Itaú to buy Citibank Brazil for US$ 220 million 

Itaú has agreed to pay R$ 710 million (approximately US$ 220 million) for the retail operations of Citibank in Brazil. The transaction was announced this morning. Citi primarily serves high-income customers and has 315,000 account holders in the country.
In the acquisition, Itaú acquired loan portfolio, credit cards, deposits, asset management, insurance brokerage and the 71 branches that Citi has today in the main regions of the country. That is R$ 35 billion in deposits and assets under management, 1.1 million credit cards issued and a credit portfolio of R$ 6 billion reais. After the acquisition, Itaú Unibanco will have R$ 1.404 trillion in assets.

The acquisition still needs to receive the approval of the Central Bank and CADE (Administrative Council for Economic Defense)

Citibank joins HSBC in retreating from Brazil. HSBC announced at the end of 2015 that it sold its Brazilian operations to Bradesco. In a deal already approved by anti-trust authorities,  Bradesco acquired HSBC and brought their assets closer to Itaú, largest private-controlled bank in Brazil, by that metric. HSBC was a lot bigger than Citi in Brazil, but today’s acquisition shows Itaú is not willing to let this largest label go.

Itaú has a 5-star rating from Easy Brazil Investing and continues to be a great way to play the Brazilian economic recovery.

Magnesita merger with Austrian RHI creates global giant in the industry

In an operation that creates a global leading company in the refractories market, mainly used in the steel industry, Brazil’s Magnesita, the third largest manufacturer in the world in this sector, merged their businesses to the Austrian giant RHI, based in Vienna. With the merger of assets, it is formed RHI Magnesita, which will have an annual revenue of approximately € 2.7 billion (R $ 9.8 billion).

The new company, which will have dispersed control, in line with the current profile of RHI, will have its shares listed on the London Stock Exchange. The corporate headquarters will be established in the Netherlands and the Austrian company stocks will be de-listed from the Vienna stock exchange.

Brazilian Economy shrinks 0.51% in May, according to the Central Bank

The Brazilian economy has not confirmed the brief improvement in April. The Economic Activity Index Central Bank (IBC-Br) fell 0.51% in May, after growing 0.07% in April (revised), which was the first increase in 15 months. In the year, the decline was a significant 5.79%.

In the 12 months ending in May, the IBC-Br indicates a decrease of 5.43% in the series without adjustment and 5.51% in the adjusted data. Due to the constant indicator review, the IBC-Br measured for 12 months is more stable than the monthly measurement. Compared with May 2015, there was a low of 4.91% in the series without adjustment and 5.32% with adjustment.

The results came worse than expected by the market players. The average of forecasts made by 21 financial institutions suggested a decrease of 0.24% in the month. Estimates ranged from a decrease of 0.9% and increase of 0.1% for the monthly variation.

In the June Inflation Report, the central bank projected a drop of 3.3% in the GDP for 2016, against the previous forecast of a 3.5% decline. Analysts consulted for making the Focus Bulletin also point to a decrease of 3.3% for the Brazilian economy this year.

EWZ: Ibovespa has its best semester since 2009 and US$ drops 18.6% versus the Brazilian Real

Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:


In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.

Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.

Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:

Consumer and Industry Confidence in Brazil

Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.

Brazilian Retail Sales up 0.5% MoM in April

Brazilian retail sales volume in April increased 0.5% MoM but fell 6.7% YoY, both worse than market expectations, according to IBGE (Brazilian Institute for Geography and Statistics). Although in the monthly comparison, most of the sectors have recorded an increase, it was not enough to reverse the downwards trajectory, still visible in the annual comparison of past months. 

Therefore, we continue with a negative bias to the sector’s performance in 2016, we do not know when sales will have the strength to reverse the negative trend, given:

  • The uncertain political scenario, which makes difficult the turnaround on the confidence and economic growth. 
  • Rising unemployment Rate
  • Low and expensive offer of credit

On the other hand, we have signs that the worst may be behind, since the decrease in retail sales in January was 10.3% YoY

Brazilian Steel Industry in Survival mode for the Foreseeable Future

The Brazilian steel industry has seem better days. If we look at the three stocks traded as ADRs in the NYSE, we can see the depth of their agony in the last ten years:

Gerdau (NYSE:GGB):

Gerdau - Brazilian Steel Industry Agony in the last 10 years
Gerdau – Brazilian Steel Industry Agony in the last 10 years

Companhia Siderúrgica Nacional – CSN (NYSE:SID):

SID - Brazilian Steel Industry Agony in the last 10 years
CSN – Brazilian Steel Industry Agony in the last 10 years

Usiminas (OTC:USNZY):

Usiminas - Brazilian Steel Industry Agony in the last 10 years
Usiminas – Brazilian Steel Industry Agony in the last 10 years

In the 27th Brazilian Steel Congress, held by the Brazil Steel Institute, industry executives said that the moment is still of high pressure and explained their survival strategies. As a common theme, they all mentioned exports will be the way to survive in the short term.

