Bradesco’s senior management is reported to be delighted with the price paid for HSBC Brazil, despite its final bid having been more than expected.
Meanwhile, the UK-based universal bank faces obstacles in its claims to be able to continue to serve investment banking and corporate clients in Brazil – and also challenges to hold on to its Mexican unit, which is now the bank’s focus for its Latin American investment banking strategy.
Bradesco won the auction for HSBC Brazil with a bid of R$17.6 billion ($5.2 billion), or 1.8 times book value – more than Bradesco’s initial 1.2 times valuation. The price is almost 15 times projected profits for 2015.
However, Bradesco’s chairman Lazaro Brandao’s comments to business magazine Exame, in which he claimed the bank increased its bid only “slightly” and that it had “been psychologically prepared for a fight” for HSBC Brazil, corresponds with comments made by other senior management to Euromoney.
The acquisition will take Bradesco close to the size of Itaú and into contention, once again, in the fight to be the largest private bank in Brazil (not to be underestimated as an important employee-motivational tool in the country).
Beyond scale the bank adds strategic assets, not least 1 million high-income clients (defined as earning more than R$10,000 a month) – or a 125% increase – in the retail segment that has been dominated by Itaú.
“The opportunities to enhance Bradesco’s position in private banking and the mass affluent section is probably the greatest prize,” says one person with direct knowledge of the transaction. “And more than the additional clients it is the know-how of the bankers in this area that made Bradesco ensure that it won this auction.”
Until the transaction is final, Bradesco cannot see HSBC’s client list or start its client-retention exercise but informal conversations with the bankers have been taking place and Bradesco has been keen to reassure HSBC bankers that there will be no redundancies.
Management’s greatest fear is that other banks such as Itaú and Santander, as well as the publicly-held banks, will use this period of uncertainty to recruit bankers.
João Albino, head of private banking at Bradesco, echoes this view. Speaking at Euromoney’s private banking roundtable in August, he said: “The clients they have are important but it is equally important to be adding senior bankers to our team. Bradesco is a closed career; you have to be hired at a low level and progress internally. When you bring fresh air that can be so important.”
While the sale of HSBC Brazil makes sense from a retail perspective – the bank had only a 2.4% market share – the implications for its regional corporate and investment banking teams are unclear. No one from HSBC would speak on the record but it is widely understood that it tried very hard to maintain its wholesale and investment banking teams and privately a bank source admitted that the noncompete clause included in the sale documentation would limit its commitment to retain a presence in the market.
Its DCM brand may enable it to retain some international bond business but even in that area competitors say that such a public retrenchment from the country will affect its ability to win mandates from both public and private issuers. And with a very low profile in Brazilian M&A and equity underwriting, HSBC’s potential Brazilian revenues look limited.
Moody’s has questioned the bank’s “very aggressive goals for revenue and earnings growth” and says, “should the bank’s financial results fall short of [its] targets it would raise new questions about the parent company’s commitment to remaining in the Mexican market”.
|The opportunities to enhance Bradesco’s|
position in private banking and the mass affluent
section is probably the greatest prize
HSBC’s global management has tasked the holding company, Grupo Financiero HSBC, with increasing pre-tax profits to $600 million by 2017 – a tripling of the group’s results for the first half of 2015, to increase return on risk-weighted assets to between 2% and 2.2% in 2017 (compared to just 0.55% in the first half of 2015) and to cut costs by $100 million a year – roughly 10% of current expenses.
However, as Moody’s points out, with moderate economic growth the system is expected to grow at about 10% to 12% and HSBC would have to outperform to achieve these objectives. It is also at a competitive disadvantage versus domestic peers because of low profitability and small market share (6.3% of total assets – down from 11.8% in 2007).
Combined, Moody’s suggests that these pressures could force HSBC Mexico “to lend aggressively and to lower-quality borrowers in order to grow its loan portfolio enough to achieve its earnings targets, which will raise asset quality risks and boost provisioning needs”.
According to Moody’s, HSBC Mexico faces a choice of either missing targets or building risky growth – with both scenarios ultimately leading to the prospect of the bank adding Mexico on to the list of countries to exit – which would have further damaging implications for its Latin American investment banking business.