Igor Cornelsen gives you the basics on Brazilian banking

Jan 06, 2015, 20:37 ET from Igor Cornelsen

MIAMI, Jan. 6, 2015 /PRNewswire/ -- The banking world was left scratching its head over the anomaly of Brazil's banks at the end of 2014. While banks typically suffer along with troubled economies-- and with no economic growth under Dilma Roussef's populist policies, Brazil's economy was troubled end-of-year, to say the least-- the country's top two private banks, Itau Unibanco (ITUB) and Banco Bradesco (BBD) saw shares rise up by one-third during 2014. They also saw solid profit increases: Itau's third-quarter net jumped 36% from a year earlier; Bradesco's rose 28%.

So how do Brazilian banks weather the storm? According to top Brazilian banker and investment expert Igor Cornelsen, the secret is knowledge of the market, and experience over other turbulent years.

"Brazilian bankers in the private sector are only lending to borrowers who are the most worthy of credit. This really streamlines costs and provides banks with a sense of security looking ahead," says Cornelsen. "This means people with less desirable credit must focus public sector banks, cash-based spending or forego their business plans, which of course is a challenge to the macro-economy and the development of the country. The best thing the Brazilian government could do to make investors feel secure is instill more market-oriented reforms and fiscal austerity."

In such an uncertain climate, why would anyone consider Brazil at all? An abundance of natural resources and an increasing need for infrastructure development to support a booming population makes Brazil the most attractive market in South America. Brazil is one of the world's top food producers and the largest country on the continent.

It certainly is a fascinating example to watch, but as 2015 gets started Cornelsen finds that many investors are behind on the world of Brazilian banking.

"Before you look to any investment, you must know the bare-bones, the basics," he explains.

This is why Cornelsen has created a short and easy profile for busy investors to brief before considering Brazilian stocks for their portfolios. Below are Igor Cornelsen's basics on Brazilian banking:

1. Brazilian banks have ten major players

Brazil is the largest economy in South America and the eighth largest economy worldwide. Backing this powerhouse are 10 major privately and state owned commercial and investment banks. "Banco Itau is really interesting as it's seen tremendous growth since merging with Unibanco in 2008," explains Cornelsen.

Other notables include Banco Bradesco, Caixa Economica Federal, HSBC, Banco J Safra, Banrisul, Santander, BTG Pactual and Banco do Brasil. Citibank Brazil is considered one of the top-ten, but as part of the largest multi-bank in the world, this comes at little surprise.

2. A fresh face could turn things around

"The 'new economic matrix' dreamed up by Guido Mantega was a complete failure. It was based on ideology, not rational economics," says Cornelsen. "The new finance minister is seemingly going to to return to relatively orthodox policies."

The appointment of Joaquim Levy as finance minister brings hope for Brazil's banks. His views on fiscal reform are a stock contrast from President Dilma Roussef's populist ideals. With a PhD from the University of Chicago and a background at the IMF, he is seen as a shrewd policymaker and a friend to the private sector in a government that is otherwise inhospitable. "Levy's appointment is hopeful, but whether or not real economic reform will go into effect has yet to be seen," warns Cornelsen.

3. Pay attention to China

China is Brazil's largest trading partner and the two countries' economies are intrinsically linked. "A stronger Chinese economy means good prices for Brazilian raw materials," says Cornelsen.

On the other hand China is the biggest competitor to Brazil exports of industrialized goods to other Latin American countries. "When you invest in a country, you should pay attention to their trading partners too," says Cornelsen. "Keeping an eye on all connected markets will give you a greater understanding of your investments, which leads to more success and more profits."

4. The real value of the real

Brazil for years has had an overvalued currency. This has made exports of industrialized goods to lose competitiveness, and has created a huge current account deficits. In the past two years, the Central Bank of Brazil has sold dollar swaps in the local markets in order to avoid a fast depreciation of the real. So the currency must be still over appreciated.

It is expected that the new administration will be less interventionist and as a consequence the devaluation of the real will continue on a controlled pace. This in turn will spark investments in industry, making the export of manufactured goods from Brazil more competitive. Finally, the disequilibrium of the current account should decrease.

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SOURCE Igor Cornelsen