Benjamin Steinbruch, shareholder and president of Cia. Siderúrgica Nacional (CSN), said he believes the internal market is “the future” of the sector. It is necessary that the government create mechanisms to ensure that competitive conditions are the same as in other countries. He also complained about the high interest rate in the country today.

Questionable government policies in recent years have led to an impoverishment of the country. “It is the highest impoverishment through which a nation has been, without a war”, he said.

The new president of Usiminas, Sergio Leite, explained that the focus of the moment is survival – in the next three to five years this will be the order of the day. Meanwhile, calls for government priority to a program for the processing industry in the country. “Restructure and adapt businesses to market reality [is needed].” The “bottom” is already approaching, but recovery will take time, he said.

André Gerdau Johannpeter pointed out that the current crisis in the sector was announced. For some time, he said, we have been discussing the pressure that the Chinese excess capacity would have on the Brazilian market. According to the president of Gerdau, this oversupply from China will impact even on the next five to ten years.

“In the short term, what we can do is to seek export. There will be no domestic recovery”, Gerdau said. “Without exports, the picture is dramatic: layoffs and closed plants. In the medium and long term, we need structural competitiveness, changes in labor laws and taxes”, he added.

The event also brought experts on China and foreign trade, which said that the recognition of the Asian country as a market economy by the World Trade Organization (WTO) could distort the steel industry and other sectors in the world.

Usha Haley, professor at the University of West Virginia, said Chinese mills have access to cheap and easy capital, while receiving large subsidies from the local government. She believes that Chinas’s ultimate goal is just to increase production and, while maintaining employment and guaranteed volumes in the domestic market, be able to become a major exporter of the material.

Despite the gigantic fall in stock prices over the last 10 years, it’s hard to get positive on this industry. Sure, after so many years of oversupply and depressing costs, one could expect a turnaround and, in fact, all three ADRs are sharply higher in 2016. However, a more consistent recovery seems to be far for this industry.

CADE Approves Bradesco’s HSBC Brazil Acquisition with Restricticions

Brazilian anti-trust council (CADE) has approved the acquisition of HSBC Brazil by Bradesco with restrictions.

One immediate consequence of the of the restrictions imposed by CADE is that Bradesco is definitely out of the dispute to acquire Citi in brazil, since no new acquisition will be allowed to the bank for 30 months. On top of that, the bank has to lower the portability costs for HSBC customers that do not want to come under Bradesco.

With the acquisition, Bradesco gets closer to the largest private bank in Brazil (Itaú Unibanco). HSBC has around 2 to 3% of the banking system market share and now Bradesco should reach around 17%.

The EPS should have neutral impact for the first year, since the bank does not plan on issuing new stocks to finance the acquisition and the multiples of the acquisition are in line with Bradesco’s itself. The acquiring bank’s expectation is that the transaction starts to generate value a year after its closure.

What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.

Brazil mulls emergency loan to Rio de Janeiro ahead of Olympics

By Alonso Soto and Marcela Ayres

BRASILIA (Reuters) – Brazil is considering an emergency loan to the cash-strapped state of Rio de Janeiro as it prepares to host the Olympic Games in less than two months, according to two senior government officials familiar with the situation.

The loan would be guaranteed by the state’s participation in local companies and could be extended to the states of Minas Gerais and Rio Grande do Sul, which are struggling to pay employees and pensioners as a crippling recession reduces tax revenues.

“These states need cash injection. There is no other way,” said a member of the government’s economic team who asked for anonymity in order to speak freely. “These loans will be backed by states’ assets such as banks, utilities, gas and sanitation companies.”

Eligible states would transfer their stakes in government-led companies to the federal government, which could in turn sell them to private investors as it did during the last states’ debt restructuring in the late 1990s, the source said.

Rio’s main state-controlled company is its water and sewer provider Companhia Estadual de Aguas e Esgotos do Rio de Janeiro, commonly known as Cedae.

The city of Rio de Janeiro has enough money to complete the infrastructure for the Olympics, but a financial crisis at the state level threatens to disrupt public services during one of the world’s biggest sporting events, which starts on Aug. 5.

