Roberto Setubal, co-chairman of the board of directors at Itaú Unibanco
"We are not allowed to make any more acquisitions in Brazil,” shrugs Roberto Setubal, co-chairman of the board of directors at Itaú Unibanco. “The central bank and Cade [the Brazilian antitrust regulator] have said: ‘That’s it, you can’t buy anything important, you are already too big in Brazil.’”
In August 2018, the central bank surprised the markets by effectively calling time on the consolidation of the Brazilian banking sector; it announced that it was blocking Itaú from building a majority stake in financial services firm XP Investimentos.
Itaú, originally leading XP’s IPO, had agreed a staggered equity deal with a path to full acquisition.
“So we are looking outside of Brazil to grow and for diversification,” adds Setubal. “But it’s much harder.”
The challenge he outlines arises from changes to global banking rules since 2008. Increased capital requirements – and particularly the demands of local regulators to capitalize banks onshore – have made economies of scale from regional retail banking very hard to achieve.
“When you have scale in Brazil, then acquiring something can be very profitable because of the synergies that you can create,” Setubal says. “But when you go into new countries you have no synergies at all. So it’s more difficult to buy something in a competitive way that makes sense from a shareholder perspective. Without synergies you are buying and paying a premium, believing that you will run the bank better than the previous controller – otherwise how does it make sense to pay the premium?”
We had some clash of culture. You know wholesale and investment bankers – remuneration is very high – so it caused a lot of jealousy- Roberto Setubal
The bank has a presence in Argentina, while Banco do Brasil is expected to offload Banco Patagonia. Could adding scale there make sense?
“It’s a small system,” he says. “Even if I did a big acquisition in Argentina, it wouldn’t move the needle and there would be too much risk for the reward.”
He drops a hint: “I think the Chilean market is much bigger, so is Colombia and Mexico.”
In 2014, Itaú bought Chile’s Corpbanca for $3 billion to become the fourth-biggest bank in the country. It has been something of a troubled acquisition, certainly in comparison with the bank’s history of smooth mergers and acquisitions in Brazil. But headway is being made.
The latest result of the Chilean operation was an annual profit of $320 million, up from $80 million the year before. In Setubal’s own terms, even that improvement barely moves the needle – and the bank’s operations are dilutive (the bank’s return on equity in Brazil is 22.7% and 13% in Chile, while in Colombia the bank is still seeking profitability).
Chile and Colombia offer scale and potential acquisition synergies. Just don’t expect an acquisition to be swift. Itaú is sensitive to paying high multiples – it tried to buy a retail operation in Mexico before the 2008 financial crisis, but couldn’t find anything for a price that appealed. Banks in Chile and Colombia are also “hard to buy”.
In the meantime, the bank has become a dividend stock. With a consolidated RoE of 21.8%, it targets a 13.5% capital base (a four percentage point buffer above regulatory requirements to cover its strictest stress test) and is giving the rest to shareholders – of which Setubal is a large one.
Setubal smiles at the suggestion that his bank has become a dividend stock after years of returning huge growth. But he doesn’t argue about the characterization.
“It’s interesting,” he says. “In the past decade when Brazil was growing, we were growing our asset base by 20% to 30% a year and we needed to retain a lot of our profit – we have had a RoE of over 20% for more than 20 years – to finance this growth.
“Then there was 2008, and that led to Basle III and we needed to retain profits to comply with Basle III. Now we have done that and the country is not growing. We haven’t got anything to do with our profits.”
That appears to be the end to Itaú’s Brazilian acquisitive strategy that started shortly after Setubal became chief executive in 1994. He assumed the leadership of the bank just before the Plano Real, which was to radically transform the country’s banking sector. Setubal admits to being sceptical about the plan – there had been multiple failed stabilization attempts previously – but he quickly saw opportunities for growth once the plan’s viability became apparent.
Previously the banks had managed a simple, profitable business from the high real interest rates (sometimes worth 3% a day) they achieved amid the hyper-inflationary environment. This float was therefore hugely valuable and the banks had developed very efficient payment systems to capitalize on skimming transactions.
When inflation fell with the Plano Real, so too did interest rates and the banks were pushed into more conventional models – lending credit and capturing deposit bases to supplement the payment revenues.
