Bloomberg News

Cielo Credit-Card Profit Draws Rousseff, Banks: Corporate Brazil

November 08, 2012

President Dilma Rousseff

President Dilma Rousseff this year has pushed banks to cut rates on loans, utilities to reduce power bills and phone companies to charge less as she seeks to curtail inflation and spur the economy. Photographer: Jonathan Ernst/Bloomberg

Cielo SA (CIEL3), Latin America’s biggest credit-card processor, is making so much money that foreign competitors and regulators want a piece.

Cielo’s return on common equity, a measure of its ability to generate earnings from shareholder money, was 135 percent in the third quarter. The gain is the most on the benchmark Bovespa index and the highest among companies worldwide that process credit-card transactions, data compiled by Bloomberg show.

The profits are luring Banco Santander SA (SAN) and Citigroup Inc. (C:US) as record low interest rates and falling unemployment fueled a 23 percent surge in Brazilian credit-card purchases to 386 billion reais ($190 billion) in 2011, according to the nation’s credit-cards association. For the government, Cielo and Redecard SA, a rival taken private by Itau Unibanco Holding SA (ITUB4) in September, earnings are above fair levels and may require regulatory change.

“The stock was hit hard after news that the government would likely tighten its grip in the industry,” said Carlos Alberto da Silva Junior, equity fund manager at Modal Asset Management, which oversees 6 billion reais in Rio de Janeiro. “For us it was a buying opportunity because we don’t think the government will do anything to reduce the industry’s profitability.”

Government Intervention

Cielo, the Bovespa index’s second-best performing stock in the first half of the year, plunged in the month after Brazilian President Dilma Rousseff said interest rates on credit cards were too high. Rousseff this year has pushed banks to cut rates on loans, utilities to reduce power bills and phone companies to charge less as she seeks to curtail inflation and spur the economy.

Cielo, which is backed by Banco Bradesco SA (BBDC4) and Banco do Brasil SA (BBAS3), rose 35 percent in Sao Paulo this year as the Bovespa index gained 3.1 percent. Of 25 analysts who cover the stock, 15 say hold, 9 recommend buying and 1 says sell, according to data compiled by Bloomberg.

The stock was little changed at 54.14 reais at 4 p.m. today in Sao Paulo trading.

“We’re more cautious because there is regulatory uncertainty and we see more aggressive competitors,” Mario Pierry, an analyst at Deutsche Bank AG who rates the stock a hold, said by telephone from Sao Paulo. “The government is eyeing this industry. This sector is more profitable in Brazil than abroad.”

Purchases made with general-purpose credit cards in the U.S. in 2011 climbed 9.6 percent from a year earlier to $2.05 trillion, according to the Nilson Report, an industry newsletter based in Carpinteria, California.

Cielo’s press office in Barueri, Brazil, declined to comment. The central bank also declined to comment in an e-mail.

Return on Equity

Cigarette maker Souza Cruz SA and cosmetics maker Natura Cosmeticos SA are tied for the second-best return on common equity among Bovespa companies with 89 percent. Itau and Banco Bradesco, Latin America’s biggest banks by market value, each posted a 19 percent return.

Policy makers want to end exclusivity agreements that credit-card brands have with Cielo and Redecard to foster competition, central bank policy director Aldo Mendes said in an Oct. 17 speech. There’s room to cut card costs at a faster pace, with increased competition, Mendes said. Exclusivity deals still occur for cards and meal voucher plans, he said.

Banco Santander Brasil SA set up a company in January 2010 to provide credit- and debit-card processing services in a joint venture with Getnet Tecnologia em Captura & Processamento de Transacoes H.U.A. Ltda. Santander said the unit may control 10 percent of the market next year, up from 3.9 percent in September, according to an e-mailed statement.

Citigroup

Elavon Inc., which formed a partnership with Citigroup that started commercial operations in July, aims to capture 15 percent of the market for card transaction in its first five years of operations in Brazil, the company said in an e-mailed statement.

Cielo posted a 17 percent gain in the past two weeks, and is rebounding from its cheapest level relative to the benchmark Bovespa index in two years as concern over regulations eased.

Cielo traded at 13.3 times its 12-month estimated earnings on Oct. 23, the cheapest relative to the Bovespa index since November 2010, according to data compiled by Bloomberg. That marked a reversal from earlier this year, when Cielo was more expensive than the gauge. Cielo’s price-to-earnings ratio rose to 16 yesterday, compared with 28 for the Bovespa.

“Regulation in the sector is confirmed but in a milder form,” Gustavo Schroden, an analyst at Bes Securities Brazil, said in a telephone interview from Sao Paulo. “Over the next four or five years, both Cielo and Redecard are likely to lose market share, but the structure of the sector with major banks behind the companies should limit losses.”

‘Biggest Risk’

Itau paid 11.8 billion reais in September to acquire the remaining 50 percent stake in Redecard that it didn’t already own as part of a plan to take the company private.

Even with increased competition, expanding demand for credit cards as incomes and employment rise in the world’s second-largest emerging economy will fuel profit growth at Cielo, said Pedro Galdi, an analyst at SLW CVC Ltda. Brazilian consumers use cards for only about 27 percent of their purchases, according to the national credit-card association.

“The biggest risk is that the government will hurt the sector; the government complains that the fees the companies charge are too high,” he said in a telephone interview from Sao Paulo. “The high margins are attracting competitors, but Brazil still has plenty of room to grow.”

To contact the reporters on this story: Josue Leonel in em São Paulo at jleonel@bloomberg.net; Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net

To contact the editor responsible for this story: Jessica Brice at jbrice1@bloomberg.net


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