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Reaping the rewards of the newglobal economy
www.pwc.com/projectblue
Project BlueCapitalising on thegrowth and globalinterconnectivity of theemerging markets:Financial services in Brazil
2 PwC Project Blue
04 Foreword
05 Section one:Emerging superpower
10 Section two:A new model of growth
12 Where next?
13 Making sense of an uncertain future
14 Project Blue framework
Contents
PwC Project Blue 3
Project Blue explores the major trends that are reshaping the competitive environmentfor financial services (FS) businesses worldwide. Our clients are using the frameworkto help them judge the implications of these developments for their particular businessand look at how to take advantage of the changes ahead.
The rise and interconnectivity of the emerging markets of South America, Asia, Africaand the Middle East (together these regions form what PwC terms ‘SAAAME’) is inmany ways the most far-reaching of the developments facing the FS sector. Tradewithin SAAAME is growing much faster than the developed-to-developed anddeveloped-to-emerging market flows.
As Brazil’s economy grows and its businesses reach into new markets, FS organisationsare following suit. Brazil is building the capacity to become an FS hub for SouthAmerica and businesses within the sector are aiming to extend their footprint not onlyinto US and Europe, but also into Asia, Africa and selected South American countries.
At the same time, there are key challenges that Brazil’s FS environment presents toforeign institutions which are reassessing their potential within the SAAAME region.First is how to break into the market when acquisition costs are increasing, competitionis so strong and there are several barriers to entry. The second is differentiation, both inhow products and services are developed and distributed, and how banks, insurers andasset managers engage with an increasingly demanding client base.
Opportunities for growth will continue to exist in different sectors. The underlyingchallenge is that the Brazilian FS sector will need to undergo significant changes toprepare itself for a lower interest rate and spread environment.
I hope you find this paper interesting and useful. If you would like to discuss any of theissues raised, please feel free to contact either me or one of my colleagues listed onpage 13.
Alvaro TaiarPwC (Brazil)Financial Services Leader
Foreword
Welcome to ‘Capitalising on thegrowth and global interconnectivityof the emerging markets: Financialservices in Brazil’. The paper isa Brazil-focused companion toour global paper: ‘Capitalisingon the rise and interconnectivityof the emerging markets’,the latest viewpoint in ourProject Blue framework.
4 PwC Project Blue
What do we mean by SAAAME?
‘SAAAME’ refers to South America, Africa, Asia and the Middle East. SAAAMEdoesn’t include Japan as this is a developed G7 economy. Mexico is excluded as ittrades mainly within the North American Free Trade Agreement zone and lesswith SAAAME. For now, Russia and the Commonwealth of Independent States(CIS) are also excluded from SAAAME, as trade is largely internal or with Europe.
Financial crisis accelerates Brazil’s economic riseAlready growing strongly in the lead-up to the global financial crisis, Brazil’s move toeconomic superpower status has accelerated since.
Of the all BRICs (Brazil, Russia, India and China), Brazil has the most developedcapitalist system in terms of market liberalisation, openness to foreign investment andthe stability of its democratic and legal institutions (Figure 1 outlines the key strengthsand challenges of this fast growing market).
Section one:Emerging superpower
Why Brazil is so pivotal in therise and interconnectivity ofthe emerging markets andwhat the accelerating shift inglobal economic power means foryour business.
PwC Project Blue 5
Figure 1: Snapshot of Brazil
Source: Banco Central do Brasil statistics and Instituto Brasileiro de Geografia e Estatística
In Brazil, we have:• Nearly 200 million people;
demographic bonus• Portuguese as single language despite
being a ‘melting pot’ society• Clean and renewable energy sources
(hydro, ethanol, wind and solar)• Will become net exporter of oil
(pre-salt layer)• GDP of nearly US$2.3 trillion,
32 million new consumers over last5 years; 5.5% unemployment rate
• Net foreign creditor: US$355 billionof reserves
• One of the most internet-connectedcountries (over 67 million peoplewired)
• Sophisticated financial services sectorand regulatory system
• Strong and stable democraticinstitutions
In Brazil, we do not have:• Border conflicts• Major natural disasters• Ethnic/racial/religious
tensions/terrorism or conflicts
However, we still have:• Social inequality• Education challenges• Slow judicial decisions• Bureaucracy• High interest rates• Complex tax environment and
heavy tax burden• Infrastructure gaps
Brazil is the sixth largest economy in theworld and is expected to rise to fifth bythe end of 2012.1 Despite the prospect of aweaker global economy, it is possible forBrazil to expand at long-term rates of 4%a year, based on the still strong domesticmarket and the realisation of the manyinvestment opportunities.2 A furtherboost in investment and internationalprofile will come from the World Cup in2014 and Olympics in 2016.
