Banco Santander grabbed 25% of the market for car loans in Latin America’s largest country, Brazil, in part by extending credit to borrowers shunned by other mainstream banks. As Reuters explained, that means financing working-class customers in need of cheap motorcycles and cars up to two decades old.
According to the same article, that business line helped power Madrid-based Santander through Brazil’s recent recession, even as domestic rivals Itau Unibanco Holding SA and Banco Bradesco SA hit the brakes, and other foreign banks such as London-based HSBC Plc and U.S. Citigroup sold their struggling Brazilian retail businesses.
Despite the risks of the high rates of default in this specific consumer credit niches, the fact is Santander is cruising in Brazil, where is the third-largest private sector bank. Its 90-day default ratio is the lowest among Brazil’s largest private banks, at 2.9% in September.
Year-over-year consumer loan growth in Brazil hit 22.6% in September, more than triple the industry average of 7%. Brazil unit profitability, which for years has lagged peers, jumped to 19.4% from 16.3% in the same period. That beat Bradesco, the country’s second largest private lender, and narrowed the gap with industry-leading Itau.
Santander’s increasing reliance on Brazil shows how emerging markets can still provide a jolt of growth. The Brazilian unit contributed 26% of group profits in the first nine months of 2018, up from 19% four years ago. Santander Brasil’s stock price has surged more than two thirds in the last 12 months, vastly outperforming the shares of its parent company, as well as those of Itau and Bradesco.
Still, Santander Brazil’s outsized auto loan portfolio, and its willingness to bet on borrowers and vehicles avoided by competitors, could presage a bumpier road ahead in a country with a history of economic volatility.
«Certainly, Santander’s growth strategy is a success story so far,» said Andre Martins, an analyst at XP Investimentos, to Reuters. «But the bank will be the one most exposed to defaults if the Brazilian economy turns down.»
Around 80% of the Brazil unit’s auto loans are on cars aged four years or less, and down payments are hefty, averaging 36%. «If Santander’s loan book were problematic, it would already have popped after a 3-year historic recession,» said Angel Santodomingo, chief financial officer for Santander Brasil. «Our success in credit quality is related to our ability to analyze and price individuals’ risk.»
Big data at the service of consumer credit
The bank is harnessing big data to glean information beyond borrower income and savings. And Brazil risk officers are using company tools that have proven successful elsewhere, including the United States, where Santander is a major subprime auto lender.
The bank has also embraced the internet to grow its business, leveraging online sales generated through WebMotors, a top car-selling website that it owns. Two years ago it launched an app that allows dealers to arrange car loans within minutes for buyers who provide eight pieces of information, an innovation that is now being copied by other Brazilian banks. That process had previously taken at least a day and required car buyers to provide reams of documentation. If a loan is approved, clients sign the contract digitally.
Santander plans to use that model to grow its consumer finance business in Brazil with loans for vacations, building materials and solar panels, according to Andre Novaes, head of Santander’s consumer finance unit. Many Brazilian banks have avoided such lending because of the high default risk and shaky collateral.
To safeguard its portfolio, Santander said it has encouraged highly-indebted clients to refinance and consolidate different types of loans in arrears into a single loan with more amicable terms.
Some bankers, however, view the practice as a way to mask Santander’s default ratio. We must remember that severe losses in 2011 forced Itau and Bradesco to stop financing low-end motorcycles, and to ban cars aged ten years and older from their portfolios. They also increased down payments and shortened loan maturities, which had stretched as long as 70 months.
Original Story: Reuters | Carolina Mandl
Edition: Prime Yield