High interest: Brazil's consumer-credit business is getting ready to boom

Latin Trade, April, 2005 by Thierry Ogier

Money for nothing? You bet. Hordes of youths in flashy uniforms compete to catch the attention of pedestrians in downtown Silo Paulo. They seem to belong to rival gangs, down to the odd-sounding street names. Tatiana, a 20-year old saleswoman dressed in an orange-and-green jogging suit, is a member of the Tail sales task force. Just like dozens of her colleagues, she's chasing cash-starved customers for consumer-credit institutions looking to charge a lucrative 6.9% in monthly interest.

The traditional path to credit--paying by installment--isn't cheap, thanks to stratospheric interest rates, but for many Brazilians it's the only way to have a sense of comfort at home. "My sofa, TV, sound system. I bought everything at Casas Bahia," says Ze Souza, a 34-year-old waiter who frequently shops at the popular retail chain. He does not mind paying the interest as long as he manages, he says, to drive a good bargain. When Souza heard that Casas Bahia had struck a deal with Banco Popular, the consumer-credit arm of the state-owned Banco do Brasil, he had no doubts. "If there's something like this, I'll go for it" he says.

Within the past 18 months, household names in world banking such as the U.K.'s HSBC and Citigroup in the United States also have moved into this potential growth area to compete with increasingly strong domestic competitors Raft, Bradesco and Unibanco. Big banking groups have acquired several independent consumer-credit institutions, such as Losango and Finasa, in order to boost their funding capabilities.

HSBC, which took control of Losango when it paid US$815 million to acquire the Brazilian subsidiary of Lloyd's TSB in October 2003, has big plans. Bank executives expect consumer credit to grow five times faster than the overall economy, which is forecast to increase by 3.8% this year. "Losango is now backed by a large retail bank in Brazil. Lloyd's did not have such a distribution network," says Leonel Andrade, president of Losango, which has a portfolio of 15 million customers. In August, HSBC invested a further US$125 million to buy a smaller institution, Valeu, from Banco Indusval Multistock.

Itau, Brazil's second-largest private bank, lost the bid for Losango to HSBC. It instead has invested on two fronts: It launched its own, new consumer-credit institution, Tail (which means "seeds" in the indigenous Tupi-Guarani language) to offer loans to the poor. "We really want to be and look different. We are happy, close, friendly and transparent in our long-term relationship with our customers," says Dilson Bibeiro, Tail's director.

Itau also has set up a joint-venture with the country's largest retailer, Pao de Acucar, to finance purchases at more than 500 supermarkets starting in 2005. Itau intends to set up small agencies within those stores to try and sell insurance and other financial products. "It's a huge flow of customers and a great opportunity to grab customers," says Paulo Marinho, Itau's spokesman. The bank paid US$150 million for a 50% stake in the venture.

"It's a real battle, and it's good business. Supermarket customers are excellent, because they do pay their bills," says Alexandre Lodygensky, presidential adviser at BNP Paribas in Sao Paulo. Carrefour, the French retailer, also is launching its own banking activities in more than 80 hypermarkets in Brazil this year, in partnership with Cetelem, a consumer-credit company owned by BNP Paribas.

Several institutions are targeting the notoriously underbanked Brazilian population, where between 30 million and 40 million consumers do not have bank accounts, all aiming to broaden their customer bases, says Tony Martins, from IBM Consulting services in Silo Paulo.

After 7 years of continuous decline in purchasing power, Brazilians started to enjoy a recovery in 2004. As consumer confidence improved and interest rates declined between June 2003 and May 2004, banks and retailers saw good opportunity to boost credit. "It's time for the financial sector to provide credit to the people," says Marcio Cypriano, chairman of Bradesco, which acquired various institutions and grouped them under the Finasa brand.

Volume. The potential is great: In spite of Brazil's economic clout, outstanding loans are only equivalent to 26% of gross domestic product, which is weak by international standards. But if economic growth is sustained in the medium term, and inflation remains low, it will translate in real income gains and greater credit volume. Losango's Andrade expects consumer-credit volume to reach 12% of economic output in a few years' time, up from a paltry 7% now. According to that scenario, banks will gain economies of scale and could eventually shave a few percentage points off their huge spreads--currently more than 40%--which have long made interest rates impossibly high for consumers.

Until then, it's up to Tatiana and street-working friends to turn passersby in downtown Sao Paulo into active borrowers.

THIERRY OGIER * SAO PAULO