Valuations: Europe sells out – but who will buy?
Santander cashes out in Chile; HSBC puts up Losango
The high valuations of banks in Latin America are proving to be a tempting – though scarce – source of money for capital-starved banks in Europe. Santander is selling a 7.8% stake in Santander Chile and hopes to raise $1 billion. The Spanish bank is selling the maximum stake it can while retaining control. However, HSBC recently sold its retail Chilean bank to Itaú as part of a strategic withdrawal from what it sees as non-core Latin American markets and has put Losango, its Brazilian consumer finance business, up for sale.
The announcement of Santander’s Chilean sale – Santander will work with Bank of America Merrill Lynch and Credit Suisse on the international portion and with LarrainVial on the domestic tranche – follows Santander’s recent renewal of a shelf to sell secondary shares of Santander Brasil. The bank could sell up to 8.2% of the Brazilian unit in a transaction that would fetch about $2 billion. The bank needs to find close to $11 billion in new regulatory capital.
"How times have changed," says a Latin American banker. "I remember when Santander was warned by the rating agencies that it was going to be downgraded in Spain because it was too reliant on revenues from supposedly precarious Latin American countries. Now the bank runs adverts boasting that a quarter of its profits come from Latin America."
And as well as boasting about Latin American profitability, banks are also liquefying their Latin American assets to remain solvent. Banks across Europe are faced with the need to sell assets and rebuild capital. Banking assets in the region are trading at multiples that will make it hard for European banks to resist.
Latin American banks’ valuations are on average about two-and-half times book but Scotia’s recent acquisition of 51% of Colpatria bank for $500 million and 10 million shares values the Colombian bank at about 3.6 times book. UBS advised Colpatria and MBA Lazard advised Scotia. The Canadian bank paid a premium to enter the Colombian market, which is forecast to have credit growth of more than 20% in the coming years. Colpatria has only 5% of the market but other opportunities are scarce, with Helm Bank being one of the few alternatives in the country.
European banks with assets in Latin America face a dilemma: these assets can be used to rebuild capital but if they sell they lose exposure to the region’s banking system, which is set for strong growth. The other issue is finding buyers, with the US and European banks unlikely to be in investment mode. The Colpatria deal shows that Canada’s banks have the capital and desire to enter the larger Latin America markets and Brazil’s big banks are looking for potential targets to drive regional expansion plans.
Itaú and Banco do Brazil were interested in buying Colpatria and Itaú’s investment banking division, Itaú BBA, is looking to open in Colombia as part of a gradual development of a broader Latin American presence. However, while the bank has ambitious plans for the region, Jean-Marc Etlin, chief executive of Itaú BBA Investment Bank, is keen to emphasize a continuing focus on the domestic market.
Etlin says: "Latin America is important but Brazil still represents between 60% and 65% of the fees of the region so it is important to be in Latin America but if the cost of that is to overlook Brazil then you may get hurt in the end." He points out that Brazil’s investment banking fee pool has grown from about $300 million seven years ago to about $2 billion today and while fees generated in the rest of Latin America might grow faster than in Brazil over the coming years, Itaú BBA’s home investment bank market will continue to be a priority.
|“It is important to be in Latin America but if the cost of that is to overlook Brazil then you may get hurt in the end”
Jean-Marc Etlin, Itaú BBA
Itaú BBA has operations in Chile and Argentina, where the bank also has retail banks, and the investment banking division has a representative office in Peru. The bank has just been awarded a licence to operate in Colombia by the Brazilian central bank and appointed Ramiro Gonzalez-Prandi its country manager. Gonzalez-Prandi was previously global corporate and investment banking director for Banco Itaú Chile.
High valuations of banking assets in the region and a lack of suitable targets in investment banking have led Itaú to pursue a start-up strategy. "Most of the time it’s going to be on a greenfield basis because it is difficult, with one or two exceptions, to find suitable targets in most jurisdictions," Etlin says. Potential targets will be assessed on more than valuations, he says: "The key question is to weigh adequately the required management effort relative to how scalable we think the business is."
Colombia is attracting a lot of attention from international investment banks. Many banks are reported to be considering establishing offices in Bogotá. "If Colombia does just half of the business that we expect it to do over the next four years then it’s going to grow very, very quickly," said the banker responsible for Latin American investment banking strategy.
Despite the optimism in the amount of new business that is likely to come from Colombia in the coming years he said he was unlikely to set up an office – instead hoping to win business from the bank’s offices in nearby Latin American countries. "If we’re looking at it seriously, so is everyone else. And I’m not going to invest in an office with the scale that you need to make it work without being very sure my bank would win enough of the business there to generate sufficient revenues."