Mid-size banks: the big squeeze

In the Brazilian banking world, big is still beautiful. But mid-size banks are feeling a squeeze, due to the extended international financial crisis, higher funding costs and also the backlash from several scandals involving fraud. Over the last two years, Banco Panamericano (of the high-profile television mogul Silvio Santos), Banco Morada and Cruzeiro do Sul were all caught up in the regulatory nets of the central bank, investigated for fraudulent operations and large holes in their accounts.

This has caused a “credibi-lity challenge” to other middle market banks, says Luis Miguel Santacreu, a bank industry analyst at Austin Ratings, a São Paulo-based consultancy. Hoping to head off further trouble, authorities introduced new regulations earlier this year.

Banks working in consumer finance also faced tougher funding conditions and a drop in profitability on the back of higher default rates, especially in car loans. Some, like BMG, had to look for partners. A mid-size bank specializing in payroll loans (those that are backed by wages or pensions), BMG agreed to take a minority stake in a joint venture with Itau Unibanco, Brazil’s largest private bank. The going was even tougher for banks focused on small- and medium-sized businesses, due to the economic slowdown in the first half of the year. Central bank president Alexandre Tombini is adamant that the situation is well under control. Brazil has 130 small- and medium-sized banks, which account for around 70 percent of the total assets of the financial system and have a credit portfolio that accounts for slightly more than 13 percent of total credit in Brazil.

“When we detect problems, we have acted upon them and we’ve seen some important moves lately which I think bode well for the fact that (this) cluster of (mid-sized) banks is on a better footing today than it was at the beginning of 2011,” he told foreign journalists in July.


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