Brazil’s central bank draws a line


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Restricting Itaú’s purchase of XP is good for competition.

The Brazil central bank’s decision to prevent Itaú from taking a majority of the voting shares of online stockbroker XP Holding Investimentos sets an important precedent.

According to the terms of the staggered transaction, Itaú acquired a 49% stake (30% of voting shares) of XP for R$5.7 billion ($1.5 billion), plus a R$600 million capital increase. The central bank has allowed the next phase of the deal – to come in 2020 – when Itaú will then buy a further 12.5%, creating a 62.4% stake (40% of voting shares), at 19-times price/earnings.

However, the deal’s next timetabled steps – with Itaú purchasing a further 12.5% in 2022, reaching a 74.9% stake (49.9% of voting shares), as well as options allowing for Itaú’s 100% control, either through a 2024 XP put option or a call for Itaú in 2033 – will not be allowed.

The banking system in Brazil is one of the most consolidated in the world – certainly for a big country. The top five largest banks hold around 85% of all assets. The sale of HSBC’s and Citi’s retail businesses to Bradesco and Itaú respectively is symptomatic of this process.

'Lack of competition'

However, under the leadership of governor Ilan Goldfajn, the central bank has since been vocal about the need to target the high so-called ‘spread bancario’ in the country. He has argued that one of the structural reasons for the high spread between the Selic base rate and interest rates charged to corporates and consumers is a lack of competition.

That the central bank has now acted, while the antitrust authority, Cade, approved the whole deal, is also important. Because, compared with other deals, this should not have hit any limit issues – XP is large, but, given Itaú’s size, it is hard to argue the acquisition would be transformative.

So belatedly then, the banking regulator is signalling enough is enough in terms of consolidation of the financial services industry.

While it is too late to do anything about the dominance of the traditional retail market – the top five banks have more than 90% of the country’s bank branch network – Brazil’s digital future is still in play.

This decision by the central bank is a clear message to the country’s growing fintech industry and the incumbent banks that M&A exits that absorb exciting startups back into the consolidated status quo will not be nodded through by a passive regulator.

The decision by XP in 2016 to call off its planned IPO and instead sell out to Itaú disappointed many – not just the equity capital markets bankers who had hoped the deal would spark life into dormant equities markets.

Now, the central bank’s decision to promote plurality should excite people.