The purchase of HSBC by one of the three largest private banks in the country will probably represent the last large bank acquisition opportunity in Brazil. In terms of concentration, the union of HSBC mainly with Itaú Unibanco or Bradesco will make the banking concentration reach levels that are already considered a yellow sign by the Central Bank (BC). Today, the four largest banks – Itaú Unibanco, Banco do Brasil, Bradesco and Caixa – hold 70.25% of assets, 76.01% of deposits and 76.06% of the financial credit system. If Itaú or Bradesco buys HSBC, this level will rise to 72.94%, 79.12% and 78.26%, respectively.
Ethanol producers in Brazil are feeling relief from improving demand, prices with tax incentives and an increase in the amount of fuel mixed with gasoline, according to a unit of Louis Dreyfus Commodities.
“I’m excited about the prospect of demand for ethanol this year,” said CEO Rui Chammas of Biosev in a telephone interview. “The market is reacting to the incentives.”
Sales of hydrated ethanol at gas stations in Brazil rose 32.6% in the first four months of the year, to 5.47 billion liters (1.44 billion gallons), while gasoline sales fell 3.7% after the government reintroduced a tax on fossil fuels that had been discontinued in 2012, showed regulator data.
Consumption has also increased due to a tax exemption in sales in the state of Minas Gerais, as well as the increase in the mandatory blending in the national gasoline, Chammas said. The Biosev is the largest producer of ethanol from Brazil after Raizen Energia.
Most of Brazil’s cars can be fueled with either gasoline or ethanol, and often consumers choose the most cost-effective fuel at the pump.
The country’s ethanol plants suffered from low demand in recent years, hurt by weak demand related to the measures by President Dilma Rousseff like price caps and tax breaks for gasoline in inflation control efforts. Only 36% of the country’s flex cars were fueled with ethanol last year, down from 82% in 2009, according to data from Datagro.
Since 2001, 49 producers were forced to close the doors and 67 others are under bankruptcy protection, according to a report from Unica.
Biosev’s harvest of sugarcane will probably grow in the 2015-2016 season, which began in April, with better weather after years of drought, Chammas said. The company expects to reach between 29 and 32 million tonnes this season, up from 28.3 million in the previous season.
HSBC confirmed on Tuesday that will leave Brazil and Turkey, in a restructuring plan that will eliminate 50,000 jobs worldwide. In the dispute by the British bank business portfolio in Brazil, Bradesco took the lead with an offer of $ 3.4 billion by the British bank, ahead of Santander and Itaú Unibanco.
HSBC is one of the ten largest players in Brazil, the seventh largest bank in operations in the country with 2.2% stake in the asset market and 1.9% of loans and 853 branches, corresponding to 3.7% of system. The bank also has R$ 57 billion in deposits for a market share of 2.9%. The bank’s loan portfolio consists mainly of commercial loans (70%), while loans to individuals account for 22% and 8% are mortgages. Analysts estimate a potential valuation of the bank’s assets from R$10 billion to R$ 14 billion (US $ 3.5 billion to $ 4.6 billion).
For Bradesco, in addition to having an opportunity to get closer to Itaú Unibanco in terms of assets, the purchase is of particular importance in terms of synergies that it can bring to the bank. Bradesco is particularly interested in the portfolio of high-income customers and HSBC’s micro credit company, Losango.
Santander Brasil announced yesterday (3) that it won a cause of R$ 4.8 billion in court that will provide an extraordinary profit in the second quarter. With all that money positively affecting its balance sheet, the bank took the opportunity to announce an extra provision of R $ 1.6 billion. Much of this additional provision should be used to insure against defaults amid the crisis generated by Lava Jato and the growing number of judicial recovery.
While the other Brazilian big banks announced significant increases in provisions in the first quarter, Santander was the only one not to have any impact in this regard. With the victory in court, it may make this increase without having to lose the profit line. The bank did not explain what the R$ 1.6 billion on its balance sheet is for. According to a spokesperson, the new provision will serve to a number of issues, including bad debt.
According to the material fact disclosed by the institution last night (3), the bank had a win on a decision of the Supreme Court on the charge of Cofins tax levied on financial institutions since the enactment of Law 9718 of 1998. The They claimed that banks should not pay a higher rate, as previously understood by the taxman.
The bank had already won the case in the District Court, but federal prosecutors appealed to the Supreme who unanimously denied this appeal. That way the bank can now reverse a provision that had been doing for this case in the amount of R $ 4.8 billion. Just like when you make a provision, profit is negatively affected, the reverse is true. Ie to reverse this provision of R$ 4.8 billion, Santander can register directly on its bottom line.
