage to get inflation on a sustainably downward trajectory. That will mean economic slowdown, if not recession. So the fiscal adjustment will need to be sped up or risk fiscal collapse and an unsustainable debt build-up – with a large proportion in foreign currency.

The other way in emerging markets history has been to inflate your way out of the problem through a weaker currency, but that means a swift end to Macri’s attempt to cast the Argentine economy in a new economically orthodox light. The working assumption must be an increase in rates and that the government will switch its priorities to reflect the supremacy of the inflation fight over growth.

As one FX trader told me: “You can’t get back on the path of reform that they were on. Argentina is now on a permanently worse trajectory than it was before. The inflation leg of the ‘trilemma’ is the most important. Eventually they will have to raise interest rates to tame inflation via the currency, and everything else – the growth rate – will be sacrificed.”

Read all this together and there is little chance that the Argentine peso will appreciate on spot in the longer term. But the downside to talking to traders is that their timeframes are much, much shorter than mine.

When I asked what our shared view of peril for Argentina meant to him strategically, he shrugged: “At the moment, the central bank is supporting the Argie, so tactically it’s a buy.”

Posted in Blog | Tagged , , , , , , , | Leave a comment