In the current financial crisis roiling economies around the globe, the spotlight is especially bright on the financial services sector, including the banking industry. While noting the difficulty of predicting exactly what to expect in the next year, Banco BBM CEO Pedro Mariani, in a recent interview with Knowledge at Wharton, offered his opinions on Brazil’s banking industry, the real estate market, his own strategy going forward, and leadership challenges he has faced over the past two decades.

An edited transcript of the conversation follows.

Knowledge at Wharton: Our guest today is Pedro Mariani, CEO of Banco BBM. Thank you very much for joining us today.

Pedro Mariani: It is a pleasure.

Knowledge at Wharton: Everyone’s mind these days is on the international financial crisis. Could you tell me a little bit about what you think the impact has been on the Brazilian economy?

Mariani: Foreign currency price is very important here. Basically, we are coming out of a long period of very low volatility in the foreign currency market. So companies in Brazil started to not care very much about what was happening in the longer term, but were looking for profits on a day-to-day basis, basically selling dollars and waiting for the revaluation of the real. The crisis made a big difference in how people think about the dollar devaluation. So we have had a devaluation of around 50% and that [caused] some panic in the corporations and some financial institutions, too…. There is probably an inflationary impact from that. 

The other important area is credit. The currency problem made the demand for credit much stronger. The banks started to wonder if they could supply this credit. The central bank of course helped out … which made an impact on the amount of credit we have in the economy today. There were [other] banking problems in the sense of lack of confidence in small banks, but that was not as important as the total amount of credit [available] in the big banks. 

So these are the two [areas] of short-term impact – foreign currency price and credit.

Knowledge at Wharton: Was the Brazilian banking industry prepared for this kind of impact?

Mariani: It is a healthy system in the sense that we had big problems in the beginning of the 1990s. The Central Bank [is much better now] than it was [back then]. The people who work in the Central Bank got much more training … the overall quality of the bank is good, and regulations made the system more prudent. It is a very regulated system, as you know.

And last but not least, we have had no time for big leverage in the system. We were just starting on real estate financing, and it is still very, very small in Brazil, smaller than Mexico. Basically we have some big debt from consumer [car loans], but that is the only big market here for the consumer to have debt…. In the end, we were much better prepared than a lot of other countries that we saw….

Knowledge at Wharton: You mentioned real estate finance. What is the policy of Brazilian banks towards subprime mortgages? Does such a thing exist in Brazil?

Mariani: Not at all, because mortgage financing was basically about deals between the people from civil construction and the banks. They were just starting on that and the banks were [keeping tabs] on them, doing statistical analysis and working on a case-by-case basis. Maybe we will have some similar subprime issues in the consumer credit market as a whole – but not comparable to what happened in the U.S. or even in Europe.

Knowledge at Wharton: I just wanted to touch upon a couple of other aspects of the economy. As we know, a lot of Brazil’s growth was driven by commodity exports. Now, with devaluation of the real, what are the prospects of growth for commodities?

Mariani: The main commodities are agricultural commodities that are very strong in their exports. At the same time, we are having a devaluation of the dollar. If you take the raw materials — the fertilizers and even the fuel for the machines and all that, and the cost structures in soy beans and corn and cotton — they are probably around 60% linked to the dollar. So you have a 40% impact on the currency and you have a 100% impact on the price.

I understand that for commodities mainly [related to] food, the price will not come down as much as the metals. But let us say that 2009 will not be a good year as compared with what happened in 2008. 

I think that there is no reason for Brazil to have a very high devaluation to compensate for the decrease on price. But some devaluation will come from this side. Another problem is on the mineral side, basically iron ore. Let us just see what happens in China. That is the main buyer, so if they agree on the price, it is all right. If the price comes down very fast, that will hurt the balance….

Knowledge at Wharton: We have talked a lot about the overall world economy and the Brazilian economy. Turning now to your bank, in an environment like this, where do you find good buying opportunities?

Mariani: Basically we see ourselves as [having a very good] understanding of the credit environment here in Brazil. We will not grow the portfolio — it is impossible to grow — but we will have a better, much more profitable operation because we [understand] what clients really need and what kind of collateral we can have. At the end, that is our specialty here.

Knowledge at Wharton: What are your top priorities for the next two or three years in terms of taking the bank forward?

Mariani: We are keeping a good relationship with our clients, so we believe we have room to grow when the crisis stops.