Another important part of the Plano Real was the privatization of the state banks. The states’ lavish use of its own banks – funded by the central bank – had been a monetary and fiscal problem for the country. Now, spurred by the success of the Plano Real, new president Henrique Fernando Cardoso moved quickly to privatize away the problem.
Itaú was concentrated in the state of São Paulo, so when the government invited offers for the first sale – that of Banerj, the state bank of Rio de Janeiro – he saw an opportunity. Others saw it too, but were discouraged by the risks.
“The image and the problems of these [state] banks were so huge that everyone was afraid of buying them,” says Setubal. He took the risk and was the only bidder and got Banerj for “a minimum price”.
We will probably make some reforms, but they will not be extreme- Roberto Setubal
Setubal tried to minimize the risk by adding a clause to the deal that if the bank – whose employees were on strike during the acquisition process – was closed for 30 consecutive days, then Itaú could hand the bank back. It wasn’t needed. “The day after we had bought it the strike stopped,” says Setubal. “We learned the employees were more afraid than we were!”
The deal was transformational.
Then came the state bank for Minas Gerais, the third-richest Brazilian state. This time Setubal was forced to bid competitively as the rest of the market joined in after observing Itaú’s success with Banerj. Setubal secured the deal and Itaú’s scale was boosted further. The third bank came to market – São Paulo’s state bank – and this time Itaú was outgunned and Santander entered Brazil.
From there Euromoney skips ahead to the 2008 Unibanco merger that propelled the bank past Bradesco to become the largest private-sector bank in the country. But Setubal wants to highlight another deal, the acquisition of BBA Creditanstalt in 2002. Setubal ranks the deal as one of his most important. The addition of BBA’s expertise and credibility in corporate, wholesale and investment banking rounded out a weakness in Itaú’s predominantly retail offering.
“It was a very interesting negotiation,” says Setubal. “My vision was very clear. If we incorporated BBA inside Itaú, we would lose everything we were acquiring. We wanted to keep the people and the culture, and so although we bought 95% of the bank, we kept it separate.”
In previous acquisitions, Setubal was relentless in securing synergies. Even in the coming Unibanco merger, all systems were integrated into single platforms. Efficiencies were chased even when it caused some friction for clients who were migrated onto new systems. “Clients suffered a little bit,” Setubal says about the Unibanco merger, although he says attrition didn’t hit “important” levels.
But with BBA, Setubal put his own corporate banking assets into BBA and then managed the bank as a separate entity. “We didn’t optimize costs at the beginning because my priority was to keep the people and culture,” he says. “We appointed a CFO for BBA and he had autonomy for loans and risk to a certain level.”
The strategy worked well although there were some big managerial challenges.
“We had some clash of culture,” says Setubal. “You know wholesale and investment bankers – remuneration is very high – so it caused a lot of jealousy.
“But I was able to manage to keep things calm, and over time we absorbed some of the culture. I think BBA made the culture of the rest of the bank more modern – strengthening meritocracy and bringing in variable remuneration that is more aligned with shareholder interest.”
Setubal says BBA has, in turn, absorbed some of Itaú’s risk culture: “We brought some conservativeness in terms of risk. BBA wasn’t a boutique anymore; you can’t manage a big bank like a boutique – you need to be more careful.”
But now the Brazilian merger story might be over and acquisitions elsewhere may take time. And so Itaú’s main growth will be linked more closely to the growth of the Brazilian economy than at any time in its recent history.
The good news is that the economy’s growth is positive. But Setubal isn’t overly-optimistic.
“I think GDP growth will be between 2% and 3% in the coming years,” he says, which he calls “mediocre but a huge improvement on the -1% of the past few years.”
Reforms could push sustainable growth to “between 3% and 4%”, but Setubal is only “cautiously optimistic” about that. “We will probably make some reforms, but they will not be extreme – for instance the pension reform that is a very important one, will be an OK reform that will be enough to make it through the next four or five years from a fiscal point of view but not something that will solve the problem for ever.”
It’s certainly not clear what will come next for Brazil. And the same is also true for Itaú outside Brazil.