Banco Sofisa is one of a small group of “middle market” banks operating in Brazil. It was founded in 1961 as a consumer finance company and became a multiple bank in 1990. It has around 1,000 clients and is now expanding into the payroll loan and vehicle financing segment. It was listed on the São Paulo Stock Exchange, the Bovespa, in May 2007 and has assets of R$3.7 billion (around US$1.9 billion). The middle market banks generally provide services, including cash management, to companies with non-audited balance sheets and their loans are guaranteed by receivables, trade notes, checks, mortgages etc. They generally operate on less formal terms than the bigger banks and form much closer relationships with their clients. In this interview, we talk to Gilberto Meiches, Sofisa´s investor relations director, about the possible effects of the financial crisis in the United States on Brazil and how the middle market banks are shaping up to meet the booming demand for credit. 

Gilberto Meiches: No. Brazilian banks are in a completely different situation from the US and European banks which are in difficulty. The Brazilian banks are growing thanks to the domestic economy and the higher demand for credit. The international crisis might have some effect on Brazil´s GDP growth but even this should be limited and could perhaps reduce the projected growth for 2008 from 5% to 4%. As long as the economy keeps growing, the Brazilian banks will continue to grow.

Meiches: Most of them do practically all their business on the domestic market so they will not be affected to any great extent.

Meiches: We decided to tap the external market for the first time in order to get long-term funding for our consumer finance unit. We are closing a US$ 180 million syndicated loan with the participation of the International Finance Corporation arm of the World Bank. This money will be used to expand our lending activities.

Meiches: Yes, subject to the conditions of the international capital markets.

Meiches: First of all, you have to separate the specific case of Banco Santos from the sector as a whole. The Central Bank had been monitoring Banco Santos for some time and it was widely known on the market that it was facing serious problems. In this sense it was a one-off affair. However, it had a drastic effect on some middle market banks which lost up to 50% of their deposits as clients pulled out. On the other hand, some banks were not affected in the slightest and others, including Sofisa, benefited. This was because of our history, ratings and transparency. Investors were able to check our track record and judge our strength. We are a family-owned bank which does not just look ahead to the next quarter or semester but looks years ahead and makes sure it has a solid base.  

Meiches: There was a general movement to list as the middle market banks foresaw they would need fresh capital to meet the expected demand for credit in the coming years. However, it was not just middle market banks which started to open their capital. There were also about 18 real estate developers which listed due to the rising demand for homes. I think, in some ways, there is a better case for banks to list on the stock market than homebuilders. For example, banks are better organized, more transparent and, above all, subject to inspection by the Central Bank. There were two main reasons for this trend. Firstly, for the first time in 20 to 25 years, Brazil faced the prospect of sustainable economic growth and banks needed extra capital. Secondly, there was a follow-on effect as middle market banks saw their peers taking this road and felt they had to follow. We were the second bank to list in February and there was a peak of IPOs around August and September. Another important factor was the attitude of the investment banks which were very aggressive in their marketing of these issues.

Meiches: We put almost 28% of the capital on the market in the form of preferred shares. The issue was fully subscribed at a share price of R$12.00 and raised R$ 505 million. February was a difficult time and we did not get the immediate results in terms of the share price but, perhaps, this was because we were only the second middle market bank to do an IPO and were not experienced enough in valuation. However, we really had no choice if we were to take advantage of the market situation. We don´t regret making this move at all and it has been a great success. We will be making similar operations in future and will be better prepared.

Meiches: The share price rose by 15.4% to the end of the year compared with an increase of 30.5% in the Bovespa index. Liquidity has been low – around R$2 to R$3 million in daily trading. However, we are trying to raise our profile among domestic and international investors through road shows and meetings with analysts. Around 80% of the shares are held by foreign investors, mainly investment funds. Two foreign investors each hold about 5% of the shares.

Meiches: The big banks already hold around 70% of the middle market but they are more interested in cross-selling their products and services. We are more focused. The middle market sector is highly complex and you need to know your clients´ business intimately. You have to give them special attention and dedication. This is why the middle market banks have survived and grown over the years.

© John Fitzpatrick 2008