On the world stage, national championssuch as Vale, JBS, Embraer, Odebrechtand AMBEV are becoming multinationalcompanies as they expand acrossSAAAME and non-SAAAME markets.
Domestic potentialIn terms of demand, products, technologyand regulation, Brazil has one of themost advanced FS sectors in SAAAME.Its banks are highly profitable and well-capitalised (17% average capital ratio3)and have suffered little impact from theglobal financial crisis.
While a number of international FSgroups have been able to establish astrong position in the Brazilian market,domestic financial institutions are takingadvantage of the significant retail growthover the past decade and using theirdominant distribution networks to createa high barrier to further outside entry.
FS in Brazil is now entering the nextphase of its development, creating bothchallenges and opportunities. Whilerelatively high by South Americanstandards, credit penetration is less thanhalf of major Asian economies such asSouth Korea,3 highlighting the potentialfor further growth as aspirations andaffluence increase.
More long-term finance is neededto meet the increasing retail demandfor mortgages and durable goodsconsumption, and meet the corporate and
infrastructure investment requirements.In turn, the capital markets will need tomature and expand by providing moredebt instruments, increasing their marketliquidity and by enhancing thesophistication of the stock market.
Saving for retirement is a further growtharea. The country has more pensionersfor every 100 contributing workers (35)than the US (34) and the governmentspends more on pensions as a percentageof GDP than Germany, France, or Japan.4
The private savings and pensions sectorwill need to grow quickly to relieve thepressure on the public purse and providefor an ageing population – thegovernment has already begun to put acap on its liabilities.5 While assets undermanagement are the highest in theregion,6 the market is still weightedtowards the institutional sector, openingup considerable opportunities on theretail side. In the past, asset managerswere able to rely on the country’s highinterest rates to deliver good profits andreturns for investors. But as interest ratesfall, asset managers may need to diversifytheir portfolios, both through fixed andvariable rate instruments and, in time,more foreign investments.
Both life and non-life insurance sectorsachieved double digit growth in 2009.7
At 3.1%, however, insurance spending asa percentage of GDP is lower than China(3.8%) and India (5.1%), highlighting theroom for further growth as the economyexpands and affluence increases.
The main challenge is how to make suremarket growth is sustainable. Rapidexpansion could create asset bubbles.While overall debt is low, household debtsare rising to levels that are beginning tocause concern. FS businesses will alsoneed to look at how to improve efficiencyand control costs now they can no longerrely on high interest rates to sustainmargins and returns.
6 PwC Project Blue
1 IMF World Economic Outlook
2 Brazil Ministry of Finance, February 2012
3 Banco Central do Brasil statistics, 30.06.11
4 Economist, 24.03.12
5 Bloomberg, 29.02.12
6 FTSE Global Markets, 08.02.12
7 Swiss Re Sigma, World Insurance in 2010
PwC Project Blue 7
Growing globalinterconnectivityWhile Brazil’s domestic potential isconsiderable, the country’s position atthe epicentre of intra-SAAAME tradeopens up even greater opportunitiesfor its FS sector.
The trading relationship betweenChina and Brazil exemplifies the growinginterconnectivity of SAAAME. Chinahas now overtaken the US as Brazil’sbiggest trading partner, with tradegrowing exponentially in recent years(see Figure 2).
Landmark deals include thememorandum of understanding betweenthe Shanghai Stock Exchange andBrazil’s BM&F Bovespa exchange,which could eventually pave the wayfor the cross-listing of stocks.8
At present, only around 5% of Brazil’strade is with Africa and the next stageof development for FS and Braziliancompanies as a whole will be buildingup these links. The importance ofAfrica–Brazil trade to the government’splans was highlighted by PresidentRousseff’s extensive tour of the continentin 2011 and the creation of a high level‘Africa Group’, led by the country’s tradeand industry minister.9
Figure 2: Brazilian trade balance with China (US$ million)
35,000
15,000
20,000
25,000
30,000
10,000
5,000
-10,000
-5,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
n Exports n Imports Surplus
Source: Secretariat for Foreign Trade (SECEX)/Ministry of Development, Industry and Foreign Trade (MDIC).
8 BBC News Online, 18.02.11
9 Reuters 17.11.11
Major player on theworld stageThe expansion of Brazilian financialinstitutions abroad is going to becomplementary to their local strategy andbusiness focus.
