Although trade finance pricing is beginning to creep up, the Brazilian banking sector is still well-placed to support the trade finance needs of the country’s exporters, writes Rebecca Spong.
Brazilian banks are outperforming many of their global competitors and although the economic problems in Europe are beginning to erode some of their strength, they are presently demonstrating a good deal of resilience.
Itaú BBA, the segment of Itaú Unibanco responsible for banking transactions with large corporates and investment bank services, reported a net income of R$600mn (US$323mn) in the third quarter of 2011, a virtually stable result compared to the previous quarter. Itaú Unibanco as a whole notched up R$11bn in net income between January and September 2011.
In terms of trade finance, Itaú BBA reported that as of September 30, 2011, foreign trade financing increased by 43.1% when compared to December 2010 and rose by 27.3% compared to the previous quarter.
For the first nine months of 2011, Banco Bradesco reported an adjusted net income of R$8.427bn, marking an 18.4% increase compared to the R$7.120bn recorded in the same period in the previous year.
Banco do Brasil reported a net income of over R$9bn for the first nine months of 2011, up almost 20% over the amount recorded in the same period of 2010.
Even the smaller Brazilian banks are gaining ground, with Banco Pine’s global scale rating upgraded by Standard & Poor’s to BB+ from BB-, with a stable outlook.
The rating agency stated: “The stable outlook reflects our view that Pine has successfully implemented its strategy of becoming a dedicated bank serving small corporate enterprises while diversifying its revenues and funding sources and maintaining good asset quality and adequate liquidity.”
Similarly Banco Safra has seen strong growth in its trade finance business volumes.
Rodrigo Cossermelli May, correspondent banking & trade finance comments: “Trade finance business increased consistently throughout the year, at a pace of over 25% year-on-year. Both export and import financings presented higher demand in comparative terms, with special attention on the import side due to the investments in infra-structure all over the country, targeting the upcoming World Cup and Olympic Games.”
There are of course some less attractive results coming from the Brazilian banks, with some institutions reporting slight increases in their non-performing loans ratios. But there is a universal feeling that the banks are well-capitalised, with the large players achieving an average return on equity of around 20%.
Perhaps more importantly there is a sense of optimism and confidence in the market, as well as faith in the ability of the Brazilian central bank to provide the necessary back-up if needed.
“I don’t see any bigger problems going forward due to the strength of the banking industry. The reserves held by the Brazilian central bank are very strong and if a similar situation to 2008 occurs then the central bank can just inject liquidity into the market,” Antonio Alves, principal, head of short-term finance department, Latin America and Caribbean region, at the IFC tells GTR.
Trade finance impact
“What we are seeing in Brazil is the impact on the cost of funding. So the first impact we see is a hike in pricing, starting with the European banks,” observes Angela Martins, international department director at Banco Pine.
Up until the last quarter of 2011, most trade finance bankers didn’t see much fallout from the European crisis, with pricing of trade risk in Brazil remaining tight and very competitive, particularly for the top-tier players.
As the sovereign debt crisis worsened, the impact on Brazil became more apparent.
“Although internal demand is still strong, we recently felt a reduction in the lines available. Pricing were adjusted, tenors reduced and traditional lenders revised the exposure in foreign markets,” observes Banco Safra’s Rodrigo Cossermelli May.
Adoniro Cestari, trade and loans Brazil head at Citibank in São Paulo commented to GTR in November: “During the last three to four months we have seen Europe and its problems result in increased risk aversion of other markets, so pricing here in Brazil has gone back up.”
“Pricing is 50-80% higher than it was which reflects lack of US dollar liquidity among European banks that were pretty active in Brazil. But the Brazil market moves very fast and when liquidity is there, pricing gets compressed.”
In other words, the increased pricing being witnessed in Brazil may well be a knee-jerk reaction to the European problems that could be reversed fairly quickly. It is not a reflection of any deterioration in the perception of Brazilian risk.
“It seems that Brazil has been less affected by the global crisis than other countries,” observes Martin Schmitz, executive director, structured finance, Latin America at WestLB.
“There has obviously been an increase in funding costs but it hasn’t led to a situation where there won’t be enough lines available. Top commodity companies can still access trade finance even if pricing might have increased.”
Schmitz does not see any retreat from the Brazilian market. In fact, if banks have lending capacity, then Brazil remains an attractive market to work in.
“More and more international banks are moving into the promising Brazilian market; there are more players getting involved. Also, Brazilian banks are quite active. As we focus on the best risks, our clients here don’t have too many problems getting their funding,” he adds.
What is also widely felt this time around is that Brazil is better positioned to cope with the problems afflicting Europe.
“One thing that is different from 2009 and the previous crisis is that everyone is more prepared. Most banks are highly provisioned and the authorities are monitoring everything quite closely,” notes Banco Pine’s Martins.
“If there was a further hike in pricing and a decrease in the availability of credit lines, the central bank would easily come to market and make credit lines available. So that’s why I think the market is a bit calmer now despite the international scenario,” she adds.
During the 2008-09 crisis when investors pulled billions out of Brazil, the central bank stepped in with a repo mechanism which enabled it to lend US dollars to Brazil’s banks.
The mechanism was used in April 2009 and it ensured that banks and in turn exporters had access to an adequate source of US dollars. In mid-December 2011, the central bank did attempt to use such device again to boost liquidity. According to Bloomberg, it held an auction offering to sell and repurchase dollars. However the bank ended up rejecting all bids, reportedly due to investors’ bids being too low.
Future of trade
As well as central bank support, the World Bank’s IFC has played a role in plugging the gap in the provision of trade finance.
The IFC has been active in Brazil for six years and has supported a total of US$2.6bn of exports and imports, with exports representing 80% of the total guarantee volume.
