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Economic crises around the globe have often hit Brazilian banks hard, with capital flight hammering the country’s currency, the real. But Brazil’s financial institutions seem better positioned to weather the current worldwide credit crunch, although lending there is just as frozen as it is elsewhere, according to Candido Bracher, president and chief executive officer of the São Paulo-based Banco Itaú BBA, one of the country’s largest private banks. In an interview with Knowledge@Wharton, Bracher discusses how the international market turmoil has affected Brazil and how this differs from the financial crises of the 1990s. He also speaks about what a commodity-price “hangover” could mean for the country’s economy.
An edited transcript of the interview appears below:
Knowledge@Wharton: What impact has the international financial crisis had on the Brazilian economy, specifically on banking and investment banking?
Bracher: It is too early to use the past tense. It is having an impact and it is larger than what initially we had anticipated. We thought this time [would be different] — because Brazil has such substantial foreign-exchange reserves, because the trade balance is positive, in short, because external dependence is so reduced in relation to what it had been in previous crises.
During the 1990s and various crises — the Asian crisis, Russian crisis, every crisis — Brazil was hit severely. We were so dependent upon foreign savings. Our foreign-exchange rate was devalued very quickly. We had to send our interest rates through the roof to attract capital.
In all these cases, if there was a liquidity crisis abroad, we would be very severely hit. We thought that, this time, it will be different. And as a matter of fact, we are not seeing capital flight. The central bank still has exactly the same $206 billion in reserves. It has not been necessary to use reserves to meet the needs of investors seeking to take their dollars abroad.
Knowledge@Wharton: But did not President Lula da Silva recently authorize the use of the reserves to stabilize the real?
Bracher: The government has authorized the central bank to buy private-issued paper from the banks in the discount window, which is what every central bank in the world does. But here in Brazil, the central bank was afraid because of some specifics of the law here and because justice here can be very tough on public employees.
Knowledge@Wharton: Is that enough to restore confidence?
Bracher: I do not think it is. What we have here is a liquidity crisis. As in the rest of the world, the credit markets are not fully frozen, but they have diminished a lot in intensity because banks and companies think they will need liquidity for themselves. It is very much the mirror of what is happening in the developed world.
None of the Brazilian banks has come under the suspicion of being weak. The balance sheets are very strong. The Brazilian corporate sector is extremely underleveraged. The Brazilian citizen is underleveraged. The credit to [gross domestic product] ratio in Brazil is just above 30%. It used to be in the low 20% range, and 30% is still quite a low figure. Despite all that, what we’re witnessing with European and American banks has made everybody more cautious and has brought [the credit markets] to a halt here.
Knowledge@Wharton: You were quoted some time ago in The Economist saying that, in the past, commodity prices paid for the party. Is it time for the hangover?
Bracher: Commodity prices will definitely be affected by the fact that the world is going to borrow less. I do not know if they will be affected 10%, 20%, 30% or how much. We will not have the same trade surplus we used to have. So maybe the party will not be as fancy as before. We are still low-cost producers in most of these commodities. The country will still have a trade surplus.
Now we have oil. We do not have it this year, but we will have it two or three years from now. [Editor’s note: In late 2007, Brazil reported the discovery of offshore oil fields estimated to contain up to 80 billion barrels of oil. If that supply were to be tapped, it could increase Brazil’s oil production by almost 50%.] There is a big discussion going on in the country about what will be made of the oil proceeds: How will the state take its share, in what form, and what is going to be done with this share? Are these dollars going to be brought into the country, thus appreciating the currency and rendering every other producer less competitive? Is it going to be kept abroad as it happens in, I think, Norway? They have a fund which is kept abroad and they use only the interest. So it is a very interesting discussion we are having in the country right now.
Knowledge@Wharton: What do you think is likely to happen?
Bracher: We are still in the beginning of the discussion. Most of it centers on how is the government is going to take its share — through taxes, exploiting it through Petrobras where [the Brazilian government] is the controlling shareholder, or selling licenses to companies? I really would not know how to answer your question.
I am just very happy that the country [is mature enough to have] this discussion. The government could simply be setting these licenses, putting the money into the treasury and spending it before the next elections. This is not what is happening. From the viewpoint of the solidity, of the fundamentals of the country, I think it is very good news. First, that this discussion is taking place and, second, that there is all this oil there.
