What does the Itau-Unibanco merger mean for Brazil's banking system? Three experts share their insights.
BY LATIN AMERICA ADVISOR
Brazil's Banco Itau announced [recently] that it would merge with Unibanco, creating Brazil's largest bank. What does the merger mean for Brazil's banking system? Is it the result of the credit crunch hitting home in Brazil or a natural trend toward consolidation?
Thomas Rideg, Associate Managing Director of Business Intelligence for Latin America at Kroll InfoAmericas in Sao Paulo: Itau and Unibanco have planned this merger for more than 15 months without making a sound. This venture not only positions Itau/Unibanco as the largest bank in Latin America, but also places a big question mark regarding who Bradesco (formerly Brazil's largest private bank) is going to buy among the few available and relatively large local candidates. This merger will be positive for Brazil as it brings further strength to Brazil's financial sector in a time when the country's companies (as well as those in most emerging markets) become vulnerable to losing value in the international arena as a result of the global crisis which not only affects share value but also depreciates local currency, hence depreciating revenues in US Dollars. Losing this value makes these companies vulnerable to buyouts by international players. Itau/Unibanco is now that much more difficult to become an acquisition target, and ready to explore international territory. Furthermore, this does illustrate some consolidation in Brazil, which already began to take place as a first wave in the 1990s (when more than 30 acquisitions took place), and now will be further stimulated by any expected turbulence in the financial sector: buy or get bought.
Eduardo Kiss, Senior Partner at Demarest & Almeida Advogados: The answer is quite simple and straightforward: The merger has nothing to do with credit crunch or with the present problems in the international financial markets. Negotiations, according to the bankers involved, were initiated 15 months ago, long before the worldwide difficulties became so prevalent. The move created the largest private-sector banking group in the Latin America and this represents more protection to clients, investors, employees and business partners. Central Bank President Henrique Meirelles declared that the merger would 'contribute to the strengthening of the national financial system.' In a moment of unprecedented difficulties in the international market, such strengthening is very positive. Issues related to competition law are certainly among the most interesting legal matters related to the merger, as the figures involved are impressive. According to media reports, the new group will have 4,800 branches and will control approximately 18 percent of Brazil's banking market with 14.5 million clients. The new group will have 17 percent of the nation's insurance market and 24 percent of the pension sector. A heated discussion among legal scholars as to the competent authority to review competition issues in a merger of banks was decided in favor of the Administrative Council of Economic Protection (CADE). In August, 2007 the Federal Appellate Court of the First Region decided that CADE is the authority in charge of reviewing competition matters in a bank merger. Thus, the analysis of risks and other issues is left to the Brazilian central bank.
Maria Rita Gonçalves, Financial Institutions Ratings Director at Fitch Brasil: The proposed transaction will result in Brazil's largest financial franchise, with its strength deriving from the combination of diversified businesses across the range of financial services products. Given the realities of the challenging environment, Banco Itau Holding Financeira's diversification of activities should provide a diversified revenue base sufficient to cushion against potential pressures on asset quality, and allowing internal capital generation. While both banks have a track record of successfully integrating prior acquisitions, the magnitude of the proposed merger is far beyond that of past experience and will present important integration risks, both operational and cultural. Itau Unibanco Holdings will initially operate through the existing Itau and Unibanco franchises, maintaining the respective brands over at least the near term; over time, it is likely that synergies will lead to rationalization of legal entities and brands. Comments to the market since the announcement of the proposed transaction indicate that the new entity will look to both organic growth in Brazil, as well as international growth, both organic and inorganic. With a presence already in Chile, Argentina and Portugal, Itau is currently the most internationalized of Brazilian banks, and the new bank will likely have ambitions in other major markets in the region, on a scale compatible with its larger capital base. While both institutions have a well-established track record of effective risk management, the challenges of cross-border risk management on a larger scale could be significant.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.