The oil-producing state, hit hard by the recession and drop in crude prices, faced its worst ever public health crisis this year when unpaid doctors and nurses walked off the job at hospitals and clinics were left without essential supplies such as syringes and disinfectants.

The Rio Olympics, the first held in South America, also has been marred by political turmoil that led to the suspension of the president and an outbreak of the mosquito-borne Zika virus that has been linked to brain malformation in babies in Brazil.

The amount of the emergency loans will depend on how much debt relief the government can give other states also in fiscal distress, another source involved in the talks said.

On Thursday, several Brazilian states seeking relief from debt that amounts to 11.2 percent of Brazil’s gross domestic product resumed talks with the government of interim President Michel Temer.

This creates a tricky situation for Temer, who in May replaced suspended President Dilma Rousseff while she stands trial for allegedly breaking fiscal rules. Providing relief to the states could exacerbate a fiscal crisis that has cost the country its hard-won investment grade rating late last year, driving up borrowing costs.

Temer’s government has rejected a proposal to pardon state debt payments for two years and lower interest rates retroactively, according to state representatives who met with finance ministry officials on Thursday. More meetings are scheduled for next week.

The finance ministry press office declined to comment. The finance secretary of Rio de Janeiro could be not be reached for comment.

Rio de Janeiro’s finances have deteriorated so much that the state missed debt payments to a French development bank and the Inter-American Development Bank last month. Moody’s Investor Services called the event a “credit negative for all of Brazil’s states.”

The state ramped up its payroll during years of high oil prices, expecting that royalties on massive crude discoveries off its coast would keep its coffers full.

Now the state is cutting social programs, eliminating secretariats and raising taxes to plug an expected budget deficit of 19.9 billion reais ($5.91 billion) this year.

Rio Grande do Sul-state Finance Secretary Giovani Feltes confirmed the negotiations for the loans, which he said will be used only for investment, but will give his state a much-needed breather.

“This loan will not go to current expenditures because the law doesn’t allow us to use loans to pay our employees,” Feltes said in a phone interview. “Obviously this (loan) would improve out fiscal situation.”

Brazil taps ex-Bunge boss Parente as Petrobras CEO, replaces Bendine

Brazil’s interim President Michel Temer named Pedro Parente chief executive officer of state-led oil company Petroleo Brasileiro SA on Thursday as his government tries to kick-start a shrinking economy and shore up the debt-laden oil producer.Parente, an engineer, former Bunge Ltd executive and one-time chief of staff to former President Fernando Henrique Cardoso, replaces Aldemir Bendine, according to the president’s office. Bendine had been running Petrobras, as the company is known, for the last 15 months.

Petrobras did not immediately reply to a request for comment on the appointment.

Parente, 63, will be charged with efforts to rescue Petrobras from financial crisis brought on by low world oil prices, crippling debt and a massive corruption scandal.

Parente is best known for his role as chairman of the Brazil unit of agribusiness and commodities-trading giant Bunge Ltd from 2010 to 2014. Bunge is Brazil’s largest grains exporter.

The appointment also marks Parente’s return to Petrobras after 14 years. He sat on Petrobras’ board under former Brazilian President Cardoso. Parente was a key player in opening Petrobras to competition and international investment after the Cardoso administration ended Petrobras’ monopoly over exploration and production in 1997.

From 1999-2002 he also served as Cardoso’s chief of staff and managed a severe energy crisis that required electricity rationing and the quick building of supplementary power stations. He also helped manage a reduction of the government’s stake in Petrobras.

The Petrobras he will take over, pending approval by the company’s board of directors, will be quite different than the one he left. Petrobras invested $4.91 billion in 2002, Parente’s last year on the board. A decade later Petrobras was investing nearly $50 billion a year and despite major cutbacks still plans to spend $19 billion this year.

Despite the nearly ten-fold increase in investment, Petrobras has struggled in recent years to increase domestic oil production as much as expected, missing annual targets for 12 straight years.

Meanwhile, its total debt soared faster than output to about 450 billion reais, or nearly $130 billion, at the end of the first quarter from 33 billion reais ($9.32 billion) in 2002. Petrobras is now the most indebted oil company in the world. Plans to sell $14 billion of assets have stalled, forcing more cuts.

Temer, who replaced suspended President Dilma Rousseff last week while she faces an impeachment trial, chose Parente on Monday, according to a report on the Web site of the O Globo daily newspaper.

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