Bradesco CEO Luiz Carlos Trabuco uses the weather forecasts of -15 degrees Celsius this week in Davos — even frequent visitors of the alpine town during the winter are scared of such intense cold — to establish a contract with the global prospects.
“In terms of temperature, it will be one of the coldest meetings,” says the banker, who every year attends the World Economic Forum here. “Regarding the world, it never has been so heated, so belligerent. It seems that the mood has gotten worse in comparison to previous years.”
The message that Mr. Trabuco carries in his luggage to Davos, as a highly sought after executive by foreign investors, is that “Brazil is at a turning point” and “the stock of pessimism of the last three years is being exhausted.” In his opinion, 2017 will have two years in a single one: the first half carries an inertial recession; the second ends with GDP growth at an annual rate of up to 2.5%, inflation under control and single-digit interest rate.
Restrained in praising the government, but demonstrating support to the reform agenda proposed by President Michel Temer, Mr. Trabuco sees two “unannounced and correlated pacts” as effect of the crisis. One is the growing coordination between executive, legislative and judiciary branches. Another is greater harmony between state and market. Both revolve around the need of reforms. “The crisis has been so evident and the future view of the economy has been so compromised that most of the Brazilian society is seeking the middle path, in which there is no ideology. You can’t look back,” he says.
Below, excerpts of his interview with Valor:
Valor: What is the message that you and other Brazilian business leaders will bring to Davos?
Luiz Carlos Trabuco: Brazil is at a turning point. In 2017, we will have two years in a single one. The first half is a given: the inertial recession still causes slowdown in the economy. It stops worsening, but we will still see negative data, especially in the economic activity. In the second half, the expectation I have been hearing — and I also believe in it — is of another year. We will have concluded the agenda of proposed reforms and the reduction of the Selic [benchmark interest] rate will already be producing results, from the point of view of changing the cost of capital, in addition to a consolidation in the drop of loan delinquency. Troubled credits are being cleaned off the banks’ portfolios, either by write-off or by renegotiations with increase in collaterals. As for irrecoverable credits, you book as loss and turn the page. But when the client may improve the guarantees, the banks — and we in particular — have been lengthening maturities and changing profiles. The default problems in 2016 will not repeat in 2017.
Valor: Hanging over President Michel Temer is the risk of invalidation of his campaign ticket [with ex-President Dilma Rousseff] by the Superior Electoral Court. Do you count on a certain normalization of the political scenario or see the possibility of more turbulence?
Mr. Trabuco: Risks always exist, but the turbulence we saw last year was very intense and impossible of happening in 2017. The tone of this year is a pragmatism and a realistic view of the present. This has been the government’s demonstration. There is awareness that time is short, that there is no space for anything extravagant or unorthodox, but that the future will depend on the work seen now. There is an expansion of the awareness, by the Brazilian society, that the agenda proposed by the government is necessary. It is not the possible agenda, it is the necessary agenda.
Valor: So you bet on passage of the Social Security reform and the labor mini-reform? Is there no risk that the proximity of the 2018 elections will block this agenda?
Mr. Trabuco: We have no alternative. We’ve reached a level of awareness that this is absolutely necessary. Otherwise there will be no sustainable growth. If not that, it is the “chicken flight.” When I say that 2017 is worth two years, it is recalling that 2018 is also an election year. The reforms need to be carried out now. But this future depends on closing the doors to the past. What is past is past. This stock of pessimism of the last three years, mainly in 2015 and 2016, is being exhausted. It ties the shift in expectations. There is a certain moment in which there is the so-called material fatigue. The climate of pessimism is left behind. We are undergoing a transition moment. The new government proposed an important agenda, hefty, but key to restore growth and job creation.
Valor: Does the 75-basis-point reduction of the Selic rate marks a shift of mood in the economy?
Mr. Trabuco: This is a localized issue. The new cycle of monetary easing was a sure thing. The prior cycle, of monetary tightening, was extremely intense. This rigor was necessary, mainly, to establish credibility in inflation targets. But once made permanent it would bring an unbearable cost to the public debt. The Copom [Monetary Policy Committee] statement already signals new 75-basis-point cuts in the next meetings. It was not a decision based on reports. It was a sound conclusion: we won the opportunity of cutting rates in a more accelerated manner. This has to do with the deceleration of inflation. There is near unanimity that the future inflation is behaving and maintaining such high rates would be innocuous to reduce the indices to another level.
Valor: What is your expectation for the Selic’s trajectory?
Mr. Trabuco: It is moving toward one digit.
Valor: Does it fall to 9%, as some analysts are predicting?
Mr. Trabuco: I wouldn’t be able to say whether it gets to 9%, but something a little under 10%, probably. The direction is positive, the scenario is benign for this trajectory.
Valor: You say 2017 will be two years in one. What will be the pace of growth late in the year?
