For the best part of a decade, the two largest private-sector banks in Brazil have been locked in a duel to be not just the best bank in the country but the region. A mixture of good management (driving internal consolidation) and luck – sitting pretty in a huge, growing economy with 200 million-plus consumers and with a legacy of high real interest rates – meant that Bradesco and Itaú Unibanco were, in switchable order, the best and second best banks in Latin America for years.
That has changed, even though a quick look at the banks’ headline figures would seem to show it’s almost business as usual, despite a deep two-year recession.
Closer scrutiny of some of the banks’ key metrics show a big decline versus the best banks elsewhere in the region. There are also severe concerns that these big players may be just months away from revealing the credit stress that has been steadily building beneath the reported delinquency numbers.
Instead, Credicorp’s Banco de Crédito del Peru has usurped them to become the best bank in the region, while many banks outside Brazil enjoy better dynamics.
Is that a bold claim?
Look first at return on equity. According to a UBS banking report, ROE at the end of this year should be 18.2% for Itaú and 17.4% for Bradesco. That’s a great return, albeit down on 2013, when Itaú reported ROE of 20.4% and Bradesco 17.3%. However, while the Brazilian pair have stood still or fallen back in the last three years, Credicorp has increased its ROE to 19.9%, from 15.7%.
But that’s not the whole story, for as the Peruvian bank’s ROE has increased, its cost of equity has also fallen. Meanwhile Brazil still has the highest cost of equity (15.8% for the system) in Latin America – and second highest in the big emerging markets after China. This dynamic between return and cost of equity is crucial.
UBS banking strategist Philip Finch has highlighted this trend. He found that Peru enjoys the strongest dynamic in the balance between increasing ROE and reducing COE. In the six months to April 2016, Peruvian banks had an annualized improvement in ROE of 1.7%, while COE fell by 2.8%. That, in part, helps to explain the strong performance of Banco de Crédito del Peru.
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