D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Banco Central do Brasil Banco Central do Brasil The Role of International Financial The Role of International Financial Conglomerates in Emerging Conglomerates in Emerging MarketsMarkets

June/2005June/2005

Banco Central do Brasil Banco Central do Brasil The Role of International Financial The Role of International Financial Conglomerates in Emerging Conglomerates in Emerging MarketsMarkets

June/2005June/2005

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Composition of the Brazilian Financial Composition of the Brazilian Financial System – BFS (as % of total assets)System – BFS (as % of total assets)

1998

46%

35%

19%

Government-ow ned Domestic private Foreign private

2001

41%

33%

26%

Government-ow ned Domestic private Foreign private

2004

38%

41%

21%

Government-ow ned Domestic private Foreign private

Number of banks BFS 1998 2001 2004

Government-owned 23 16 14Domestic private 122 96 82Foreign private 58 70 58

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Composition of the Brazilian Financial Composition of the Brazilian Financial System - BFSSystem - BFS

• Overall reduction in the number of banks Overall reduction in the number of banks point to more concentration in the BFSpoint to more concentration in the BFS

• Private banks (domestic and foreign) Private banks (domestic and foreign) occupy the space left by the reduction in occupy the space left by the reduction in the number of government-owned the number of government-owned institutions, as a result of privatizationinstitutions, as a result of privatization

• Foreign banks grab a greater share of the Foreign banks grab a greater share of the market in 2001, only to lose it to domestic market in 2001, only to lose it to domestic banks in 2004banks in 2004

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Capital adequacyCapital adequacy

Basel capital ratio

0

10

20

2000 2001 2004

Year

Government-ow ned Domestic private Foreign private

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Capital adequacyCapital adequacy

• Private banks maintain their Basel capital Private banks maintain their Basel capital ratio at good levels (above 15%), well above ratio at good levels (above 15%), well above the required capital of 11%the required capital of 11%

• No difference: Domestic X ForeignNo difference: Domestic X Foreign

• Government banks show considerable Government banks show considerable improvement in theirs (doubling from 8 to improvement in theirs (doubling from 8 to 16% in the period)16% in the period)

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Evolution of Intermediation

0

50

100

%

1998 2001 2004

Year

Share in total volume of loans BFS

Government-ow ned Domestic private Foreign private

01020304050

(%)

1998 2001 2004

Year

Loans/Assets

Government-ow ned Domestic private Foreign private

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Evolution of IntermediationEvolution of Intermediation

• Considerable reduction in the loan Considerable reduction in the loan portfolio of government banks (portfolio portfolio of government banks (portfolio restructured ) and good increase in the loan restructured ) and good increase in the loan portfolio of private domestic banksportfolio of private domestic banks

• Foreign banks also increased their credit Foreign banks also increased their credit portfolios, albeit less than domestic banksportfolios, albeit less than domestic banks

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

EfficiencyEfficiency

0

20

40

60

80

(%)

2002 2003 2004

Year

Operating costs*

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

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

EfficiencyEfficiency

• While government banks find difficulty in While government banks find difficulty in improving their efficiency, domestic private banks improving their efficiency, domestic private banks gradually improve theirs and foreign banks, gradually improve theirs and foreign banks, inversely, see their efficiency deteriorating inversely, see their efficiency deteriorating

• The administrative expenses of both private The administrative expenses of both private domestic and foreign banks increased in the domestic and foreign banks increased in the period but, in the case of the former, this was period but, in the case of the former, this was more than compensated by a comparatively more than compensated by a comparatively higher increase in revenueshigher increase in revenues

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

EarningsEarnings

-10

0

10

20

30

(%)

2000 2001 2004

Year

Return on equity (ROE)

Government-ow ned Domestic private Foreign private

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

EarningsEarnings

• 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)

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Some tSome thoughtshoughts• 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).

D i r e c t o r a t e o f S u p e r v i s i o n

T h e R o l e o f I n t e r n a t i o n a l F i n a n c i a l C o n g l o m e r a t e s i n E m e r g i n g M a r k e t s

Contact Contact

BANCO CENTRAL DO BRASILBANCO CENTRAL DO BRASIL

Directorate of SupervisionDirectorate of SupervisionE-mail: secre.difis@bcb.gov.brE-mail: secre.difis@bcb.gov.br

Phone: 55-61-414-2442Phone: 55-61-414-2442

Fax: 55-61-321-4280Fax: 55-61-321-4280