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The Role of International Financial
Conglomerates in Emerging Markets
Banco Central do Brasil
The Role of International Financial
Conglomerates in Emerging
Markets
June/2005
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Composition of the Brazilian Financial
System – BFS (as % of total assets)
2001
1998
19%
26%
41%
46%
35%
Government-ow ned
33%
Domestic private
Foreign private
Government-ow ned
Domestic private
Foreign private
2004
Number of banks BFS 1998 2001 2004
21%
38%
41%
Government-ow ned
Domestic private
Government-owned
Domestic private
Foreign private
23
122
58
16
96
70
14
82
58
Foreign private
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Composition of the Brazilian Financial
System - BFS
• Overall reduction in the number of banks
point to more concentration in the BFS
• Private banks (domestic and foreign)
occupy the space left by the reduction in
the number of government-owned
institutions, as a result of privatization
• Foreign banks grab a greater share of the
market in 2001, only to lose it to domestic
banks in 2004
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Capital adequacy
Basel capital ratio
20
10
2000
0
2004
2001
Year
Government-ow ned
Domestic private
Foreign private
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Capital adequacy
• Private banks maintain their Basel capital
ratio at good levels (above 15%), well above
the required capital of 11%
• No difference: Domestic X Foreign
• Government banks show considerable
improvement in theirs (doubling from 8 to
16% in the period)
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Evolution of Intermediation
Share in total volume of loans BFS
Loans/Assets
50
40
30
(%)
20
10
0
100
% 50
0
1998
2001
2004
Year
Government-ow ned Domestic private Foreign private
1998
2001
2004
Year
Government-ow ned Domestic private Foreign private
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Evolution of Intermediation
• Considerable reduction in the loan
portfolio of government banks (portfolio
restructured ) and good increase in the loan
portfolio of private domestic banks
• Foreign banks also increased their credit
portfolios, albeit less than domestic banks
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Efficiency
Operating costs*
80
60
(%) 40
20
0
2002
2003
2004
Year
Government-ow ned
Domestic private
Foreign private
* ratio between administrative outlays (including staff-related costs) and
the sum of the net income of financial intermediation and fees
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Efficiency
• While government banks find difficulty in
improving their efficiency, domestic private banks
gradually improve theirs and foreign banks,
inversely, see their efficiency deteriorating
• The administrative expenses of both private
domestic and foreign banks increased in the
period but, in the case of the former, this was
more than compensated by a comparatively
higher increase in revenues
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Earnings
Return on equity (ROE)
30
20
(%) 10
0
-10
2000
2001
2004
Year
Government-ow ned
Domestic private
Foreign private
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Earnings
• After a bad year in 2000, foreign banks recovered; the slight
reduction in profitability from 2001 to 2004 being basically
due to the appreciation of the Brazilian currency (Real)
• Remaining government institutions were restructured and
significantly improved their earnings performance
• Domestic private banks confirm their good phase with a
leap in profits from 2001 to 2004 (originating from higher
earnings in both financial intermediation and services)
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Some thoughts
• No performance differences among domestic private and
international financial conglomerates;
• No financial innovation;
• Support from home-supervisor
• Lower concerns with capital adequacy;
• International conglomerates interest tend to be unstable:
• Market share depends on economic and political
stability;
• Strategic presence for market survey;
• Strategy of speculative positions to arbitrage domestic
gaps and fragilities;
• Domestic private and government long term committed (no
options).
Directorate of Supervision
The Role of International Financial
Conglomerates in Emerging Markets
Contact
BANCO CENTRAL DO BRASIL
Directorate of Supervision
E-mail: [email protected]
Phone: 55-61-414-2442
Fax: 55-61-321-4280
Directorate of Supervision