As already announced they will take advantage of this extraordinary event to strengthen its balance sheet at $1.6 billion, the net impact should be less than the total won to the cause. Even so it will be around R $ 3 billion, quadrupling earnings in the quarter. But this number will depend on the tax incidence on the results.
According to the notes of the first quarter balance sheet, there are still issues to be evaluated on the PIS tax, for the same law 1998. At the end of the first quarter, the bank reserved R$ 10 billion for if they lost these causes.
The Brazilian committee for monetary policy (COPOM) has raised the interest rate benchmark by 0.5% to 13.75% per year. The decision was unanimous and came without a direction indication and in line with expectations. Therefore, Selic is back to the level of december 2008.
In the note released with the decision, the committee suggests that it did not finish the credit tightening cycle, since it’s maintaining the text used since January: “Evaluating the macroeconomic scenario and the perspectives for the inflation, COPOM has decided to raise the Selic”.
Now, the analysts debate if in the next meeting in July, the rate of 0.5% increase will be maintained, if it will drop to 0.25% or even if the cycle may be extended until September. A better understanding of this direction will probably be possible after the minutes release Thursday of next week.
The real interest, when discounted the inflation, is at 7.3%. This same index was 2.4% in April, 2013.
COPOM is clearly trying to show to the markets that this time, its search to take the inflation back to 4.5% by the end of 2016 is real. Brazil has damaged its credibility in the last few years after continuous spending deficits and a monetary policy lenient to higher inflation.
Central bank’s job of controlling the inflation may be “helped” by a stronger than expected cooling of the economy. Unemployment rate has reached 8% in May. The cooling in the economy could take some of the pressure off of the prices.
Brazil is today more resilient to face external turbulence, despite the significant growth in its debt in US dollar in 2014. The reason for the resilience, according to the IMF, is that the majority of the short-term debt is hedged. This is an undebatable advantage but that also brings a concern: the Real did not devalue as much as it should, according to the country fundamentals, at least not until December of 2014. The extension of the exchange swap program in June 2014, created by the central bank in August 2013, is partly responsible for this. For the IMF, taking into consideration the domestic inflation and the inflation of its commercial partners, the Brazilian currency still needs to depreciate 5% to 15%.
The IMF considers the swap program was a success is its objective of reducing the extreme volatility caused by external turbulence. The program was created after the exchange market suffered strong oscillations, after the then FED president, Ben Bernanke, suggested it was time to interrupt the financial support in the US economy. The swap program has reduced the Real volatility in 13% to 15% in comparison to other currencies that followed the instability after the announcement by Bernanke. The IMF economists note, however, that the reduction in volatility was also due to other instruments adopted by the country, like the end of the IOF over derivatives and the increase in the interest rate, SELIC.
Grupo Pão de Açúcar (aka Companhia Brasileira de Distribuição – CBD), Via Varejo (VVAR11:BR) and French group Casino Casino Guichard-Perrachon (OTC:CGUIF) (OTCPK:CGUSY) have announced a joint venture to create a giant new e-commerce company: Cnova.
CBD and Via Varejo will own 53.5% of the new company, while the remaining 46.5% will belong to Grupo Casino. The French group has already filled for an IPO of the new company in the US.
Cnova is born as one of the largest e-commerce companies in the world, with a volume of goods nearly US$5 billion, based on data from 2013. The company will have a large presence in France, Colombia, Thailand and Vietnam through the Cdiscount websites, besides Brazil, with Extra.com, CasasBahia.com and Pontofrio.com, sites operated by Nova Pontocom, a company owned mainly by CBD and Via Varejo.
According to the companies’ release, the success of Cnova will be based on a business model of low cost operations, attractive prices, a wide variety of products and delivery solutions and highly differentiated payment.
Cnova will have two co-presidents, and one will probably be the current president of the Nova Pontocom, Germán Quiroga Pasquale, while the other will be the president of Cdiscount.
Moreover, the company’s board will consist of 9 members, 3 appointed by Casino, including Jean-Charles Naouri – president of Casino and who will be the chairman -, 2 members shall be appointed by Pão de Açúcar, 1 by Via Varejo, while the other two members will be independent. Finally, the two co-presidents will switch in the position that remains on the board.
While the news is positive in general, Via Varejo, the brick-and-mortar side of CBD, may end up with the worst part of it. If Cnova gets the same buying power that Via Varejo has and transfer this benefit to the end consumer, there may be serious cannibalization of the physical stores from Via Varejo. Casino has reportedly always wanted to do an IPO of its global operation with the intent of extracting value from Nova.com, the online arm of CBD, which Casino partly owns.
