EM Banks - A side-by-side comparison: Brazil vs. SA

We compare and contrast two key emerging market banking sectors, Brazil and South Africa. There are several similarities with both facing macro and political challenges including a constrained GDP growth outlook and ongoing currency depreciation, as well as competition from new entrants. There are important differences though, especially the lower credit penetration and associated higher long-term growth prospects in Brazil, but also a higher tax burden. However, in the short-term, SA banks are showing solid earnings delivery. At this juncture, we think Brazilian banks offer better risk-reward.

Between 2012-22E GDP growth of both countries has been modest at around 1% pa (0.7% pa in Brazil and 1.1% in South Africa). UBS expectations for 2023E and 2024E are not much more favourable with slightly better dynamics for South Africa than Brazil (2.2% pa on average for SA vs. 1.2% for Brazil). Furthermore, the per capita GDP is very similar in both countries (US$ ~7,000 for South Africa and US$ 7,500 for Brazil) as Brazil saw a big decline in recent years from a peak of >$12 000 in 2011. We note that commodities play an important role in both economies.

The monetary policy rate (MPR) ended 2022 at 13.75% in Brazil compared to 7.0% in South Africa – likely the peak in this cycle for both countries, in our view. Historically the interest rate gap has been smaller than the current gap (between 2012-2022 the average MPR in Brazil was 9.1% vs. 5.8% in South Africa). Brazil also has a slightly higher inflation rate than South Africa (the average annual inflation between 2012-2022 was 6.0% per year in Brazil vs. 5.3% in South Africa).

The currencies in Brazil and South Africa have both been in a continued depreciation trend – between 2012-2022 the Brazilian Real depreciated by 9% pa compared to 7% pa for the South African Rand. We also note that the level of gross debt to GDP for both countries has been in an upwards trend, although appearing to stabilise at around 70% of GDP for SA and closer to 80% for Brazil.