The international comparison in Figure 3highlights Brazil’s status as a majorbanking centre. Two of its banks alreadyfeature in the global top 20 in terms of
market capitalisation and a number ofgroups are seeking to follow the country’smultinational corporations by developingtheir presence in Asia, Africa and otherparts of Latin America. Building on thesestrong domestic foundations and growinginternational presence, we anticipate thatBrazil will have risen to fifth place in theglobal banking rankings in terms of assetsby 2050.10
8 PwC Project Blue
10 ‘Banking in 2050’, 2011 update, published by PwC on 18.05.11
PwC Project Blue 9
The international ambitions of Brazil’sfinancial institutions are exemplified byItaú Unibanco’s aim to be the ‘global LatinAmerican bank’.11 Itaú Unibanco isconsolidating its position in Brazil as aleading institution among high-incomecustomers and middle to large corporates.Its expansion abroad is building on theselocal foundations as it develops a nicheposition in selected South Americaneconomies, as well as Asia, Europe andthe US.
Banco do Brasil is establishing operationsin Asia, Africa and other parts ofSouth America12 as it follows Braziliancapital investment and corporateexpansion abroad.
Bradesco has developed a strongdistribution network, especially amonglower and middle income retail customersand small- and medium-sized businesses.While consolidating its growing strategyin Brazil, it is looking to expandselectively in niche segments in SouthAmerica, Africa and Asia as it seeks toevolve the international presence neededto support its clients.
Following its tie-up with Celfin, a brokerdealer in Chile, BTG Pactual wantsto be the ‘leading Latin Americaninvestment bank’13.
Figure 3: Comparison of global banking markets
10
9
8
7
6
5
4
3
2
1
0
Number of banks in the top 50 ranking
Brazil
China
Japan
France
United States
United Kingdom
Germany
Netherlands
SumitomoGroup
MitsubishiGroup
Bank ofChina
ICBC
GroupBPCE
Others2,194
Others3,414
2,9641,725
2,025
1,219
1,281
2,440
1,482
1,856
Others2,309
Others2,559
SwitzerlandBelgium
SwedenRussia
Denmark
ItaúUnibancoHolding
Banco doBrasil
Bradesco
Italy
Spain
Canada
Australia CréditAgricole
PNPParibas Royal
Bank ofScotland2,749
HSBCHolding2,364
Citigroup
JPMorgan2,031
Bank ofAmerica2,223
Barclays2,234
Others2,100
407
349
290
0 2000 4000 5400 5600 9200 9400 9600
Aggrevated relevance of top 50 banks – total assets ($US Mil)
Source: The Banker 2010, PwC analysis. Note: The ranking refers to the net equity values
11 Itaú Unibanco www.itau.com, 24.05.12
12 Banco do Brasil www.bb.com/br, 24.05.12
13 BTG Pactual www.btgpactual.com, 24.05.12
Developing a pan-SAAAME footprintPrior to the global financial crisis, a number of FS groups from Europe and NorthAmerica were able to make multiple acquisitions to rapidly build up their internationalfootprint in SAAAME markets. The challenge for Brazilian groups looking to follow suitby extending their international presence is that this type of fast acquisitive growth isnow much more difficult, at least within the most attractive SAAAME markets.
Prospective entrants may face restrictions on foreign ownership, China and Indiabeing notable examples. Even in open markets, there may be little market share forsale and it may be prohibitively expensive if it is. Entrants may also face entrenchedcompetition from dominant local rivals. In some cases, the markets are less evolvedand an entry strategy may consider participating in the development of the financialsystem as a whole.
A more targeted growth model could emerge as a result, in which the ability todifferentiate, develop niche segments, seek out untapped geographical markets andgain access to new digital distribution networks is critical.
In many of the hard-to-access markets, the main route to entry would potentiallybe to form joint ventures. With many local businesses already having establishedpartnerships in a number of areas, incoming organisations will need to think aboutwhat distinctive attractions they can offer that competitors cannot. It might be productor credit risk expertise. It might also be complementary international coverage.Very few groups are going to be able to cover all the key markets. So collaborationbetween competitors – ‘co-opetition’ as it’s sometime called – is going to becomeevermore common.
Reinventing the organisationDesigning the organisation of the future will be crucial as Brazil’s FS businesses seek tocreate more nimble and adaptive operational capabilities and make sure their talent,structure and governance reflect their increasingly international horizons.
Operating models will need to reflect the changing geographical focus of the business.They will also need to deal with more extensive partnership and co-opetitionarrangements, and be sufficiently agile to respond quickly to unfamiliar marketconditions, distribution channels and cultural preferences.
Section two:A new model of growth
As many Brazilian FS businesseslook to be regional and pan-SAAAME leaders, they will need tofind ways to differentiate and makethemselves relevant within theirtarget markets and trade routes.
10 PwC Project Blue
PwC Project Blue 11
Businesses also need to contend with amore complex risk profile. SAAAMEcountries have varied legal and regulatoryframeworks, political systems, businessethics and cultures. It is important forBrazilian institutions to make sure theyunderstand the ways of working requiredto operate in these jurisdictions.