Knowledge@Wharton: What is the likely economic impact?
Bracher: I am not an expert in that, but to give you an idea, there are 14 billion barrels in measured reserves, and the most modest projections expect it to go from 50 billion barrels to 70 billion. At the present price, [exporting would bring in] $40 billion to $50 billiona year in proceeds. It’s not pocket change. It is a lot of money.
Knowledge@Wharton: Finance Minister Guido Mantega said in a statement that Brazilian banks do not have a solvency problem, they have a liquidity problem. Do you agree?
Bracher: They have neither. What is happening is that everybody is keeping their liquidity for themselves.
Knowledge@Wharton: Tell us about Itaú BBA and its clients.
Bracher: Itaú BBA is a part of the Itaú Group. The Itaú Group is a holding company, which is Itaú Financial Holding, which is publicly traded and holds Itaú BBA and Itaú. Itaú BBA takes care of 2,000 corporate clients. That is all it does. Itaú does all the rest.
Itaú BBA is thesecond largest private bank in the country or the largest, depending on how you measure it. By market capitalization, there are times when we are the first or the second. It would be fair to say it is the second largest privately-owned bank in the country. After all the price changes in the stock exchange now, I do not know, but it was among the 20 largest in the world. I think it still is.
It is the result of an acquisition Itaú made of BBA Creditanstalt, which was generally a wholesale bank. Itaú acquired 95.75% of BBA Creditanstalt stock, merged it with its own wholesale business and created a separate bank where the employees still hold a 4.25% stake and a 50% vote in the bank.
The bank focuses on being profitable in its market, which includes 2,000 corporate clients. Being specialized in so few clients, we are very inefficient — we have 1,200 people to deal with 2,000 clients. The efficiency ratio is not very good.
But we do everything with this client. We pay their payroll and we do their initial public offerings … equity derivatives, cash management, credit. We strive to be the leader in each of the markets in which we work with these clients. I think we can say that, in 90% of these markets, we are second-to-none. The bank seems to be quite profitable and we have been having a return on equity above 20%-25% for years now.
The bank enjoys a good reputation with its clients. We invested heavily in investment banking four years ago. In the beginning, we were told that it would be very difficult to succeed if you are not a pure-play investment bank. I do not think people would say the same thing today.
We put a lot of effort into using all the commercial strengths we acquired with our clients because we serve them in so many markets to originate transactions for investment banking. And we have been very successful. This year so far we are the leader in the equity rankings, the leader in the fixed-income rankings in the local market, and ranked among the first five in [mergers and acquisitions] in investment banking.
But we also occupy leadership positions in cash management. We are the leader in the market and, in credit, we are among the largest. The idea behind this is that we invest a lot of time and effort in knowing the corporate client, understanding its business and [offering] products that we think will suit them better. Most of what we do is tailor-made, be it in cash management, investment banking or derivatives.
Knowledge@Wharton: Have the present market conditions affected the investment banking part of the business more than others?
Bracher: Investment banking, with the exception of M&A, is paralyzed. On the other hand, credit has become more important than it was. The good thing about having such a diversified portfolio of products is that you always have something.
Knowledge@Wharton: Where do you see opportunities amid the turmoil in the markets?
Bracher: I would see more opportunities if I were a private-equity fund, because so many things are so cheap. Here, basically, I think opportunity is in sticking to your clients and earning the reputation of being a relationship-oriented bank. We have done this for the past 20 years. There was no scarcity of crises during this period, and I think we have earned much respect [from] our clients for being constant with them throughout the crisis, and that is what we are trying to do now.
Knowledge@Wharton: Where do you see your growth coming from?
Bracher: Thereare so many different possibilities and we have to choose. Recently, growth came from the product base. We have enlarged the product base as much as we could. Growth also has come from adding more clients. We used to have 1,000 clients, now we have 2,000. Itaú Bank, the retail bank, just transferred to us its 1,000 next-largest clients.
We were very reluctant to double the number of clients overnight, and so we prepared for it, and we are very happy with the results. I am not sure that going from 2,000 to 4,000 in Brazil would be a good thing. Because then you start dealing with a very different kind of company, and, maybe, all the time we invest in each client would not pay.
