Brazil: Itaú acquisition raises competition concerns

Itaú is close to buying Citi’s retail banking assets in Brazil in a move that will do little to address growing concern about the concentration of the country’s retail banking market.

Santander Brasil had been interested in buying Citi’s Brazilian assets in an acquisition that would have added much-needed scale to the country’s fifth largest bank – and it was understood to have mandated Morgan Stanley to assist in the process. However, it appears that Itaú has used its huge resources to out-muscle Santander and has entered into exclusive talks to buy the US bank’s Brazilian subsidiary.

“This deal further illustrates the growing systemic risk in Brazilian banking with two very large public sector banks,” says Luis Santacreu, analyst at Brazilian ratings agency Austin Ratings. “Also, with this level of concentration it is very hard to see lower interest rates – there is no competition – and it is creating damage to the economy, negative effects to industry and commerce, as well as small business and services. It’s a critical problem in Brazil.”

Luis Santacreu,  Austin Ratings

Itaú’s move on Citi’s Brazilian bank comes as Bradesco nears the completion of its purchase of HSBC’s operations in the country. Bradesco’s acquisition was more important: HSBC had 900 branches compared with Citi’s 71 and Bradesco paid $5.2 billion (compared with an expected sale price for Citi Brazil of about $400 million).

However, Bradesco’s deal would seem to suggest that acquisitive growth is expensive for the leading players. It has come amid a slowdown in credit and, as banks have responded by cutting branches, the addition of 900 more to the bank’s network is of questionable advantage – particularly as many of those branches are reported to be unprofitable, especially those in small towns in the states of Sao Paulo and Parana.

A report from UBS suggests that Bradesco’s acquisition will depress its results in the short term. While the bank’s total assets will rise by 14% (loans by 19% and deposits by 32%), return on equity is expected to fall by around 150 basis points to 15.6%.

“We expect ROE pressure as HSBC is less efficient and has been reporting net losses for the last couple of years,” says UBS. “Integration risk is likely to remain elevated and we believe it will be challenging for Bradesco to reduce branch numbers as well as headcount to alleviate elevated cost pressure.”

Analysts also question the extent of overlap between the client lists of HSBC and Bradesco and the ability of Bradesco to retain those clients that weren’t part of the Brazilian bank before the acquisition. 

“Brazilians like to have accounts with at least one fully international bank, and there is a question about whether some of those accounts will now switch to the only one that remains – Santander,” says one.

It’s also possible that Santander could benefit from Itaú’s acquisition of Citi in a similar way and might be part of the reason that Santander was said to be highly disciplined in its bid for Citi’s Brazilian subsidiary. Instead, it looks as though Santander will have to be satisfied with buying Citi’s Argentine subsidiary – boosting its leading presence in the country.

Meanwhile, Scotiabank is understood to be in line to buy Citi’s retail and credit card business in Colombia.

Citi’s Brazilian acquisition is so small relative to Itaú that it had been questioned in the market whether the deal was worth the migration effort. It certainly won’t be transformative to Itaú – in the way it would have been for Santander – but Santacreu does not see a defensive motive in blocking Santander with this deal. “I think it’s just a case of Itaú doing the deal with Citi because Bradesco bought HSBC,” he says. “They are only in competition with themselves.”

There have been reports that the new president of Brazil’s central bank, Ilan Goldfajn (ex-chief economist at Itaú) was concerned about the economic damage caused by the continuous consolidation of the retail banking industry by Brazil’s two leading private-sector banks. However, both the central bank and the country’s anti-trust commission, Cade, appear not to be taking any steps to prevent this latest deal.

“Tombini [Goldfajn’s predecessor] was also reportedly worried about the damaging effects of banking concentration but when did you ever see a deal being denied?” says one analyst. “Bradesco was authorised to buy HSBC with the condition it couldn’t buy another bank for 13 months but really, there isn’t anything left to buy. It’s a joke.”

Instead of preventing consolidation Alexandre Tombini ultimately restricted himself to some measures to address funding liquidity of the small and medium-sized banks. While these were welcome boosts to the viability of this segment, analysts say it did nothing to address the pricing power and domination of the leading banks.

“It isn’t just the retail sector,” adds Santacreu. “These banks also dominate investment banking and have large insurance businesses in a way that you just don’t see elsewhere.”