SAO PAULO (Reuters) – At BM Multimarcas, a used car dealership on the outskirts of Sao Paulo, owner Santel de Abreu Bernardo can show you bazaars that most major banks wouldn’t touch.
There is a faded blue 2003 Renault hatchback with 195,000 kilometers on the dial. And a Volkswagen Gol Turbo so old it could vote.
But when he needs to strike a deal, Bernardo has a funding option: the Brazilian unit of Spain’s Banco Santander.
It has captured 25% of the auto loan market in Latin America’s largest country, in part by granting loans to borrowers shunned by other traditional banks. This means financing working class customers who need cheap motorcycles and cars less than two decades old.
This firm helped Madrid-based Santander weather Brazil’s recent deep recession, even as domestic rivals Itau Unibanco Holding SA and Banco Bradesco SA slowed down, and other foreign banks such as HSBC Plc and US Citigroup , based in London, have sold their struggling Brazilian retail businesses. .
Santander’s strategy comes with risks, as any used car veteran will tell you.
âWhen an old car breaks down, its owner prefers to spend money on repairing it rather than paying off debts,â said Bernardo of BM Multimarcas. “That’s why a lot of banks don’t like financing old cars.”
Still, Santander, Brazil’s third-largest private sector bank, is on its way. Its 90-day default rate is the lowest among Brazil’s largest private banks, at 2.9% in September.
Year-on-year consumer loan growth in Brazil reached 22.6% in September, more than triple the industry average of 7%. Unit profitability in Brazil, which has lagged for years relative to its peers, jumped to 19.4% from 16.3% in the same period. It beat Bradesco, the country’s second-largest private lender, and closed the gap with industry leader Itau.
Santander’s growing dependence on Brazil shows how emerging markets can still provide growth momentum. The Brazilian unit contributed 26% of the group’s profits in the first nine months of 2018, up from 19% four years ago. Santander Brasil’s stock price has jumped by more than two-thirds in the past 12 months, vastly outperforming shares in its parent company, as well as those of Itau and Bradesco.
Still, Santander Brasil’s oversized auto loan portfolio and willingness to bet on borrowers and vehicles avoided by competitors could portend a bumpier road in a country with a history of economic volatility.
“Certainly Santander’s growth strategy has been successful so far,” said Andre Martins, analyst at XP Investimentos. “But the bank will be the most exposed to defaults if the Brazilian economy slows down.”
(For a graph on Santander Brasil’s share of auto loans in Brazil, see tmsnrt.rs/2GtCxFR)
For now, the Brazilian economy appears to be on the road to recovery. And Santander executives say their strategy has been battle tested.
About 80 percent of the Brazilian unit’s auto loans are for cars four years old or younger, and down payments are large, averaging 36 percent.
âIf Santander’s loan portfolio were problematic, it would have already exploded after a historic 3-year recession,â said Angel Santodomingo, CFO of Santander Brasil. âOur success in credit quality is linked to our ability to analyze and assess personal risk. “
Santodomingo wouldn’t reveal Santander’s secret sauce. But the bank is leveraging big data to glean information beyond borrowers’ incomes and savings. And risk managers in Brazil are using corporate tools that have been proven elsewhere, including the United States, where Santander is a major subprime auto lender.
The bank has also embraced the Internet to grow its business, taking advantage of online sales generated by WebMotors, one of the leading car sales websites it owns.
Two years ago, he launched an app that allows dealers to arrange auto loans in minutes for buyers who provide eight pieces of information, an innovation that is now being copied by other Brazilian banks. This process previously took at least a day and required car buyers to provide tons of paperwork. If a loan is approved, customers sign the contract digitally.
“It saves a lot of time,” said Eduardo de Jesus, salesperson at Basile Center Car, located in a middle-class neighborhood in northwest Sao Paulo.
Santander plans to use this model to grow its consumer credit business in Brazil with vacation loans, building materials and solar panels, according to Andre Novaes, head of Santander’s consumer credit unit. . Many Brazilian banks have avoided such loans because of the high risk of default and weak collateral.
To protect its portfolio, Santander said it encouraged heavily indebted clients to refinance and consolidate different types of overdue loans into one loan with more amicable terms.
Some bankers, however, see the practice as a way to hide Santander’s default rate.
Serious losses in 2011 forced Itau and Bradesco to stop funding low-end motorcycles and ban cars ten years and older from their portfolios. They also increased down payments and shortened loan maturities, which extended up to 70 months.
THE RIAL AT THE BAR
Santander has been present in Brazil since 1982. It has made a number of major acquisitions, including the purchase of the Brazilian unit of ABN AMRO based in Amsterdam in 2007.
But most of his organic growth spurt came from Sergio Rial, who took over as CEO of Santander Brasil in January 2016.
A lawyer and economist, Rial has served as CFO of grain trader Cargill Inc and a member of the board of directors of ABN AMRO. He was managing director of Brazilian meat-packing company Marfrig when Ana Botin, executive president of the Santander Group, recruited him to the top position in Brazil. (Santander Brasil outperforms its rivals: tmsnrt.rs/2ADY3Cx)
While auto loans have fueled growth, Rial has also relied on more secure lines of credit, including payday loans and mortgages, as well as credit cards. Overall, Rial strengthened the retail branch of Santander at the expense of corporate loans. Consumer loans make up 70 percent of the bank’s loan portfolio, up 12 percentage points since Rial took over as CEO.
To engage the bank’s employees, Rial tied more of their pay to performance; variable compensation increased 16 percent from 2015 to 2017, even as the bank’s payroll declined by around 7 percent. The number of customers has increased for 40 consecutive months, reaching 23.4 million in September.
However, the car loan business remains the bank’s center of excellence in terms of growth. De Jesus, the car salesman at Basile Center Car, said Santander rivals were paying attention.
âWhen customers come to a store, they want to know exactly if the down payment is right for them, and Santander tools show that immediately,â he said. âOther banks are copying it now. “
Reporting by Carolina Mandl; Editing by Christian Plumb and Marla Dickerson