IN 2006, DUTCH bank ABN Amro had a fair-to-middling year, with its total operating income excluding the acquisition of Italy’s Antonveneta rising by €1.28 billion, or 6.8%, to €20 billion. However, more than 70% of that increase came from one far-flung outlier of the ABN Amro group: the Latin America operations, for which read Brazil’s hugely profitable Banco Real.
ABN Amro’s Latin American operating income ended 2006 up by €904 million – an impressive 32% – to €3.7 billion. No other group within the bank came close. And although ABN has high hopes for growth in its Italian franchise, it’s clear that, for the time being, the Brazilian operation is by far the healthiest of its four "core markets" – Brazil, Italy, the Netherlands, and the US midwest.
To put it another way: Brazil is a core, strategic market for ABN Amro. Its other Latin American operations are not so much so – it’s entirely possible that it might sell its banks in Uruguay and Paraguay, just as it has been selling other non-core assets such as its Bouwfonds property business, its stake in Hungary’s K&H Bank, and possibly its holding in Saudi Hollandi Bank.
Yet it is often asked if Banco Real is for sale, if only because ABN’s strategic interest in Brazil has not always been particularly well articulated. What’s more, the bank does stick out rather among the large domestic Brazilian banks, on the one hand, and, on the other, the smaller foreign-owned banks, which consider their Brazilian operations to be part of larger Latin American franchises.
One of the reasons for the questions is that ABN Amro has a habit of running its foreign operations very much at arm’s length. The top people at LaSalle Bank in the US, or at Banco Real in Brazil, are generally locals who are given a lot of freedom to run their operations just like domestic banks. As a result, they can explain their domestic strategy very well. However, because they have very little contact with HQ in Amsterdam, they can find it harder to articulate their positioning within the greater ABN Amro entity.
The best person to do that is not in Brazil at all. It is Ron Teerlink, the member of the ABN Amro managing board responsible for the bank’s Latin American operations. And if there’s one thing he’s clear about, it’s that Banco Real is not part of some broader Latin American franchise, despite the fact that ABN Amro happens to be not only the biggest foreign bank in Brazil but also the biggest bank, period, in both Uruguay and Paraguay.
"If we look at Latin America, 95% of our business is Brazil. It’s Brazil, Brazil, Brazil," says Teerlink. "Uruguay is a very, very small market and economy. We serve that market, but it’s nothing compared with Brazil. Brazil and Mexico explain Latin America. The rest are beautiful places for a holiday."
ABN Amro’s strategy, explains Teerlink, is to build up its four core businesses, and then build a thinner international network on top of them, linking the rest of the world. "It’s an advantage that Holland is small," he says, since that has forced ABN Amro and its predecessor banks to look internationally for opportunities since the early 19th century.
ABN Amro’s global strategy is a curious mix of the strategic and the opportunistic. It has bought many, many entities over the years, around the world, occasionally selling them a few years later. Sometimes core holdings dissolve into the periphery: Saudi Hollandi Bank, for instance, was at one point the de facto central bank of Saudi Arabia. Sometimes non-core holdings get sold off at a profit: European American Bank, being on the east coast of the US rather than in the midwest, was sold to Citigroup in 2001 for $1.6 billion. And every so often, as in the cases of LaSalle Bank and Banco Real, ABN Amro discovers that it has hit a home run, and the franchises become a core part of the larger bank’s identity.
ABN Amro is always on the lookout for possible acquisitions, and was certainly in expansionary mode in 1998, when Banco Real came up for sale. Teerlink explains that ABN had a relatively short list of markets that it was interested in expanding into: it was looking for countries where it already had a long trading relationship, and also for those with open economies. India might have suited, but it was in Brazil that the opportunity arose, and ABN grabbed it with both hands.
In hindsight, 1998 was a fantastic time to snap up a Brazilian bank: ABN Amro paid a mere $2.1 billion for what was Brazil’s fourth-largest private bank at the time. Brazil had been hit hard by devaluation and a general flight to quality away from emerging markets, and more than a few eyebrows were raised among ABN Amro’s European shareholders when they found out that their bank was taking on extra emerging-market risk while everybody else seemed to be exiting as fast as possible.
But ABN Amro knew Brazil. It had opened its first Brazilian branch in 1917, helping to facilitate trade from Brazil to the major ports of Amsterdam and Rotterdam. In 1963 It had also bought local bank Aymoré, which is now a leading auto-finance shop. "We were looking to create home markets around the world," recalls Teerlink, "and we considered Brazil as somewhere we would like to be a home market."
Stability
The bet paid off, of course, although not without a wobble before the Brazilian presidential elections of 2002. Since then, however, the Brazilian banking sector in general, and Banco Real in particular, has gone from strength to strength, helped along by the acquisition of Banco Sudameris from Italy’s Banca Intesa in 2003. "Since [president] Lula [da Silva] came into power, it’s become a very stable country," says Teerlink. "Income inequality is decreasing, so the banking wallet is growing faster than the economy – at double-digit rates. And we get a disproportionately big part of a growing pie."