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September 2000

Banespa is the key to bank


“Banks will need stronger cost discipline and controls to preserve margins”




When Euromoney reported on Brazil's banking sector earlier this year, the expectation was that the long-awaited and much-postponed sale of Banespa, the bank formerly controlled by the state of São Paulo, would spark a wave of consolidation in the industry during the second half of the year. The sale has been postponed yet again - it may now not take place before 2001 - but the industry, tired of waiting, has got on with consolidation anyway.
So far, it has consisted of two big banks buying two medium-size ones. More deals can be expected. The question now is whether the biggest banks themselves will survive as they are, be forced to merge with each other, or be bought by multinationals. First-half results suggest they are in better shape than you'd expect just 18 months after a currency crisis. As the economy grows and interest rates continue to fall, however, competition for market share will become more and more a fight for survival.
       
The sale of Banespa must be the longest-running non-event in global banking. First mooted in the early 1990s, the sale has been dogged by legal challenges and changes of direction. When the São Paulo state government failed to sell the bank, it was taken under federal control. Injuctions granted to opponents of the sale twice preventing its taking place this year - it was scheduled first for May and then July - mean the central bank may have to start the process all over again. Citibank, one of a handful of foreign banks interested, recently dismantled a team set up to prepare for the sale, having spent some $3 million. Other likely bidders are BankBoston, BBVA and BSHC, both of Spain, and local private sector "big three" Bradesco, Itaú and Unibanco.
The sale, if it happens, will change the shape of the industry. If one of the big locals buys Banespa, it will take a big step forward against its rivals: Banespa has 2.7 million account holders and R$11 billion (US$6 billion) in deposits, and its home state of São Paulo is the richest and most developed in the country. For foreigners, it offers the last chance to gain scale through acquisition - short of buying one of the big non-government banks, none of which is up for sale.
Despite the Banespa fiasco, says Erivelto Rodrigues of Austin Assis, a São Paulo firm of business analysts, "the mergers and acquisitions market is really heating up". In June and July, Bradesco bought Banco Boavista and Unibanco bought Banco Bandeirantes. Other medium-size banks, such as Mercantil Finasa, or regional banks like Banco Rural and Banco Mercantil do Brasil, may be next in line.
The only one of the big banks that analysts see as a takeover target is Unibanco, and its purchase of Bandeirantes, bringing with it almost R$10 billion in assets, has put it in a better position both to fend off unwanted attention and to bid for Banespa.
       
In common with its bigger rivals Bradesco and Itaú, Unibanco has spent the past year preparing for tougher market conditions by scaling back dependence on income from government securities and by expanding credit operations and financial services. As interest rates continue to fall - the central bank's basic rate, having peaked at 45% a year during last year's currency crisis, fell to 16.5% in July - better lending and services will become increasingly important, as will the ability to provide banking services to a bigger and poorer section of the population.
That Brazil's banks have managed to make more money from traditional activities over the past year is one of their major strengths. All the big banks saw significant increases in these activities during the first half, especially in the second quarter as credit operations began to respond to the economic recovery. Alberto Setubal, director of market relations at Itaú, says the bank began to be more aggressive in its credit operations a year ago and saw its loan portfolio expand by 20% in the first half compared with the same period in 1999.
But revenues from credit operations at the big banks actually fell during the first half because of lower interest rates. That means they will have to improve efficiency to maintain earnings levels from this source. Earnings from financial services, on the other hand, fared better. At Bradesco, they rose from R$972 million to R$1.47 billion, at Itaú from R$1.44 billion to R$1.67 billion and at Unibanco from R$722 million to R$764 million. Even so, competition and increasing use of internet banking, where charges are significantly lower, will maintain pressure in this area too.
The internet may squeeze margins, but the banks have seized the opportunity it offers in terms of low-cost distribution and as a means of attracting new customers. On-line banking has been well established in Brazil for at least five years, first through direct dial-up systems and more recently through the internet. Banks have been at the front of the internet explosion seen in Brazil since the end of 1999. Bradesco became the first free internet service provider last December, sparking a rash of imitators, and all three of the biggest banks have made their on-line banking systems available through cellular telephone handsets using WAP technology. These kinds of services are expected to expand rapidly as more bandwidth and higher-velocity services become available when licences to operate three new cellular "bands" are sold, possibly later this year.
The biggest challenge, however, will be to compete for new customers looking for banking services as the level of economic activity continues to rise. Celina Vansetti, Brazilian banking analyst at Moody's Investors Service in New York, says banks' efficiency ratios in Brazil are still poor compared with international standards, although they have been improved by serious cost-cutting. Nevertheless, she warns that "banks will need even stronger cost discipline and controls as well as a clear focus on execution in order to preserve margins." That will be particularly true, she says, as banks go after credit business among poorer borrowers - a huge, but risky, market.
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