To become a global player within five years: That’s the idea behind the merger of Itaú and Unibanco, two Brazilian banks. Separately, they occupied the third and fifth spots, respectively, in terms of total assets in the Brazilian banking market. Together, they are now the largest financial institution in the country, and one of the major banks in Latin America, with assets of $265 billion — more than the Bank of Brazil’s $174 billion and the $163 billion of Bradesco bank. The merger is the second chapter in the story of the Brazilian banking sector’s transformation. Last year, Banco Real was acquired by Spain’s Banco Santander.
“Ever since the 1990s, we’ve been witnessing the creation of large conglomerates in the Brazilian banking market,” says Luis Miguel Santacreu, an analyst at Austin Ratings, the Brazilian risk management firm. “The monetary policy involves high interest rates; it is immoveable so Brazil has one of the highest interest rates in the world. Legislation authorizes banks to operate without any official controls, and the banks are going to take advantage of the anomalies of the Brazilian market and are going to generate huge profits.” Santacreu adds that the trend is for these mergers to create gigantic profits but without any repercussions on competition or any improvements for consumers when it comes to the rates they are charged.
Fabio Kanczuk, professor of economics in the University of São Paulo’s administration and accounting department, is skeptical about the reasons why the presidents of the two banks, Roberto Setúbal of Itaú and Pedro Moreira Salles of Unibanco, have joined forces. Kanczuk rejects the idea that their decision was related to the financial crisis. “People were curious to know if the crisis was having a major effect on the banks, but it appears not to be the case,” he says. “The decision to merge was only a question of personal motivation more than anything else.” (The two bank presidents are old friends.) “When you study the banking sector, you see that it doesn’t make sense to merge in order to try to compete with other banks. In a market this competitive, that’s not the way you wind up winning.”
Ricardo Araújo, professor of finance at the Getulio Vargas Foundation in Rio de Janeiro, agrees. “The crisis in the international banking sector only helped to catalyze their decision. They made their decision precisely during a time of crisis in order to demonstrate to the entire world that Brazil has very strong banks.”
Salles gave some clues about the negotiation process that resulted in the merger. He told the press, “The process began a little more than a year ago, as the result of the perception that when Banco Santander took over Banco Real in Brazil, it was going to form a new type of competitor that Brazilian banks had not known [on a global scale].” Salles, a descendant of the founder of the 84-year old bank, explained that negotiations were launched as a result of Santander’s decision “in order to see how to prepare ourselves for that new world and new conditions.”
Mauro F. Guillén, director of the Wharton School’s Lauder Institute, explains that the Brazilian banking sector is going through changes that are normal in any market that is growing but which has lots of banks. This could lead to further consolidation. The growth of Santander, following its acquisition of ABN Amro, is a major catalyst, he says. In fact, this year, Santander vaulted past Unibanco in terms of total assets, and it wants to become the leader in this market over the medium term.
Salles said that the meeting resulted in a stronger conviction to work toward merging the two banks. “Every time people met, they were taking notes. [The goal] was very well summed up by Roberto [Setúbal]. At the end [of his notes], there is a line that says, ‘To become a global player within five years.’ We are going to follow that original plan …,” Salles explained. Setúbal, a descendant of the man who founded Itaú in 1943, also wanted to separate the merger from the financial crisis. “I would say that with the crisis, an opportunity may have been created — a desire to speed up things and make that plan materialize. We understood that we had to become stronger; we had to walk together toward that goal. The crisis has only helped bring that idea to fruition,” he said.
Itaú-Unibanco has now become one of the 20 largest banks in the world, and it is the largest private-sector bank in Latin America. The Brazilian giant will have 18% of the country’s bank network, with almost 4,800 locations. In terms of credit volume, the bank will have 19% of the nation’s system, and that percentage rises to 21% when you include total deposits, investment funds and administered portfolios. The bank has 14.5 million customers under current account, and it has a significant share of the Brazilian insurance market, 17% of the total, as well as 24% of the health insurance market. Its managers explained that the new bank will be jointly managed and governed by a holding company, IU Participaciones, formed by Itaúsa, the holding company that controls Itaú, and by Unibanco. Salles will assume the role of chairman of the board of directors, and Setúbal will be chief executive.
Although its expanded volume of business assures Itaú-Unibanco top spot in the Brazilian market, its new leadership faces dangers. Brazilian President Luiz Inacio Lula da Silva has not hidden the fact that he wants the Bank of Brazil, owned by the federal government, to once again hold the top spot in the rankings. The first step in that direction came on November 20, when the Bank of Brazil confirmed the purchase of Banco Nossa Caixa from the government of S?o Paulo state, for a price of $2.251 billion. The transaction was being negotiated for months, but legislation impeded the move from taking place.
The obstacle was overcome on November 12, when the Chamber of Deputies approved Provisional Measure 443, which permits state-owned banks to buy private-sector institutions. Even with the acquisition of Nossa Caixa, the Bank of Brazil is not going to resume its leadership position. After this acquisition, the public banking sector will have $198 billion in assets, which will still leave it behind Itaú-Unibanco. In coming months, the Bank of Brazil will try to buy other institutions. Its acquisition of Banco Votorantim, which has assets of $28 billion, is practically a done deal. When that happens, public-sector banking will once again rank first. Bradesco, one of the country’s most important banks, has also shown interest in acquiring smaller banks, so that it doesn’t miss out on the acquisition bandwagon in the sector.
International Expansion
From the moment that the merger was announced, speculation began about how and when the new Brazilian giant would expand next. Although Salles spoke of plans to become a global player during a joint announcement of the new bank’s senior managers, Setúbal displayed – or at least tried to display – a certain degree of moderation. “The globalization of this bank is a process that will also depend on the opportunities that exist. When you have a certain objective, it depends also on the other party,” he said.
