Brazil’s Joseph Safra was the world’s wealthiest banker when he died earlier this month. Born in Lebanon, Mr Safra built a $23bn empire from his adopted city of São Paulo, the commercial hub of a continent which offered rich pickings in financial services. Chile’s billionaire president Sebastián Piñera was another of those who did well; he struck gold after founding a credit card company in the 1970s.
Latin America is the world’s most profitable region for banks after Africa, according to a recent analysis of IMF data by the left-leaning think-tank Celag. Banks’ return on assets in the region from 2010-2018 averaged just above 2.1 per cent, it said, three times the return in the US and more than twice that of Europe.
Guillermo Oglietti, Celag’s deputy director, attributes this to what he calls the “monopolistic” nature of capital in Latin America. He points to Argentina, consistently one of the region’s worst-performing economies but home to some of its most profitable banks. Their return on assets amounted to a juicy 5.4 per cent in 2019, according to JPMorgan research.
But there now indications that those days may be over as fintech challengers multiply and the banking sector deals with the fallout of Covid-19. The pandemic has hit Latin America harder in health and economic terms than almost any other region of the world. Inevitably, there will be an impact on loan books.
The region’s banks had benefited from a round of consolidation forced by the economic crises of the 1980s and 1990s. This left the sector highly concentrated by the start of the century, forming what Joerg Friedemann, Latin America banks analyst at Citi, delicately calls “a very important sphere of influence in terms of price”.
High real interest rates, another legacy of inflation in the 1980s and 1990s, persisted well into the 2000s in the region, thanks to conservative central banks. Such an environment made it lucrative for LatAm banks to take in deposits and invest them in higher-paying government bonds. For, Brazilian banks, it was “the best arbitrage ever”, says Mr Friedemann.
Now, interest rates across the region have followed those in the rest of the world down to historic lows. Brazil’s Selic reference rate stands at 2 per cent, while those in Chile, Peru and Colombia are lower still.
Argentina, as ever, remains the outlier. Its runaway inflation has led to a reference interest rate of 38 per cent — but also makes the 40 per cent-plus returns on equity among the country’s banks look rather less impressive in real terms.
Finally, limited banking competition allowed some easy pickings which may not be sustainable. Current accounts were a source of rich profits in some Latin American markets. Domingos Falavina at JPMorgan, reckons that fees on these accounts, typically around $10-15 per month, are still worth a tidy $6bn-$7bn a year for Brazil’s banks. Banks in Brazil also charge high lending rates to retail and business customers by European or US standards.
But a host of fintech challengers such as Nubank, Brazil’s internet banking unicorn, are eyeing the region’s retail banking profits hungrily, encouraged by a reformist central bank which wants to encourage innovation and competition.
Latin America’s traditional banks have also left a large proportion of the population unbanked — creating a market that fintechs are now targeting. Around a quarter of the $4bn in venture capital in Latin America last year was invested into fintechs, according to The Banker.
Celia Vansetti-Hutchings at Moody's believes that lower interest rates and increased fintech competition will reduce the overall profitability of Latin American banks but adds: “You will never see levels as low as those in Europe or the US.”
Conor McEnroy, an Irish banker who bought control of Sudameris, a Paraguayan lender in 2004 and has since profited handsomely, believes that is a very good thing — and not just for the obvious reason that it makes him money.
“The question is not why South America is so profitable,” he said. “The question is what’s wrong with the banking system in Europe and the United States?”
Central bank bond-buying programmes known as quantitative easing, he argues, have distorted markets in the developed world. At least, he argues, Latin America’s central banks are not doing massive QE.
“Why are we profitable in South America?,” he asks. “We have our feet on the ground and we’re not living in La-La Land.”