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.
Bradesco has confirmed its favoritism and, in the early hours of Monday, has formalized the acquisition of HSBC’s Brazilian operations, as highlighted by HSBC in its earnings report. The purchase was made for US$ 5.2 billion, or R$ 17.6 billion. The Brazilian central bank was notified last night of the transaction outcome. Thus, the amount to be paid by the national operation of the bank was well above the already rumored, US$ 4 billion. In recent weeks, the estimates for the business ranged between R$ 10 and R$ 12 billion.
Bradesco shares were down up to 3% on the São Paulo stock exchange today on the news.
HSBC Brazil is the last bank acquisition opportunity in the country
Race for HSBC Brazil: Bradesco is ahead with an offer of US$ 3.4 Billion
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.
Read More: Race for HSBC Brazil: Bradesco is ahead with an offer of US$ 3.4 Billion
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.
HSBC Brazil will be the last bank acquisition opportunity in the country
More about Brazilian Banking Companies
Bradesco is the third-largest bank in Brazil. Unlike in most developed countries where small banks and credit unions are always present, in Brazil, the bank industry has a well-established oligopoly, where the 4 major banks have around 70% of the market share together. This oligopoly along with the high switching-cost in the banking industry gives these 4 banks a good pricing advantage.
The bank industry in Brazil is also conservatively regulated and highly lucrative, with spreads north of 10%. These two factors reduce considerably the risk for small investors in these banks.
Bradesco has over $800 Billion in assets and ROE around 20%. Its main two segments are banking and insurance, with each contributing almost equally to the company’s bottom-line.
With 4600 branches throughout the country, Bradesco is the only of the major banks to be present in every city in Brazil. This strong presence will allow Bradesco to take advantage of Brazil’s growth over the next decades.
Easy Brazil Investing Rating
Bradesco’s competitive advantage is built on its presence, brand, scale, high switching-cost and the oligopoly in the industry. These factors along with the exposure to a fast-growing market, grant Bradesco the highest EBI Rating: 5 stars.
Banco Bradesco S.A.