In turn, reporting will need to beupgraded to reflect these more extendedoperations. For Brazilian businesses,the particular challenge is that manyof the measures used in its FS sector varyfrom international norms, which canmake it difficult to track performanceacross borders.
The underlying challenge is the need totrain, hire or relocate unprecedentednumbers of skilled people in SAAAMEmarkets where suitably qualified andexperienced people may already be inshort supply. Short-term and reactiveapproaches, be this seeking to lure keypeople from competitors or bringing inlarge numbers of expatriate personnel,are likely to prove excessively costlyand may still fail to provide the peopleneeded to meet strategic objectives.A more systematic and forward-lookingworkforce plan capable of anticipatingand meeting skills’ needs could reducecosts and enable FS organisations tobuild a more sustainable platform forbusiness development.
The ability to adapt and take advantage of technology and economic interconnectivitywill be the key differentiators for FS businesses in the new global economy.
We believe that there are four key questions that FS businesses should consider as theylook at how to gear their strategy and operations to the rise and interconnectivity of theSAAAME markets:
• How are your corporate clients following the shift in the focus of global growth andhow can you help them to respond more effectively?
• If you can’t develop a pan-SAAAME presence, what specific sectors or regions couldyou target as you look at how to build on your strengths and existing relationships?
• How can you use technology to provide customer access and financial services indifferent parts of the world?
• How will you need to adjust your risk management capabilities, talent managementand operating model (more joint ventures, longer lines of communication etc.) asyou extend your international presence?
Where next?
As Brazilian FS groups look tofollow their corporate customersinto new markets and takeadvantage of their increasingfinancial strength, the key questionsare where, how and how quicklythey should grow.
12 PwC Project Blue
Making sense of an uncertain future
We’re working with a range ofFS organisations to judge theimpact of the mega-trends shapingtheir industry, and where and howthey can compete most effectively.If you’d like to discuss any of theissues raised in this paper, or theimpact of other trends examined inProject Blue, please contact eitherof those who are listed here, or yourusual PwC contact.
PwC Project Blue 13
Alvaro Taiar Junior Financial Services leader PwC (Brazil) Tel: +55 11 3674-3628 Email: [email protected]
Alfredo Sneyers Partner, Financial Services PwC (Brazil) Tel: +55 11 3674 2664 E-mail: [email protected]
Marianella Alarcón Partner, Financial Services PwC (Brazil) Tel: +55 11 3674 3571 Email: [email protected]
14 PwC Project Blue
The Project Blue framework seen here begins with the considerations needed to adaptto the current instability. It then goes on to assess what FS businesses need to do to planfor, and ideally take advantage of, the changes ahead.
One of the main things we’ve been looking at is the extent to which these developmentscould disrupt existing business models. We’ve also been looking at how these trendsare feeding off each other. A clear case in point is the extent to which rapid growth inemerging markets is spurring a mass influx of people into the cities.
Our clients are using the framework to help them judge the implications of thesedevelopments for their particular business, and look at how to take advantage of thechanges ahead. Will business and operational models still be viable in this newlandscape? What strengths within the business would allow it to develop a leadingposition? What talent and investment will need to be put in place now, to prepare forthe changes ahead?
Project Blue framework
The Project Blue frameworkconsiders the major trendsthat are reshaping the globaleconomy and transforming thebehaviour of consumers, businessesand governments.
Figure 4: The Project Blue framework
Source: PwC Project Blue analysis
Project Blue Fram
ework
Global instability
Regulatory environment Fiscal pressures Political and social unrestAdap
t
Rise and interconnectivityof the emerging markets(SAAAME)
• Economic strength• Trade• Foreign direct investment
Demographic change • Population growthdiscrepancies
• Ageing populations
Social and behaviouralchange
• Urbanisation• Global affluence• Talent
• Capital balances• Resource allocation• Population
• Changing family structures• Belief structures
• Changing customerbehaviours – social media
• Attitudes to financialinstitutions
Technological change • Disruptive technologiesimpacting FS
• Digital and mobile
War for natural resources • Oil, gas and fossil fuels• Food and water• Key commodities
Rise of state-directedcapitalism
• State intervention• Country/city economicstrategies
• Technological and scientificresearch and developmentand innovation
• Ecosystems• Climate change andsustainability
• Investment strategies• Sovereign wealth funds/development banks
Plan
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact Áine Bryn, Global Financial Services Marketing Leader, PwC (UK)on +44 207 212 8839, or [email protected].
For additional copies, please contact Maya Bhatti, Global & UK Financial Services Marketing, PwC (UK) on +44 207 213 2302, or [email protected].
www.pwc.com/projectblue © 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.