In the meantime, I do not know exactly what is going to happen with the global financial system. In Brazil … you have the listed government guarantee on the big banks and that is explicit. Let us see how we will deal with this, [given that] this guarantee will not be explicit for smaller banks like ourselves.

Let us see how our liabilities will perform when dealing with clients that will have to choose between a not state-owned bank but a state guaranteed bank, and other ones. So that will change our policy in the sense that maybe we cannot have as big a portfolio in our balance sheet because [in the end] we do not take liquidity risk. That is something that is almost a religion [for us].

It is not clear to me what is going to happen when we look six months ahead. In Brazil, you probably already have 30% of our financial markets in the state-owned banks. 

Knowledge at Wharton:  Banco BBM is very well known in Brazil, but for those international listeners of Knowledge at Wharton who may not be familiar with the bank, could you tell us a little bit about the history and the evolution of your institution?

Mariani: Basically it is an old story. It started in the middle of the 19th century, as a bank in the state of Bahia, financing agricultural producers. In the 1940s, it moved to a national bank, basically a commercial bank financing working capital in the country as a whole…. In the 1970s, we moved from a retail bank to wholesale bank, and since then, we have specialized in wholesale credit, in proprietary trading. There was another important time also: We became a partnership in 1995. And in 2001, we started the asset management business, basically because we have a bigger synergy with the proprietary trading activity. This year we moved proprietary trading out of the bank because of market conditions and all that. We thought our rating could be much better if we have proprietary trading in other structures of the bank. That is our story in a nutshell.

Knowledge at Wharton: How have you positioned Banco BMM within the overall banking industry? I know there are large international banks like Santander, and there are also large Brazilian banks like Bradesco and Unibanco. How have you positioned yourself?

Mariani: [In Brazil],you have two very big private banks, Bradesco and Itau. And you have Unibanco close to them. You have two middle big banks, Safra and Votorantim. Safra is a traditional bank, Votorantim is a newcomer from the industrial group. Then comes ourselves together with other ones that were smaller than us but during 2006 and 2007, they had IPOs, so today their book value is a little larger than ours. But we have not done an IPO, so we still have much more of a partnership structure than these banks. I believe that we are the one that can profit from the days that are coming now. So this is basically the structure, but in these medium-sized banks, you have different ones; you have the corporate banks like ourselves and you have the consumer finance banks like Panamericano, BNG and others.

So in the end, we compete with other three or four banks in this corporate lending. Our competitor does not have the asset management — that is our difference. But basically that is the private structure. You have the state-owned structure, basically Banco Do Brasil and Caixa Economica, and some other smaller state-owned banks. And foreign banks — you have traditional ones like Citibank, but of course that is not very aggressive now. Santander has [been here] 12 years and is being very aggressive. I [think] they will come out of the crisis very well.

HSBC here is basically a service bank but it is coming out very, very well too. I do not know if I am forgetting someone. These are the main ones, the foreigners. 

Knowledge at Wharton: In terms of your own growth, your own leadership, do you think you might seek growth overseas as a way to come out of this situation?

Mariani: No, I do not believe that in the short term. I think that there will be so many opportunities around here. We understand a lot about Brazil and I believe that in the next one or two years, there will be opportunities for us. To go abroad would [mean losing] focus on the opportunities here.

Knowledge at Wharton: In your leadership of the bank, what would you say is the biggest leadership challenge you have faced, how did you overcome it and what did you learn from it?

Mariani: I believe it was in the beginning, learning how to coordinate a family-owned bank with [the goal] of having the best people in the financial markets working together. It was difficult to [find] a model for it, and then to sell it to both the controlling partners, the controlling shareholders and to the people [working] in the bank. I was very young at that time, so it was a little difficult. Today it would probably be much easier, but I was young and ignorant back then. It was at the beginning of the 1980s, more than 20 years ago.

Knowledge at Wharton: And what would you say you learned from the way you overcome those difficulties?

Mariani: Basically to have discipline of thought … not being [swayed] by one side or the other, by the strong opinions that you hear all the time…. But when I look at young people, that is a quality that is not so easy to find.

Knowledge at Wharton: That is a great answer. One last question, how do you define success?

Mariani: That is something that I have never thought about. I think that success to everyone is different. For me, it is [the ability] to coordinate people so that they feel much richer in both material and also intellectual ways. I think that is the reason for what I do. My wife was saying to me just the other day that [making money is important to me] but that even more important is keeping the business together and coordinating people [around that goal]. That is what I like to do. 

Knowledge at Wharton: Great. Thank you so much for joining us today.

Mariani: It was a pleasure.