Profiting from Prudence

By Guerrero, Antonio | Global Finance, July/August 2009 | Go to article overview

Profiting from Prudence


Guerrero, Antonio, Global Finance


Despite a recent drop in profits amid the country's economic slowdown, Brazilian banks are poised for long-term growth.

Amid a turbulent global market, Brazil's banking and financial sector is proving remarkably resilient. A stringent regulatory environment, strong domestic demand and a banking consolidation drive have contributed to the sector's relatively positive outlook- However, consolidation has unleashed a battle for market share, and the situation may even push some Brazilian banking giants to explore cross-border investment opportunities.

While the country's central bank says Brazils 50 largest banks posted a 3K% year-on-year decline in first-quarter 20(19 profits, to S3.94 billion, it also says the banks are in better shape than before the crisis began. While the central bank requires banks to maintain a Basel index of 1 1%, which measures a banks capital adequacy against its risk profile, the actual figure was 15.5% at end-2008.

A mega -merger between Banco Itau and Unibanco, to create the country's largest private bank, has pushed rivals to seek mergers of their own in a bid to keep market share. The newly created Itau Unibanco is still in an acquisitions mode and has indicated its interest in taking over small and mid-size Brazilian banks to further grow its business. With a 20% market share. Itali Unibanco executives are aware that antitrust authorities are not likely to allow the bank to complete any large-size acquisitions.

Banco Bradesco, which lost its status as the country's largest private bank as a result of" the Itau Unibanco merger, has been struggling for market share since falling to the number two position. It is now seeking growth through an expanded credit card portfolio, for which it recently acquired Banco Ibi, Brazil's fifth-largest branded credit card issuer, for $720 million. Banco Ibi is the consumer finance arm of C&A, one of Brazil's largest clothing retailers.

Though Banco Ibi also offers insurance, personal loans and savings accounts, Bradesco was enticed by the bank's exclusivity in financing C&A customer purchases. The Banco Ibi deal marks Bradesco's largest acquisition since buying Agora, a local independent broker, in 2008. Banco Ibi had more than 30 million credit card accounts last year, when it posted nearly $5 billion in revenues. The acquisition now doubles Bradesco's credit card portfolio to more than 65 million.

Room for Growth

"Arguably, notwithstanding the recent Itau Unibanco merger, which created a Brazilian banking giant, there should still be a lot of room for growth in the Brazilian banking market, particularly when considering the low level of banking penetration in the country and Brazil's huge financing needs," says Marcello Hallake, a partner at the New York law firm of Thompson & Knight, who specializes in cross-border mergers and acquisitions.

According to Rubens Sardenberg, chief economist at Febraban, the Brazilian banking federation, recent consolidation is the final phase of a long-term strategy to restructure and strengthen the sector. He recalls that over the past decade consolidation led to the disappearance of several banks chat could no longer operate within a stable macroeconomic environment that included tow inflation. "The recent consolidation move can be seen as the final step in this process and seems to be more related to a tactical strategy of the main players to increase their competitiveness through scale, cost reductions and a more robust capital base," says Sardenberg.

Hallake argues that the domination of the market by large local banks has been a positive factor/'Clearly, at a time when US and European banks have been so hard hit by the world's financial crisis, it has been beneficia] to have relatively little exposure to foreign banks and to be able to rely on a strong domestic market, where four of the five largest banks are Brazilian-owned, not counting the role of the large stateowned banks," he says. …

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