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Study: Brazil's midsize banks to consolidate amid rising costs, lower profits

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Study: Brazil's midsize banks to consolidate amid rising costs, lower profits

Faced with elevating costs and declining profitability, Brazil's midsize banks are set for a new round of consolidation, according to a study. But banks that embrace a digital model or specialize in niche markets are more likely to survive.

German consultancy firm Roland Berger revealed that average return on equity at 33 midsize banks in Brazil fell from 12.1% in 2014 to 10.2% in the third quarter of 2017, according to a Valor Econômico report. The banks' asset-to-equity ratio has also declined somewhat.

While expenses related to loan loss provisions and funding reportedly declined in the period, administrative and staff costs rose and were not offset by service revenues, the study noted.

Roland Berger reportedly said financial institutions of that size find themselves in a vicious cycle worsened by Brazil's economic crisis, where expensive funding leads banks to adopt riskier operations, a trend common to midsize banks around the world.

"To have so many medium banks is not sustainable, unless there is a strategic change," Roland Berger Latin America head Antonio Bernardo reportedly said, adding that he expects further consolidation or acquisitions from abroad.

However, the study also revealed that midsize banks operating in specific niche markets can take advantage of a credit shortage or other sectorwide problems, such as Banco Daycoval SA, which focuses on financing companies, payroll, cars and other vehicles and has grown in profitability in recent years.

The German consultancy firm also mentioned Banco Pine SA as an example of a medium-sized bank benefiting from a digital strategy, offering investment products to individuals online and cutting out brokerage firms as middlemen, Valor reported.