Latin America as a region has the highest level of participation in the IFC’s global trade finance programme (GTFP), through which the multilateral provides guarantees for short-term trade-related payment obligations of approved financial institutions. In total, 61 banks in 20 countries in Latin America are involved in the programme.
During the last financial crisis as liquidity dried up, many banks in Brazil, even top-tier names, turned to the IFC for help.
“We also have banks coming to us in critical times. During the 2008 crisis, Unibanco (now Itaú) and WestLB joined the programme for less than a year as no one was providing trade lines to Brazil,” Alves tells GTR.
Current market sentiment suggests that any contagion from Europe will be short-term and not damaging to the foundations of what remains an attractive place to do business.
“I’d say that in the LatAm region it is the number one country that wants to work given the prospect of economic growth and the size of the deals entering the market,” comments Alves.
However, the business environment is evolving. With European banks facing their own problems in their domestic markets, local Brazilian banks are growing and gaining more market share.
There are also more Chinese banks active in the Brazilian trade finance market, and some of the Chinese institutions are using the IFC trade programme as a stepping stone into the Brazilian market.
“China Construction Bank has financed some of the mid-sized banks in Brazil through our guarantee programme with the objective of being more comfortable with local risk,” Alves notes.
He adds that it is not only the Chinese banks that are interested in Brazil, with Singaporean banks talking to their Brazilian banking counterparts, as trade flows between Brazil and Asia strengthen.
Inter-regional trade within Latin America is also growing, and this is reflected in the strengthening partnerships between regional banks.
“We see more Chilean banks, Colombian banks, Peruvian banks working with Brazilian banks. Deals that were once done via Spanish banks are now being done directly between Latin American banks,” observes Martins at Banco Pine.
“Applications for banking licences in Brazil from Indian and Chinese banks are increasing,” she adds. But the European and North American players can’t be completely dismissed. For with every bank that retreats, such as RBS abandoning its plans to open an investment bank in the country at the end of last year, another bank moves in. Bank of America Merrill Lynch extended its Brazilian banking licence in the first half of 2011.
ABN Amro also re-established a presence in Brazil, opening a representative office in Saõ Paulo at the beginning of 2011, following its merger with Fortis Bank Nederland.
Portugal’s Banco Comercial Português (BCP) signed a partnership agreement with Banco Privado Atlântico to open a bank in Brazil back in September 2011, with the aim of focusing on corporate and trade financing.
Scotiabank also bought a bank licence from Dresdner bank in Brazil last October. It had had a representative office in Sao Paulo for decades, but has now acquired Dresdner’s multiple banking licence.
In the long-term, trade finance market conditions in Brazil look likely to remain competitive, leading many banks to consider how to remain ahead of the competition.
Innovations and supply chain finance
Rather than end up purely competing over price, a number of banks are looking into how they can design solutions that help Brazil’s largest corporates manage their balance sheets and working capital more efficiently. A lot of the larger financial institutions are hoping they can carve out their competitive edge through the provision of supply chain finance solutions.
Cestari at Citibank Brazil explains: “A lot of Brazilian companies are looking for investment grade rating. They need this rating to access the bond market. Such companies need to find a way of financing their working capital needs without putting pressure on their balance sheet.”
“Programmes that use supply chain finance techniques and the sale of receivables are services that top players are looking for. A large Brazilian corporate that exports to eight countries will have a portfolio they will want to sell without recourse,” he adds.
Banco Santander is another major player in the Brazilian market, with Maximiliano Herrera, head of structured and international funding commenting that its trade finance business in Brazil increased by almost 20% in 2010. “We have a feeling that this year  we will be hitting a very similar figure”.
Herrera also tells GTR how the needs of Brazilian corporates are changing. “We see that large corporates are looking for added value products that can enhance balance sheet management and trade finance is an important part of this,” he observes.
This differs to previous attitudes in banking where structured trade finance deals in Brazil would be arranged with the aim of how best to mitigate the credit risk of the borrower.
Now top-tier Brazilian corporate risk is much improved, with companies such as mining company Vale establishing themselves as global corporations.
Today’s issue is how banks can support the growth of these corporates.
“The main driver towards doing more structured trade finance is the need for greater balance sheet management. Among other things we foresee that customers will be looking for solutions that can help them in terms of risk management related to their importers portfolio,” Herrera adds.
Innovations in trade finance are also being developed in reaction to the increasing volumes of China-Brazil trade and the use of renminbi (Rmb) in trade settlements. Citibank is on the verge of launching a new pre-shipment Rmb product in Brazil in 2012.
The bank is already actively providing post-shipment financing in Rmb via its Chinese operations. However this new product will enable Citi Brazil to use Rmb liquidity to make pre-export advances without having to depend on the availability of US dollars or euros.
The majority of letter of credit and collections business is conducted in US dollars, and the current trend is for Chinese companies to avoid any exposures linked to US dollars. This new product will help Citi capture more of these Chinese trade flows. To further support their customers in both Brazil and China, Citi has set up a specific Latin American-focused desk in China.
But it is not just China that Brazil is focused on. Africa-Brazil trade flows promise rich rewards. Brazilian corporates are strongly investing in Angola and other Portuguese-speaking countries.
Brazilian oil company Petrobras is set to start drilling oil off Angola’s southern coast this year, in the hope that it will find reserves to Brazil’s pre-salt deposits. Vale is also heavily investing in Sub-Saharan Africa.
With shortfalls in liquidity and hikes in pricing likely to be a short-term problem for Brazil, the banking sector will have to ensure it is innovative and flexible enough to meet the changing needs of the country and its ambitious corporate sector.