Itaú Unibanco: Winds of change at Brazil’s summit?
The bank may be at the peak of its value creation, as the government looks to promote greater competition in Brazilian banking.
The winds of change are blowing in Brazilian banking, and for once, they are not filling market leader Itaú Unibanco’s sails.
The country has witnessed its strongest-ever regulatory headwinds in recent years as its central bank has begun to attack the high spreads evident in the banking system. Some analysts would add that such action is overdue, not least because it was the central bank that helped create the problem in the first place by allowing Itaú to lead the way to large-scale consolidation in the sector.
In August 2018, the central bank signalled an end to Itaú’s seemingly endless acquisition spree. Eight months later the bank’s co-chairman, Roberto Setubal, told Euromoney that it was prohibited from buying anything of any scale.
This has made Itaú a dividend stock as the bank gives back increasingly large amounts of capital generated in excess of its target of a capital base of 13.5%. (Any sour taste created by that central bank decision will have been sweetened by recent estimates that XP has increased in value by around 320% since 2017, when Itaú first took a stake in the company).
That headline regulatory headwind has been accompanied by subtler, but no less assertive, regulatory decisions to limit Itaú’s ability to use its scale in the market.
For example, in November 2019 it was the turn of the country’s antitrust body, Cade, to draw a line in the sand against Itaú’s “uncompetitive behaviour”, when it prevented the bank from offering clients of its payments system, Rede, better terms if they held Itaú bank accounts.
Days later the municipality of São Paulo levied a R$3.8 billion ($925 million) fine for “fiscal fraud” at the bank – a result (it said) of registering businesses in lower-tax jurisdictions for the single purpose of lowering its tax exposure.
While there is no direct link between these individual actions taken against Itaú, it does point to a pattern of greater resistance to the bank’s previous almost unfettered progress.
Meanwhile the central bank continues to promote competition in the country’s banking sector through big picture projects such as bringing open banking to Brazil, its fostering of the fintech sector to boost cheaper credit, as well as its surprising decision in November 2019 to set limits to interest rates for overdrafts and signal that other interest-rate floors and ceilings could follow.
For a banking industry that used to look at such prescriptive regulation in Argentina with something approaching horror, the introduction of such a measure by the Brazilian central bank was important.
It’s true that the broader moves to increase competition are not aimed specifically at Itaú, but as market leader it has the most market share to lose.
Thankfully for Itaú, Brazil’s macroeconomic conditions are now more favourable. Itaú is responding to the lower-margin, lower cost-of-risk environment by reweighting its portfolio to the higher returning segments of consumers and small and medium-sized enterprises.
It is true that part of this reweighting isn’t necessarily strategic but a consequence of the lower credit demand from corporates as interest rates make local debt markets cheaper than bank debt.
The withdrawal of the public banks is also helping with Itaú’s portfolio transition; in 2019 private banks once again took their share of total credit above 50%.
However, for analysts, the bigger concern is Itaú’s response to the new private-sector players – those central bank-fostered fintechs and the new purely digital banks that are emerging in the country.
In 2019, the bank’s leadership countered those concerns by talking a good game about responding to the digital challenge: the theme of its investor day in September was the 10-year anniversary of Itaú and Unibanco, but senior management was at pains to look to the future.
Chief executive Candido Bracher said the bank was ready for the digital challenge and it would respond by lowering operating costs and continuously seeking efficiencies – including a voluntary redundancy programme that could see 5,000 staff go.
The biggest source of good news for the bank is that it recognizes that times are changing.
Bracher says that Itaú is at its peak in terms of value creation, thanks to a return on equity at 24% (and an average of 22% for the past 10 years) and the cost of equity moving down to 12.5% (from 13% in the first half of 2019 and between 15% and 16% in the years from 2010 to 2017).
That peak is unlikely to last much longer, but Itaú’s descent into banking mortality needn’t be precipitous. The bank is set fair for many good years of dividend returns to come.