Credit Suisse’s latest Alternatives Quarterly – Q4 2011 report had a piece on Brazil’s consumer credit sector. It provides a market summary and expresses their own view that it remains an area of growth. Interesting read, highlights below…
1. In the last 10 years, the Brazilian consumer credit sector has experienced tremendous growth, due to a combination of the consumption boom and increased use of credit and debit cards (see chart). Looking forward, CS believes there is room for continued expansion for two reasons: 1) consumption expenditures should continue to track Brazil’s healthy GDP growth rates; and 2) the penetration of debit and credit cards among the country’s population is still relatively low compared to other countries.
2. To provide some perspective, a year ago, the sector was controlled by two major acquirers (Cielo, Redecard). Each had an exclusivity agreement with the two major brands, Visa and Mastercard. With little competition, both card acquirers experienced high revenues. For example, the Merchant Discount Rate (MDR)—the percentage of the transaction amount that the credit card processing company charges for providing the merchant the authorization to accept credit cards—peaked in mid-2010 at almost 130 bps. By comparison, the MDR rate in most other countries varies from 20 to 90 bps.
3. In July 2010 Brazilian regulators forced the acquirers to break the exclusivity agreements with Visa and MasterCard, resulting in increased competition for market share among a wider set of merchant acquirers. This was reflected in the rapid declines of the MDR rates, which dropped almost 20% in the following six months to around 100 bps (see chart below). However, rates gradually stabilized in the first half of 2011, as we believe that the fierce competition has subsided.
4. A potential long-term concern of investors may be the impact of new entrants in the market. Because of the large, high-growth card market in Brazil, global players are extremely interested in operating in the country. However, the acquiring market in Brazil is essentially a banking business (i.e., integrated as part of a banking services package). Therefore, it seems unlikely that a new player would succeed in the Brazilian market without the support of a strong banking franchise.
5. As such, CS believes the prospects for the acquiring market remain positive for the players that continue to dominate market share, which has been reflected in the recent strong performance of sector stocks. Furthermore, CS believes the sector remains undervalued due to the broader market’s lingering concerns over the potential impact of increased competition, should it occur (an unlikely event).
Here is Banco Santander’s research on both Brazilian acquirers.
Source: Bloomberg, Credit Suisse, Santander