A study by financial data analysis firm Economatica shows that, of the ten most profitable banks in the world, four are Brazilian: Santander (Brasil), Itaú Unibanco, Banco do Brasil and Bradesco. The other six banks on the list are from the United States and Canada — countries with more developed economies than Brazil.
But why are Brazilian banks among the most profitable in the world? Economists heard by UOL claim that the result is the high concentration of the market and high interest rates, which favor the gains of institutions. For Febraban (Brazilian Federation of Banks), the banking market is competitive and the profitability of institutions is not out of line with the reality of other sectors of the economy.
The Economatica survey considered banks that have assets above US$100 billion — in practice, the largest financial institutions in the world. Of the total of 39 banks, four are Brazilian and are among the ten most profitable.
The ranking was formed based on ROE (return on equity), a measure of how much value a company can generate using its own resources. The higher the percentage of ROE, the more profitable the company. See the numbers, whose reference is the year 2021:
Concentration favors profitability
experts heard by UOL stated that one of the main factors for the high profitability of Brazilian banks is the concentration of the market in the country.
Banking concentration is a factor that explains why we are so profitable. We are talking about an oligopoly, which manages to preserve its power.
Mauro Rochlin, professor at FGV
An oligopoly occurs when a few companies hold the largest share of a given market. In Brazil, according to data from the Central Bank for 2020, the five largest institutions held 81.8% of credit operations in the commercial banking segment. In the case of the total deposit, the percentage reached 79.1%.
Among the five largest institutions is, in addition to those in the Economatica ranking, Caixa Econômica Federal.
For Fernando Dal-Ri Murcia, professor and director of Fipecafi Projetos in São Paulo, the Brazilian banking sector has always been concentrated, which favors the results of large banks.
“The ROE of the banks was higher in the past. Today, there are other institutions, such as Nubank, Inter and BTG, that have brought competition”, says Murcia. “The bigger banks have lost a little profitability, but it’s still big.”
In fact, Economatica data show that, since 2010, the ROE of Bradesco, Itaú Unibanco and Banco do Brasil has decreased. Even so, these institutions have remained among the most profitable in the world. Santander Brasil’s ROE more than tripled.
ROE of Brazilian banks
Santander (Brazil): 6% (2010); 18,9% (2021)Itaú Unibanco: 24% (2010); 17,3% (2021)Bank of Brazil: 27% (2010); 15,7% (2021)Bradesco: 22,3% (2010); 15,2% (2021)
High interest rates also favor banks
The second factor that has favored the profitability of banks, in the view of analysts, is high interest rates. Historically, Brazil has kept the Selic – the basic interest rate – at higher levels than other countries.
Economist Mauro Rochlin, a professor at FGV (Fundação Getulio Vargas) in Rio, recalls that, at the height of the new coronavirus pandemic, the Selic rate reached 2% per year in Brazil, the lowest value in the historical series. At the time, the low Selic was one of the government’s strategies to combat the economic effects of the pandemic. With the advance of inflation, the Central Bank began the process of raising interest rates in March last year. A year later, the Selic is at 11.75% per year.
The Selic serves as a reference for fundraising by banks. In theory, the higher the base rate, the higher the cost of funding for banks and, also, the interest charged to individuals and companies at the end, in loans and financing.
“Central banks in advanced economies are much more resistant to raising interest rates, which is not the case in Brazil,” says Rochlin. “Here, the rate went from 2% to 11.75% in one year. And with higher interest, the bank will profit even more.”
Professor Ricardo Rocha, from Insper in São Paulo, explains the mechanism.
when the interest [Selic] are very low, the volume of loans needs to grow a lot. When the rate is high, the bank manages to have a lower loan volume.
Ricardo Rocha, professor at Insper
For Murcia, from Fipecafi Projetos, the high interest rate contributes to the return of banks, in an environment with limited competition due to high concentration. “I don’t know if banks are so to blame for this scenario, or ‘surfed’ in the high interest rate environment,” she adds.
Profitability could be even higher, says economist
The presence of Brazilian banks at the top of the Economatica ranking calls attention because the country, despite having a developed financial system, is far from showing good results in the economic area.
One of the common discourses is that the banks continue with profits despite the Brazilian economy doing badly.
For Ricardo Rocha, from Insper, the good results actually show that the Brazilian financial system has been “extremely solid” for years. “We weathered the crisis very well [econômica global] 2008”, he exemplifies. “If Brazil finds a path to growth in the coming years, the banks’ results will increase even more.”
What does Febraban say?
A representative of the sector, Febraban recognizes that banking activity, which requires high volumes of capital, is more concentrated, and not just in Brazil. However, the entity claims that this does not mean that competition is low.
“There is a lot of confusion between concentration and lack of competition. One thing is not directly related to the other”, said the president of Febraban, Isaac Sidney.
In an interview with UOL, which can be seen here, Sidney also argued that the profitability of the banking sector is not exceptional. “That’s another fallacy, the fruit of a boring litany that has had enough,” he said.
The executive also considered that the profitability of banks depends on spreads — the difference between the cost of raising funds, by banks, and what is charged to the customer at the end — and not on the Selic level.
O UOL also questioned the Central Bank regarding profitability and competition among Brazilian banks. The institution did not comment.