After two months of discreet talks, Itaú Unibanco closed on Thursday (May, 11th) the purchase of 49.9% of the total capital of XP Investimentos for R$ 6.3 Billion, which includes R$ 600 million in resources that the bank will inject into the company. With the transaction, the country’s largest private bank reserves its space in the process of “de-banking” in progress, in which people are leaving traditional banks for brokerage accounts with banking services. “I believe this transaction will take Itaú and other banks out of the comfort zone, as it will strengthen XP and increase its ability to compete in the investment market,” said Roberto Setubal, co-chairman of Itaú Unibanco’s board of directors.
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.
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.
Brazil’s largest private sector banking group said on Thursday that it had agreed to acquire the distressed debt unit of the troubled investment firm BTG Pactual for about 1.2 billion reais, or about $307 million.The banking group, Itau Unibanco, will acquire 82 percent of the distressed debt unit, Recovery do Brasil Consultoria, for 640 million reais and approximately 70 percent of the firm’s nonperforming loan portfolio for 570 million reais. The portfolios have a face value of 38 billion reais, the bank said in a filing. Both stakes correspond to BTG’s entire ownership of each.
The International Finance Corporation, the World Bank’s private investment arm, will retain its minority stakes in both the firm and the nonperforming loan portfolios.
The price was less than the 1.7 billion reais than BTG had sought, according to multiple people with knowledge of the negotiations. Some in the market thought BTG could have fetched the higher price if it had been more patient. That suggests that BTG continues to face pressure to demonstrate liquidity and good financial health after the arrest of its founder and former chief executive, André Esteves, on Nov. 25.
Mr. Esteves faces charges by Brazil’s attorney general of obstruction of justice and interfering with the broad investigation into corruption involving the state-owned oil giant Petrobras. Although he was released from jail on Dec. 17, he remains under 24-hour house arrest awaiting trial and cannot return to work at BTG. He has resigned as its chief executive and chairman of the board.
BTG’s stock fell by about half in the weeks after his arrest and was still trading near its low at around $15 a share on Thursday.
BTG continues to grapple with turning a corner. In a December research report, Goldman Sachs said that it expected the firm’s cumulative funding gap — as measured by assets versus liabilities — to reach 1.6 billion reais by the end of this year and widen to 11 billon reais by the end of next year.
In a respite, BTG obtained a line of credit of six billion reais this month from the private credit firm Fundo Garantidor de Créditos, which is funded by Brazilian banks.
Yet it continues to be on an aggressive campaign to sell assets, and Recovery was one of its most prized.
“They were putting a lot of pressure to get it done quickly,” one of the individuals with knowledge of the negotiations said of the speed of BTG’s sale of Recovery. That turned off some potential buyers, he said, as BTG “did not want folks to be able to check under the hood” before reaching an agreement.
If BTG had been more patient, that person said, BTG may have fetched as much as two billion reais for Recovery. “There was no reason to push for a close by the end of the year,” he said, other than demonstrating financial health in the calendar year.
Initially, Itau Unibanco was neither BTG’s preferred buyer nor the most likely candidate, according to several people who spoke on the condition of anonymity. BTG was close to reaching a deal this month with the American investment firm Lone Star Funds, according to two people.
Lone Star was widely seen to be the favorite as it had been talking to BTG well before the arrest of Mr. Esteves.
“Lone Star was the pretty obvious buyer from the beginning,” said one of the people, adding that, “I did not think anyone was ahead of them.”
Recovery was particularly attractive to foreign buyers because it allowed them a way to enter Brazil’s lucrative distressed debt market without having to build their own operation here.
Yet talks with Lone Star broke off last week for reasons BTG Pactual has yet to disclose. One individual said the two parties were apart on price by about approximately 300 million reais. Sam Loughlin, Lone Star Funds president of the Americas, did not respond to an email requesting comment.
Before these negotiations, more than 20 firms had expressed interest in Recovery. BTG gave a deadline of Dec. 16 for submitting nonbinding final offers.
Clint Kollar, a managing director with TPG Special Situations Partners, the dedicated credit platform of TPG Capital, met with BTG at its São Paulo headquarters this month, according to one person with knowledge of his plans.
The Fortress Investment Group showed interest until Dec. 16, but was told its bid would be too low, so it backed out. Although Fortress recently closed its macro funds, having faced huge losses in Brazil, according to an article in The Wall Street Journal in October, its credit business, which includes distressed and special situations, continues to have interest in Brazil.
Apollo Global Management had also taken interest in Recovery. Cerberus initially looked at it but balked at a price of more than one billion reais.
The terms of the deal with Itau are subject to regulatory approval.
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.
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.
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
|Industry*||Banking, Insurance, Card Processing|
|Bovespa Ticker||ITUB3, ITUB4|