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Financials
Brazil and South Africa are two key emerging banking sectors with several similarities. What risks and rewards are offered by these countries’ banks? UBS Research compares in our in-depth report.
Comparing two key EM banking sectors
We compare and contrast two key emerging market banking sectors, Brazil andSouth Africa. There are several similarities with both facing macro and politicalchallenges including a constrained GDP growth outlook and ongoing currencydepreciation, as well as competition from new entrants. There are importantdifferences though, especially the lower credit penetration and associated higherlong-term growth prospects in Brazil, but also a higher tax burden. However, in theshort-term, SA banks are showing solid earnings delivery. At this juncture, we thinkBrazilian banks offer better risk-reward.
Very similar GDP trends
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 2024Eare not much more favourable with slightly better dynamics for South Africa thanBrazil (2.2% pa on average for SA vs. 1.2% for Brazil). Furthermore, the per capitaGDP is very similar in both countries (US$ ~7,000 for South Africa and US$ 7,500 forBrazil) 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.
Higher rates in Brazil than South Africa
The monetary policy rate (MPR) ended 2022 at 13.75% in Brazil compared to 7.0% inSouth 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 (between2012-2022 the average MPR in Brazil was 9.1% vs. 5.8% in South Africa). Brazil alsohas a slightly higher inflation rate than South Africa (the average annual inflationbetween 2012-2022 was 6.0% per year in Brazil vs. 5.3% in South Africa).
Similar FX trends and fiscal positions
The currencies in Brazil and South Africa have both been in a continueddepreciation trend – between 2012-2022 the Brazilian Real depreciated by 9% pacompared to 7% pa for the South African Rand. We also note that the level of grossdebt to GDP for both countries has been in an upwards trend, although appearing tostabilise at around 70% of GDP for SA and closer to 80% for Brazil.