(Bloomberg) -- The age of “stratospheric profits” is over for Brazilian banks because interest rates have dropped to record lows and competition from fintechs is intensifying, according to Banco Bradesco SA Chief Executive Officer Octavio de Lazari.

“We never had such low interest rates in my lifetime in Brazil,” Lazari said in an interview at Bloomberg’s headquarters in New York. “We don’t know what that really means.”

The nation’s benchmark interest rate tumbled this year to 5% from 14.25% in October 2016, still high compared with the U.S. rate of 1.75% and negative levels in Europe. But on an inflation-adjusted basis, Brazil’s rate is closer to 2%, pinching bank profit margins. At the same time, upstart financial-technology companies such as StoneCo Ltd. and Banco Inter SA are posing a bigger challenge to the nation’s large, established banks.

Bradesco’s strategy will be to cut costs and try to gain scale and market share, generating “small profits in each of many different types of business,” Lazari said. He added that the Osasco-based company -- the nation’s second-biggest bank by market value -- opened 1.5 million new checking accounts this year.

But next year could bring dark clouds. Brazilian banks’ net interest margins and loan growth could be pressured if the central bank keeps cutting interest rates and the country’s economy posts lackluster growth, according to Nathan Dean, a senior analyst for Bloomberg Intelligence. Bradesco’s profits are still booming, rising 22% to 19.2 billion reais ($4.6 billion) this year through September from 15.7 billion reais in the same period last year.

Bradesco’s priority is loans to individuals, especially mortgages -- a business in which Bradesco posted a 16% increase this year. Car loans have climbed 18%, according to the bank, which has about 80 analysts using big data to gather and analyze information about clients, including credit ratings. That’s helped put Bradesco on pace to expand consumer lending 24% this year, Lazari said.

Interest rates on loans to individuals are about 51% a year, still well above the benchmark Selic rate, according to the central bank.

“Most personal loans are taken out at night or on weekends, and 52% of those transactions are being made by mobile devices, so they are very cheap for the bank,” Lazari said, adding that the need for brick-and-mortar outlets is decreasing.

Those numbers don’t include Next, the mobile bank Bradesco created about 2 1/2 years ago to take on the growth of fintechs. Next is averaging about 8,000 new accounts a day, and Bradesco is creating a segregated unit for it and starting to look for an outside partner for the business, according to the CEO.

“Money we don’t need,” he said. “What we need is a strategic partner to add value and knowledge to Next.” An initial public equity offering could also be an alternative in about three or four years, Lazari said.

Credit Cards

In the credit-card payments business, Lazari said Bradesco is engaged in a “price war” to compete with tech firms such as Pagseguro Digital Ltd. and StoneCo.

Bradesco is the biggest shareholder at card processor Cielo SA, with a 30% stake of voting shares. It has no intention of selling them, Lazari said.

“The business has vital importance for the bank, because of my corporate clients,” he said, adding that Cielo had been “seen as an old-economy firm, and had to reinvent itself.”

About 70% of Cielo’s revenue comes from its biggest clients, and the credit card processor, which has a 43% share of the market, is trying to attract more small and midsize merchants, according to Lazari. The firm sold more than 1 million new card machines this year and is gaining back market share it had lost to the newcomers, the CEO said.

That success doesn’t mean a return to the golden years.

“Forget it -- Cielo will never again post a 3 billion-real annual profit,” Lazari said. Instead, earnings will be closer to about 1 billion reais, “and that’s fine,” he said.

“My biggest challenge is to create many assets for the bank that will give us tiny gains,” Lazari said. “There is no silver bullet anymore.”

--With assistance from Giulia Camillo and Helder Marinho.

To contact the reporter on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Dan Reichl

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