# **2.3 Discussion of Findings**

17. **The findings of the practitioner approach confirm the premise of significantly different performance between bank business lines.** In particular, although there might remain some uncertainty about the level of absolute returns or the extent of out-performance by the Retail business line, the above estimations provide support to the hypothesis that the degree of price competition is lower in retail, compared to corporate, banking. The findings also substantiate the paper’s premise that such analysis needs to take place at a disaggregated level in order to derive meaningful results.

18. **The aforementioned results are also similar to those reached by studies elsewhere** . The finding that retail banking in Brazil is higher-yielding and more profitable – even on a risk-adjusted basis – than corporate banking is not unusual. Previous studies in other countries have confirmed this result, either directly by estimating risk-adjusted profitability measures for different business lines or indirectly by comparing the valuations of different financial institutions<sup>15</sup> . Importantly, these findings have also been corroborated by various antitrust commission initiatives and other studies on specific segments of the retail banking market, such as payments services and lending to small firms<sup>16</sup> . In that sense, Brazil does not appear to be exceptional in terms of differences in performance between business lines, although this would have to be fully substantiated by undertaking a similar type of analysis for other countries. What seems particular of Brazil is the extent of such differences<sup>17</sup> .

19. **Findings need to be treated with caution due to significant methodological and data constraints** . Methodological constraints include heavy reliance on accounting statements that might significantly differ from economic reality (e.g. in the treatment of expected credit losses), and estimation at a point-in-time (2007) as opposed to a full business cycle, which might distort both absolute and relative rates of return<sup>18</sup> . Data constraints include the unavailability of business line-level information on volumes and rates, which necessitated making allocation and rate assumptions.

# 20. **Sensitivity analysis supports the robustness of the results under plausible scenarios** . Analysis was undertaken for key variables that were not fully corroborated<sup>19</sup>

> 15 See, for example, Clark et al (December 2007), the Cruickshank Report (2000), Oliver, Wyman & Company (2003), and Morgan Stanley and Oliver Wyman & Company (2002).

> 16 For example, the Cruickshank Report (2000) attempts to estimate financial performance for UK banks at a disaggregated level (i.e. by individual economic market and customer class) using accounting data. See also recent financial system competition-related inquiries by Australia, Ireland, Netherlands, South Africa, Sweden, and the European Commission,

> 17 Clark et al (December 2007) compare recent performance of eight large US banks and find that the retail business has returns two to three times higher than non-retail. However, the same article concedes that the evidence is mixed about the extent of such differences.

> 18 However, international experience from developed countries suggests that default rates on corporate banking are more correlated and volatile than those on retail banking. As a result, one would expect corporate banking to exhibit even better performance in ‘good times’ than normally. This phenomenon is also recognized in Basel II, where exposures to retail and small/medium-sized firms receive a lower credit risk weight than corporate exposures and therefore have relatively lower regulatory capital requirements. 19 Sensitivity analysis on variables whose values are confirmed – for example, the average interest rate of Selic for 2007 – is not undertaken, even though these may also represent key drivers of performance.

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