Brazil's largest banks need to slash costs and digitize

03 June 2020 3 min. read
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Heightened competition and lower interest rates in the Brazilian market are squeezing the profitability of the country’s largest banks, according to an analysis by Roland Berger. In response, Brazil’s banking sector should cumulatively cut nearly $6 billion in costs, and accelerate its digital transformation agenda.

The global strategy consulting firm conducted a study among Brazil’s largest banks, which include Itaú, Bradesco and Santander Brasil in the private sector, and Banco do Brasil and Caixa in the public sector. Profitability among these top players is being cramped by a combination of lowering interest rates and increased competition.

The answer, according to Roland Berger managing partner and regional head for Latin America António Bernardo, is to cut costs and boost efficiency. This is not to say that Brazil’s largest banks are currently lacking in efficiency. In fact, efficiency rates among these banks comes in at between 50% and 60%, which is comparable to the average in the US and the European Union.

Global consultancy McKinsey & Company reported last year that segments of the banking sector in Brazil and across Latin America were growing faster than in any other region in the world. Nevertheless, it is important to move with the times, and the big banks in Brazil need to move fast to protect their revenues.

Brazil's largest banks need to slash costs and digitize

Roland Berger suggests nearly $6 billion in costs should be slashed across all banks, which amounts to 10% of the current cost base. Some are already actively engaged in cutting back, most notably Banco Bradesco, which was up until a decade ago the largest private bank in Brazil. In the second half of last year alone, the bank closed 50 of its brick and mortar branches.

By the end of this year, Banco Bradesco plans to have closed down another 400, representing a 10% cut in the costs for its customer servicing network. Analysis of strategic plans for 2020 shows that other banks are following suit, with the exception of public bank Caixa.

Digital transformation

Not surprisingly, against a backdrop of growing tech opportunities and a digitizing consumer landscape, Roland Berger puts forward the need to embrace digitization of operations. “Core banking systems in Brazil are outdated. IT systems and even some client touch points are branch- or product-centric, and that offers a terrible customer experience,” said Bernardo.

He added that for maximum impact, an integrated view to IT is needed: “If you want to have a digital bank that is perceived by clients as such, you need to have the company, its operations, culture and working methods fully aligned with that.”

Once again, Banco Bradesco appears to be leading the way. The firm has been investing in a variety of innovative financial technology (FinTech) products, and has also launched an autonomous entirely digital banking practice by the name of Next. In 2018, Banco Bradesco was named a top ‘Global Innovator at the Distribution & Marketing Innovation Awards held by business and technology consultancy Accenture.

If Brazil’s banks manage to get the combination of cost cutting and digitalization right, then they could according to Roland Berger see their returns on equity (ROE) rise to between 12% and 16%. By global standards, a fairly profitable scenario.