Mr. Trabuco: Our economic department projects that, in the last quarter, we will be growing at an annual rate between 2.3% and 2.5%. Let’s not underestimate the capacity that the monetary easing cycle has in the Brazilian economy. The expectation with the government agenda is of a revision in the country’s cost of credit. In the last weeks of last year, this constituted an important agenda. As of April, there is the banking system’s commitment to reshaping credit-card instruments such as revolving credit and installment plans. I’m optimistic about the agenda. We don’t expect devaluation of the real against other currencies. The capital inflow is big, the trade balance surprised, the current-account deficit is around 1% of GDP.
Valor: Is the rate cut alone enough to ensure growth in the second half or does that depend on the combination of interest and reforms?
Mr. Trabuco: The interest rates, alone, don’t ensure. Together with the reforms and also with the concessions program, they allow restoring growth. It is true that, after such a protracted recession, the resumption of growth doesn’t create jobs at a first moment. The economy grows on top of idle capacity. When confidence solidifies, it turns into greater job creation. What’s new is that we are constructing in Brazil, since last year, a governance model around two unannounced and correlated pacts.
Valor: Which ones?
Mr. Trabuco: There is a link between executive, legislative and judiciary. In moments of doubt, the branches of power end up coordinating themselves. Why did this happen? Because the crisis has been so evident and the future view of the economy has been so compromised that most of the Brazilian society is seeking the middle path, in which there is no ideology. There is another unwritten pact that is a sort of advance in the coexistence between state and market. This governance model has already yielded a positive agenda, which is under way and has as priority item taking Brazil off the insolvency route. An insolvent country with such a high social debt is something catastrophic.
Valor: What is the focus of your Davos schedule?
Mr. Trabuco: I had a very big demand from investors, four of equities, one of them shareholder in the organization. But I also had demands from bond investors. I am anxious to capture their concerns regarding Brazil so we can give the adequate responses. We coordinated the last [bond offering] by Petrobras, which was very successful. We have a series of offerings in the pipeline. The market has always been open to Brazil. Now it’s time to take advantage of this drop in domestic rates, which will attract another capital flow. If we are capable of eliminating risk factors that may cause bad mood of investors, the possibilities are exceptional.
Valor: You mentioned earlier that you expect a consolidation in the decline of loan defaults. Could you better explain that?
Mr. Trabuco: When the crisis intensified, from 2014, companies were extremely balanced and with favorable cash generation. We felt a reduction in the indebtedness level of companies at that moment. The lack of credit growth is due to two factors: less need of financing to multiply the business, but also by the repayment of financial obligations. Consumer loan delinquency took long to appear. This first happened with companies, which fell into crisis. During 2016 and maybe in the first half of 2017 we will have many reprofilings, changes of level in the maturities. The Selic rate cut will help. Renegotiating credit at such a high cost of capital may burden companies even more. The point is to create a debt profile that fits the pocket and cash generation of consumers and companies. We’ve already had credit recovery at worse moments. Only 80% of the total stock of past-due credit was renewed. Today it is around 90%.
Valor: How is the succession process at the bank?
Mr. Trabuco: The succession process was initially planned to take place in 2017. Because of a board proposal, ratified by shareholders, I continue in the post for the next two years — until 2019. The succession will happen with the Bradesco values: here we value in-house talent, the career process, identification with the bank. It’s a natural path.
Valor: What is the challenge in the time you still have ahead of the bank?
Mr. Trabuco: We have huge challenges and my presence as CEO was a vote of confidence to achieve our big goal in 2017 and 2018, which is the integration of the acquired bank [HSBC], the largest acquisition in our history, equivalent to 20% of our size and precisely at the toughest moment of the economy. In any favorable scenario, the synergy gains provided by this deal add value to the shareholder. The bank’s performance last year shows we are prepared, even at an adverse scenario of credit. The organization’s earnings through the third quarter show we have a good business model: we are a bank of credit, but also of service provision, and we have the largest insurer in Latin America, in addition to an investment bank well segmented. Last year, our share price rose 62% on Bovespa, which means a market acknowledgement.
Valor: Bradesco made the point of advocating the conclusion of Murilo Ferreira’s term as Vale CEO. Has there been any disagreement with the government?
Mr. Trabuco: This is a matter always discussed at Valepar — with Previ, Mitsui, BNDES and Bradespar. Murilo’s tenure is under way and there is an extremely respectful relation between the parties. That discussion occurred during the tenure, but the tenure will go through May and is preserved.
Valor: Do you expect an outcome in 2017 for the accusations against you in Operation Zelotes [of acting to influence trials at the Administrative Council of Tax Appeals)?
Mr. Trabuco: We — Bradesco and I in particular — have an immense respect for the institutions: the Federal Police, the Public Ministry and the judiciary. The case exists, we made the defense and are confident there will be an understanding in relation to what happened and to what didn’t happen. I have a lot of confidence in the justice.
Source: Valor International