In 2013, Nova.com had a revenue of BRL 4.8 Billion (approximately US$ 2 Bi) versus BRL 25 Billion from Via Varejo. This number could change drastically in the mid to long term, which would be neutral for Casino and CBD but negative for Via Varejo.
Brazilian antitrust authority, Administrative Council for Economic Defense (Cade) rejected Telefónica’s (TEF) embargoes and kept the fine of BRL 15 million that was imposed on the company for breach of the agreement signed in 2010, by which it should stay away from TIM (TSU), controlled by Telecom Italia (TI).
With the negative for the embargoes, Telefónica must appeal of the decision. Therefore, it is necessary to wait for the posting in the “Diário Official”, the official newspaper.
The fine was imposed against Telefónica on December 4th, 2013, when the antitrust authority imposed conditions when judging the acquisition by the Company of shares of Telco, holding that controls Telecom Italia.
According to Cade, Telefónica will have to choose between seeking a new partner in Vivo (VIV), who would be entitled to have 50% of the control in this company, or selling the stakes it acquired in TIM through the purchase of shares of Telco.
Rumors have that Vodafone (VOD), who recently started operating in Brazil via enterprise services, is looking to expand into the consumer market and is interested in acquiring a stake in TIM, since it’s very unlikely that Telefónica would let got of the control on Vivo.
Wait.. What does football has to do with economy or stock investment? And even worse, how come a negative result for the country can be positive for it’s economy?
Fair questions. And to answer them, we have to remind that this year is also election year in Brazil and that football is not just one sport here. It is THE sport everyone follows. It’s almost embarrassing for us that we pretty much have no other sport. But the reality is it can change the country’s mood.
The other thing to be aware is that no matter what happens within the field, one thing is a given for this world cup: There will be riots! Maybe only pacific ones maybe not. In fact, PCC, a criminal organization is allegedly arranging less-than-pacific protests with black block. Now, the population in general is against any violent protest and would support the government and police in containing them. The part that can really change the election scenario is actually the pacific protests. And the reason is that those are supported by the majority of the population and tend to be very negative on the government currently on power.
Still not making any sense? We’ll get there… Bare with me.
So, what could change the population’s humor against the world cup? A Brazilian victory. If Brazil wins the hexa, protests will lose its strength. Make no mistake: most people in Brazil say they are against the world cup happening here but they will definitely get involved once the ball starts to roll.
So, if Brazil wins, it’s very likely that the government will get a little bit of a break and therefore Dilma becomes stronger for reelection in October/ November.
And that is why you should cheer against Neymar and team, if you are long. It’s been very clear lately the inverse relation between Dilma’s performance in the election pools and the stock market. Why? Because their government sucks (sorry for the technical term) for the private sector. PT, the labor party Dilma belongs to, has strong social programs and a good record of getting people out of poverty (especially in Lula’s first 4 years), which is great of course! But they don’t do the necessary investments and reforms the country desperately needs.
So.. what’s left? Vamos España! 🙂
Itaú is the second largest bank in Brazil. Only behind Banco do Brasil, which is a government-controlled bank, even though part of its equity is traded at Bovespa. We do not recommend exposure to government-controlled companies in Brazil so Itaú is the largest bank we cover in LATAM.
Itaú Unibanco was formed as the merge of two of Brazil’s largest banks: Itaú and Unibanco. When they merged, they were the 2nd and 3rd private-controlled banks respectively, created a huge institution and left Bradesco in second place.
There is a joke in Brazil that goes: “The three best businesses for you to have in Brazil are: 1st a well-managed bank, 2nd a bank and 3rd a badly-managed bank ”.
Ok. The joke may be an exaggeration. But the banking industry does have a lot going for it in Brazil. Unlike in most developed countries, where small banks and credit unions are always present and relatively strong, in Brazil, the bank industry has a well-established oligopoly, where the 4 major banks have together around 70% of the market share. This oligopoly along with the high switching-cost in the banking industry gives them a good pricing advantage.
The banking industry in Brazil is also conservatively regulated and highly lucrative, with spreads north of 10% and ROE around 20%. These two factors reduce considerably the risk for small investors in these banks.
Itaú Unibanco has over R$1.4 Trillion in assets (Approximately US$ 500 Billion). It provides retail banking, investment banking, real estate financing, leasing, consumer credit card, foreign exchange and foreign trade financing services.
Itau Unibanco Holding
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