Brazilian big banks losing battle for asset management

. Nov 05, 2019
big banks red ocean

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Good morning! We’re covering today why big banks are losing battle for asset management. The U.S. upholding a ban on Brazilian beef. Governors fight privatization on sanitation services. (This newsletter is for platinum subscribers only. Become one now!)

The red ocean of Brazilian banks

The Big 5 of Brazil’s banking industry—Itaú, Bradesco, Banco do Brasil, Caixa, and Santander—are losing

out badly to independent brokers in the battle for asset management, according to a report by JPMorgan. Between 2013 and 2017, the Big 5 got 85 percent of new investments in funds. Over the past two years, the trend has drastically changed: with the Big 5 getting only 12 percent.</p> <p>Banks are not only losing the battle for new customers. Their asset management market share was 65 percent in 2016. It is now at 58 percent.</p> <p><strong>Why it matters.</strong> Administration fees are banks&#8217; <a href="">bread and butter</a>. Fees on private equity make up 22 percent of Banco do Brasil&#8217;s revenues from bank fares. That rate drops to 13 percent for Itaú, 12 percent for Bradesco, and 6 percent for Santander.</p> <p><strong>How to create a red-ocean scenario. </strong>Traditional banks&#8217; portfolios are dominated by fixed income (80 percent). Lower benchmark interest rates, however, make <a href="">fixed-income investments much less attractive</a>. Plus, the profusion of independent asset brokers has spurred competition.</p> <div class="flourish-embed" data-src="visualisation/873060"></div><script src=""></script> <p><strong>Invest to lose? </strong>With the Selic benchmark rate at an all-time low of 5 percent, funds with administration fees of 0.5 percent or more are no longer making investors money. Some banks, however, charge up to 3 percent.</p> <p><strong>Open is better.</strong> The report says that banks that have opened up their portfolio to funds run by third parties, such as Itaú, may suffer much less in the new scenario.</p> <hr class="wp-block-separator"/> <h2>U.S. upholds ban on Brazilian beef</h2> <p>Two years after banning Brazilian in natura beef, U.S. authorities remain unconvinced that the product complies with the rules of the country&#8217;s Food and Drug Administration. Back in March, U.S. President Donald Trump had suggested the ban could be lifted—but a mission of American auditors wasn&#8217;t impressed with what they found in Brazilian meat plants.</p> <p><strong>Why it matters.</strong> American safety standards for foreign products are among the world’s strictest, and many countries could follow the U.S. in opening (or closing) their markets to Brazilian beef.</p> <p><strong>Not buying it.</strong> Sources within the Brazilian government say the U.S.&#8217; arguments for not lifting the ban hold no water. They say the decision was for aesthetic reasons, not sanitary ones. The ban happened after inspectors found abscesses on products—caused by vaccines against foot and mouth disease. In response, the Brazilian government decided to reduce the dosage of vaccinations.</p> <p><strong>Broken promises.</strong> After meeting with Mr. Trump, President Jair Bolsonaro made a series of concessions to the U.S.—including, but not limited to, waiving Brazil&#8217;s status as an emerging country in the World Trade Organization. But he has gotten little in return. The promise of having the U.S. backing Brazil&#8217;s entry in the OECD was broken—and now the beef ban has remained.</p> <p><strong>Exports.</strong> According to the Observatory of Economic Complexity, Brazil exported BRL 721 million of beef in 2017.</p> <hr class="wp-block-separator"/> <h2>Governors move against privatizing sanitation services</h2> <p>Last week, a special congressional committee <a href="">approved</a> a bill that would allow private companies to compete against their state-owned counterparts for sanitation services. But the margin of the vote (21-13) triggered alerts within the government, which has now seen fierce opposition from state governors, led by the states of Goiás and Espírito Santo.</p> <p><strong>Why it matters.</strong> Half of Brazil&#8217;s population has no access to basic sanitation. Many experts say that private companies could help expand this coverage and bring in over BRL 700 billion in new investments for the sector. But that could spell doom for the much less competitive public players.</p> <p><strong>Political calculation.</strong> Governors want to increase the profitability of the companies they are responsible for—even if it is to sell them for a better price in the future. They are also concerned about the upcoming 2020 municipal elections. They fear that disgruntled servants of sanitation companies could lead to protests—and electoral defeats.</p> <p><strong>Loophole.</strong> With the prospect of a market open to competition, many companies are rushing to keep their space in the market by signing long-term deals <em>just before</em> the new rules pass. As an example, São Paulo sanitation company Sabesp has signed contracts of up to 40 years with 13 municipalities.</p> <hr class="wp-block-separator"/> <h2>What else you should know</h2> <p><strong>Privatization.</strong> President Jair Bolsonaro will sign a bill today authorizing the privatization of Eletrobras—the country&#8217;s state-owned power company. The government will issue more stocks, reducing its share from 60 percent to a level just below 50 percent. The Economy Ministry expects to raise at least BRL 16 billion with the move—expected to happen next year.&nbsp;</p> <p><strong>Pensions.</strong> While state and municipal-level administrations were not included in the new retirement rules created by the pension reform, legal scholars have identified an article that essentially forces them into changing their pension systems as well. It prohibits the federal government from giving financial aid of any form for administrations that have not adopted the &#8220;general rules&#8221; for pensions.</p> <p><strong>Bolsonaro.</strong> People close to President Jair Bolsonaro say he will leave the Social Liberal Party within the next few days, to join a new party. The president wouldn&#8217;t have the time to create a new political group from scratch in time for the 2020 municipal elections (and it demands thousands of signatures across the country, a lengthy and expensive process). The most probable solution is joining one of the two parties in the final stage of registration in the Electoral Justice system.</p> <p><strong>Mariana.</strong> Today marks the fourth anniversary of the Mariana disaster. On November 5, 2015, an iron ore dam collapsed, spilling the equivalent of 25,000 Olympic swimming pools of toxic sludge—destroying entire towns and resulting in 19 deaths. It also devastated the Rio Doce. The dam was owned by mining company Samarco, a joint venture between BHP Billiton and Vale. So far, nobody has been punished—neither for the deaths nor for environmental crimes. We&#8217;ve published a series of reports discussing the causes of the disaster, its repercussions, and how it could have been avoided. <a href="">Read now</a>.</p> <p><strong>History.</strong> Seven years ago, excavations for the beautification of Rio&#8217;s port zone found vestiges of the Valongo Wharf—a major slave port that operated in Colonial Brazil and was the busiest since the Roman Empire. Since then, Rio&#8217;s City Hall has kept more than 1.3 million archeological objects in a storage unit—but experts say that mold and rust threaten the integrity of the artifacts. The State University of Rio is trying to obtain control over the collection. Back in July, our Explaining Brazil podcast took you to the Valongo Wharf—and the region in Rio known as &#8220;Little Africa.&#8221; <a href="">Listen now</a>.

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