Then we have the alternative of going abroad. We are present in Argentina and Chile as a wholesale bank. And the group also has a bank in Europe, which we use to support the subsidiaries of our clients internationally and to get to know the head offices of our international clients.
The Argentina market welcomes banks. It is a very interesting environment for banks, but a very risky one in terms of the economy as a whole, so we go carefully there. I think most of our growth will come from Brazil itself, because, despite the current turmoil, Brazil will have many good years ahead because of the commodities, the oil and the many companies there. Following up the growth of our client base, and the clients which we’ll add as the economy grows, will keep us busy in the near future.
Knowledge@Wharton: Spanish banks such as Banco Santander and BBVA have also been growing aggressively in Latin America. What kind of competitive dynamic does that create for an organization like yours and where do you need to position yourself?
Bracher: In Brazil, as you know, only Santander is present. BBVA was here and left a few years ago. And despite Santander being a very large bank and just recently having acquired ABN, which will make Santander rank among the three largest privately owned banks in the country, I think the competition from Santander is not different from the competition we had from other local banks. I say this almost as a compliment because it was able to absorb the knowledge of the banks it acquired and to use it very competitively in the local market. In the more than 20 years I have been in banking, international banks have not been a serious threat to our leadership after local retail banks.
Knowledge@Wharton: How did you come into your present role at Itaú BBA?
Bracher: I graduated in business administration in Brazil at Getúlio Vargas Foundation. I went to work right after university in Zurich for a Swiss bank operation. I spent nearly one year and then lived in Paris almost one year working for an American company that speculated in commodities. It was one of the primeval hedge funds of those days.
I came back to Brazil and I have been in banking ever since. I was working for small wholesale banks until 1988 when my father chartered a small bank: almost 20 people, $20 million capital. He borrowed half from Creditanstalt Bankverein, which was an Austrian bank. He and a partner had 50% of the bank, Creditanstalt had the other half. I left the bank where I was to work with him on the first day.
We developed this wholesale franchise and we were very lucky. Timing helped. There were many opportunities, many crises, and the bank grew to be among the most important wholesale banks in Brazil. From $20 million in capital, it went to $600 million in net worth, and it had these 1,000 clients I mentioned. It was good enough to attract the interest of Itaú.
In that time, this was 2001-2002, when Creditanstalt was no longer there, it had been sold to Bank Austria, which had been sold to HypoVereinsbank of Germany and, after that HypoVereinsbank, has been sold to UniCredit of Italy. So, many mergers. But Itaú acquired the whole of the foreign part of the bank, and Itaú BBA was created. My father was the president of Itaú BBA for the first three years. When he retired, I was elected president and that is how I came here.
Knowledge@Wharton: What is the biggest leadership challenge that you have faced?
Bracher: The most difficult challenge you face is the one you are facing at the moment, because you have somehow come through the other ones.
What I am up against right now is growing. BBA Creditanstalt was a bank of 300 people, then we moved to Itaú, created Itaú BBA, and we were 600 people. It doubled the number of clients, the profits have multiplied six times, and we are a bank of 1,200 people. The culture in a bank like this cannot be the same as a bank of 300 people. In the kind of culture we had, you lead by example, you know everybody by name, you are very fast and you are very flexible, agile.
We strive to be these things, but you have to be more structured. Itaú helps a lot in this. The group has a control culture which is very strong and we have been successful in adapting this to be flexible, agile and fast, too.
Knowledge@Wharton: What have you learned?
Bracher: That you should be able to review almost every point of view you have. There are three things — three principles — that do not change: The basic one is to have the client’s interest as a goal — so, be focused on the client. If you are able to deal with the client’s interest, you will do fine.
Another, of course, is ethics. We do not talk much about that, but that is what it is. And the third one is merit, obviously.
Apart from these three principles, many other of my ideas, which I thought I would never change, have changed. Some of them I did not actually like –casual everyday, for instance, which we have now. But this is just one example, and there are so many others. You have to be willing to check your points of view and then to see if they still make sense or not.
Knowledge@Wharton: One last question: How do you define success?
Bracher: I will know it when I have it.