Over the course of the COVID-19 pandemic, Banco Bradesco SA has more aggressively cut costs and shrunk its physical presence in Brazil as it positions itself for a continued digital shift, growing competition and lower interest rates.
Bradesco, the second-largest private bank in Latin America, has closed nearly 700 branches so far this year, representing a pace nearly triple that of last year. The reduction has also allowed the bank to trim staffing levels.
The bank said it plans to cut more operating expenditures during the remainder 2020 and throughout 2021. All told, it wants to eliminate or retool 1,100 traditional branches in 2020, representing about a quarter of its branch footprint. By comparison, the bank closed just 3% of its network, or 138 branches, during the whole of 2019.
"We intensified the ongoing adjustment because of the acceleration in digitalization trends," Leandro Miranda, an executive officer at the bank, said during a conference call. "Home office and the surge in usage of digital channels gives us all the confidence that our customer base is changing behavior," he said.
Of the 1,100 branches affected, Bradesco expects to convert 700 into satellite offices that have no bank teller services. Such conversions will be about 30% to 40% cheaper to operate, with savings on personnel and security, among other costs.
Bradesco is not alone in its pursuit of greater efficiency. Record-low interest rates and a growing pool of digital competitors have been compressing bank margins for years. The economic impact of the pandemic is further depressing profits, but the crisis is also offering opportunities for banks to position themselves for the longer term.
Brazil has long been characterized as being overbranched. In large cities centers such as São Paulo, it is common to have multiple branches within the same block. Much of that network was created in an effort to improve financial inclusion in the country, but those footprints are increasingly seen as unnecessary as digitalization takes hold.
"So long technology did not work and people needed to visit the agencies, banks had a very strong competitive advantage. ... It was a huge entry barrier for any competitor," said Sergio Furio, CEO and founder of Brazilian fintech Creditas Soluções Financeiras Ltda. "The moment technology removes that need, however, then the banks' main competitive advantage disappears."
To that point, Banco Inter SA has become one of Brazil's largest digital lenders, but it has just 18 branches. By contrast, Bradesco still has 3,791 branches — far more than even its traditional banking rivals in Brazil. Only state-run Banco do Brasil SA has more, with 4,370 branches as of October.
But across the board, the vast footprints held by Brazil's major banks have contributed to personnel expense ratios that trended higher than others in Latin America, though they are starting to fall closer in line. Bradesco's staff expenses hit 26.8% of total revenues in late 2019, falling to about 18.2% in the third quarter. At Itaú Unibanco Holding SA, personnel expenses represent about 22.3% of revenues. Itaú has shuttered a modest number of branches in 2020, though CEO Candido Bracher has said the company might close more than initially planned.
Those ratios compare to between 15% and 16% at Mexican majors such as Banco Santander México SA and Grupo Financiero Banorte SAB de CV.
Some Brazilian banks have laid out plans to further cut costs. Bradesco has set aside 900 million reais to fund additional cost-saving efforts. Banco do Brasil has committed to cutting 3 billion reais in costs by 2025, including by selling property that may become unnecessary with more remote working.
But even with the renewed focus on cost-cutting, some argue it is not enough.
"We believe banks need strong efficiency urgently, and now even more than one year ago," said Antonio Bernardo, a partner with Roland Berger. He estimates top banks need to cut 30 billion reais in costs in the next three years to retain their profitability. "They have to accelerate that much further and faster. They have very heavy organizational structures."
As of Nov. 24, US$1 was equivalent to 5.39 Brazilian reais.