Roberto Piscitelli, professor of public finance at the University of Brasilia, believes that it is quite possible that the bank will try to position itself in foreign markets. “Perhaps not in the European Union, but who knows, perhaps in other countries that don’t have any sort of regulations that can serve as an obstacle to their penetration,” Piscitelli says. His comment came after the declaration Salles made when he announced the merger: “Perhaps there is some comparative advantage in going to less explored places, but [you need to have] tempting growth rates [and a location] where you have some value to add.”
Setúbal was more direct, noting that Latin America was the natural road for the new institution to move forward. “I believe that the bank may need to expand its presence in Latin America — possibly in countries like Chile, where we already are. But I would say that there are other attractive countries where we don’t have a presence, such as Mexico, for example, as well as Colombia and Peru. These are countries that have had economic stability and where markets are growing.” However, he added, “We are not in a hurry.”
Many experts believe that international expansion must not be the new institution’s short-term priority. Kanczuk says that they can try to do that, but he notes, “They have no comparative advantage. They are doing well in Brazil. They make so much money here that I don’t know why they would [expand outside the country].” Araújo believes that it is natural for the newly expanded bank to try to position itself outside Brazil after the merger, but he agrees that this should not be its top priority. “The problem is that they don’t have any reason to do so. Why are they going to loan money in Europe, where there is the sort of recession that hasn’t been seen for two decades? They can loan money in Brazil, which has extraordinary growth potential,” he says.
Market Concentration
Generally speaking, the merger of Itaú and Unibanco was very well received by the Brazilian market. A clear sense of euphoria did away with any possible criticism of the process. Guido Mantega, the finance minister, told the press that he approved of the merger. Nevertheless, most experts believe that the merger will not generate very positive results for consumers. There is also a danger that the trend toward mergers will create a marketplace that is more and more concentrated in the hands of just a few, powerful players. This would certainly make the Brazilian banking market even less competitive for the few remaining players.
In that sense, Santacreu views the merger as an intelligent move by the managers of the two banks which could win over new customers without spending anything — merely as a result of their marriage. “The hardest thing in a country like Brazil is to get someone to move from being a customer of one bank to become the customer of another bank…. [Brazil] has a very inequitable distribution of wealth; many people don’t even have access to a bank, and it is hard to compete for the same [limited] population [of consumers] who do have money,” Santacreu says.
There are two opposing views about the concentration of the market. One sees the union of the two banks as a dangerous step toward concentration. Piscitelli stresses that concentration has been viewed as something very positive; something “that only has advantages, as if this merger were a manifestation of the power that the nation’s financial system is going to have around the world.” In his opinion, however, this merger represents a threat [for consumers]. However, Kanczuk does not believe that the merger of the two banks means that there will be enough additional concentration to make things harder for consumers. “This merger is still not going to create any serious problems. There would need to be a lot more concentration for a problem to arise. Is there some benefit in having a big bank? No, it is never beneficial to have one bank that is very large. What it can do is actually slow things down,” he notes.
Araújo agrees that consumers will not derive any major benefits from the fact that there is a new bank. “When it comes to the rates paid by customers for financial services, I believe Brazilian society is not going to gain very much. I don’t think that rates are going to rise just because they reduce the number of banks or [on the other hand,] that rates will fall in order [for Brazilian banks] to increase their competitiveness in the [global] market.”
Structural Changes and Job Losses
When the merger was announced, Salles and Setúbal tried to communicate a sense of calm about two issues. According to Araújo, the first issue was “the great challenge of making banking operations [across the newly expanded organization] uniform as rapidly as possible, and preventing customers from having problems from here on out.” Setúbal also did his best to exude a sense of calm to customers by saying that there won’t be any changes, and that everything will continue as it has up until now.
The two bankers did not provide many details about the integration or about the structural adjustments that will obviously have to take place as a result of the merger. Another thing appears to be obvious: Some people are going to lose their jobs. “As much as Roberto Setúbal says that he does not intend to close any branches, this fact is clear: There are going to be job losses. No one undertakes a merger without firing some people,” Araújo says. Piscitelli takes an even stronger view. “It is a fantasy to believe that they are going to maintain their staff or the same number of branches or the same number of workers. That doesn’t make much sense. Initially, they will be able to continue to operate [as they have in the past], but it is hard to believe that they will continue to operate [two] branches in two locations that are very close to each other,” he says.
Nevertheless, the trade unions are optimistic about job losses. Luiz Claudio Marcolino, president of the bank workers’ union of S?o Paulo, Osasco and Region, told the press recently that they had already held an initial meeting with the bankers, and that their dialogue appears to have been favorable. So much so that, according to Marcolino, for the first time in the history of the relationship between the union and Banco Itaú, the union was promised a permanent spot at the table in any dialogue about mergers and acquisitions. The parties met again on December 9 for a new round of negotiations.
“We strongly back an approach that not only guarantees jobs but also guarantees that the bank creates a process for relocating employees [to different job sites] within the bank so that the bank can take advantage of its skilled workers. There will be a surplus of workers. But there will nevertheless be some areas where there is growth,” Marcolino said in his interview. He cited back office operations as an example where relocating workers could help to avoid firings.
“Back office operations at Unibanco are subcontracted,” Marcolino said. “We are going to discuss that at our meeting [in December], where we’ll need to do away with subcontracting; that will be a way to generate more jobs.” He added that he will propose a hiring freeze. He hopes to be able to relocate many workers who would otherwise lose their jobs. “If the bank freezes the hiring process, they will be able to take advantage of employees from both Itaú and Unibanco to fill [the sorts of] working positions that are going to grow.”
