Latin America Advisor
Mexican retailer Elektra said earlier this month that its banking unit, Banco Azteca, has received preliminary authorization to operate in Brazil. Do you see retailers such as Elektra making significant inroads in Brazil's profitable banking sector? What are the biggest risks and benefits of operating in Brazil through this channel?
Thomas Morante, Chair of the Insurance, Banking, and Financial Services Industry Group at Jones Walker LLP & Yani Contreras, International Attorney at Jones Walker LLP: Banco Azteca should enjoy success in Brazil, especially given that it has been successful in Mexico, where it launched operations in 2002. The Brazil and Mexico markets, in the context of Banco Azteca's business model, are similar and thus afford opportunities which Banco Azteca should be able to take advantage of in the near term. Banco Azteca's unique business model is targeted to low-income earners, and its success derives, in part, from devising business practices with an eye toward the poorest socio-economic groups, often the largest market segment in the countries where Banco Azteca now has operations. This segment has proven to be a good market for Banco Azteca in Mexico, Panama, Guatemala, and Honduras. Banco Azteca obviously faces risks inherent in entering a new market, but with its branch operation experience in Elektra stores in Mexico, Panama, and Guatemala, Banco Azteca is poised to benefit from Elektra's recent announcement that it will open eight Elektra stores in 2008 in Brazil, each of which will house a Banco Azteca branch. Banco Azteca will also benefit from the know-how developed in other, similar Latin America market segments. The banking services to be provided in Brazil would include savings accounts, personal and car loans, and installment financing for consumers who shop at Elektra stores. This formula—built on the branch model through retail stores with a focus on this consumer group—should enable Banco Azteca to compete effectively in the Brazilian market.
Alejandro García, Director of Financial Institutions at Fitch Mexico & Maria Rita Gonçalves, Director of Financial Institutions at Fitch Brasil: At present, it is difficult to anticipate how successful Elektra's plans will be in Brazil, even considering that the group's strategy in Latin America presents a good track record, especially on the retail side where the group is specialized. In Mexico, they were pioneers in both the nationwide commercial retail chains (in the early 1950s) and in consumer finance for lower-income brackets of the population (since the 1960s through Elektra directly or after 2002 through the bank) ... One of the main opportunities for Azteca/Elektra seems clear: Brazil is the largest market in Latin America, with hefty growth opportunities in its core market, oriented towards lower-income and middle-class brackets of the population. In contrast, their main challenge is that Brazil already faces high competition, which could somewhat constrain their ability to gain a large market penetration.
Daniel Araujo, Director of Financial Services Ratings at Standard & Poor's in Sao Paulo: The banking industry in Brazil is going through a period of strong growth in loans, especially to individuals and small businesses. The maintenance of the growth pattern really attracts the attention of existing players hungry for expansion as well as potential newcomers. Most of the opportunities are captured at the large retail banks that have made agreements with retail chains, as was the case with Bradesco, Unibanco, and Itau, among others. By entering into agreements with the large retail stores, banks benefit from an existing client base and the experience of the stores in their relationship with clients. The entrance of Banco Azteca together with the retail operations of Elektra as a new player in the Northeast of the country is an interesting feature, as it brings the combination of the opportunities of a region that has not been well served—most banks in Brazil have been focusing their attention more on the South and Southeast of Brazil—with the challenges and risks of a new loan portfolio. As newcomers, the main challenges for Elektra and Banco Azteca are to generate a relevant business scale in the retail market and to have adequate risk management of the loan portfolio in a market that is new to them.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.