The sale of ABN AMRO spells tougher competition and a possible round of takeovers in the Brazilian bank market, which has not seen change at the top in years.
The battle to acquire ABN AMRO becomes increasingly complex but the result could prove significant for Latin America. Banco Santander, bidding as part of a Royal Bank of Scotland (RBS)-led group with Fortis, has a chance to acquire the Dutch banks significant Brazilian operations.
That would create a bank close to the size of Itaú and Bradesco, which would be a strong competitor. This would put pressure on medium-sized banks to merge to keep competitive, Roberto Setúbal, president of Banco Itaú, tells LatinFinance. He adds that this might spark consolidation throughout the banking industry. Combined, Santander-ABN would be a similar size to Banco Bradesco, Itaú and close to the size of Banco do Brasil, the three largest full-service banks in Brazil.
The RBS team is slugging it out with Barclays, whose bid valued the target at just over ?66 billion. RBS trumped this with ?38.40 per share for a total just above ?71 billion, for which the trio is expected to carve ABN up. In broad terms, RBS would take operations in North America, Fortis would absorb European operations and Santander would gain the Latin America businesses.
However, Barclays made the $21 billion sale of ABNs US subsidiary LaSalle Bank to Bank of America a pre-condition, but the RBS consortium will not sign without LaSalle. A Dutch court froze the sale of LaSalle to give ABN shareholders a chance to vote, a decision that ABN has appealed. As LatinFinance went to press, it seemed likely that the Dutch Supreme Court would rule on the matter by early July.
A Barclays win would have little impact beyond marginal and small niche acquisitions, says Setúbal. The bank could act in a different way, but any difference would be small, he adds. It has also been speculated that Barclays would sell the Brazilian unit, possibly igniting a bidding war between foreign and domestic banks. Itaú has already indicated that it may be interested, while Bradesco which has neither commented nor been a major acquirer in the past is widely rumoured to want the operations too. Citi and HSBC are also seen as potential buyers, though they have not commented.
No Exodus, Yet
Headhunters say the gush of CVs they typically receive when merger talks are announced have not materialised yet in Brazil. Partly that is because of corporate policies. ABN talked to a number of senior employees and guaranteed bonuses for the year, notes a recruiter. And since it is not clear who is going to buy the bank, a move now may be premature. Staff are betting that because of the scope for growth, the number of redundancies in Brazil will be fewer than elsewhere.
The culture of ABN in Brazil helps stem an outflow. The organisation has a very strong culture, the bank is doing very well and is doing something different in the market, for example in adopting sustainable policies, says an ABN insider who deals with corporate clients. He is not looking for other opportunities and is betting that any acquirer will seek not only to keep ABN intact but also to build it. Return on equity on an adjusted basis is the highest in the market and has been growing fast, says the source. He believes clients are taking a wait-and-see approach. I see more curiosity than concern from my client base. You have to remember that ABN stayed in the market when a lot of other foreign banks shipped out. Clients remember that.
João Braga, banking analyst at Hedging Griffo in São Paulo, notes that ABN has a strong franchise in some areas that are growing fastest, such as consumer lending, and in particular auto loans. Santander has a different profile in this area and is lagging in auto loans, which is a very attractive sector. Maria Laura Pessoa, banking analyst at Banco Fator, adds that at the time of Itaús acquisition of BankBostons Brazil assets, huge cost synergies were expected through a wide-ranging program of layoffs. Those staff cuts failed to materialise as Itaú used the acquisition to expand operations.
However, another ABN banker says he is worried and has contacted headhunters to assess options, claiming that many of his colleagues are doing the same. He is concerned that Santander and ABN have very similar operations. There are overlaps everywhere, in business and support: in all the major areas, he notes. The geographical footprint overlaps particularly in São Paulo state where both banks are strong.
Turf War Beckons
If mass redundancies seem on balance unlikely, the other burning question is whether a deal will shake up the Brazilian banking industry more generally. Braga reasons that if ABN is bought, it will provide a price benchmark for acquisitions in the sector, opening the door for other deals. Big banks wont want to see Santander be number one. They will look to do something to retain pole position, reasons Braga.
Still, there are very few attractive options for acquirers, Braga points out. Most state banks have been privatised. Banrisul, the bank of the southern state of Rio Grande do Sul and Brazils eighth largest in terms of assets, may hit the block, but most others are very small or not being considered for sale. Most of the private banks available tend to be niche players, says Braga.
All banks are likely to be targets, even the largest ones, thinks Pessoa. She believes that has more to do with Brazil reaching investment grade and maturing as a market. When Mexico reached investment grade, Citi acquired Banamex, she notes. As competition increases, the banking sector will also be shaken up, undergoing further consolidation, she adds.
Still, the foundation structure of Bradesco and the relatively complex shareholding structure of Itaú mean that they would be very tough deals. At the national level, Unibanco is most often cited as take-over material. Still, it has been seen as in play for the last 10 years, Pessoa points out.
The other question is what any transaction would do for retail banking fees and profitability. Plinio Chap Chap, professor of finance at Profins Business School in São Paulo, believes it would be radical and cut what he sees as outrageous charges by stimulating competition. He believes that because the sector in Brazil is concentrated for historical reasons, banks have exploited the luxury of limited competition to charge artificially high fees. The only real competitor to the big three (Itaú, Bradesco and Unibanco) is Banco do Brasil. But as a state-owned institution, it is too slow and bureaucratic to compete effectively, he believes.
Bankers argue that high fees stem from Brazils heavy taxation on banking, elevated delinquency rates and a history of economic volatility rather than from high spreads. They add that fees are coming down fast. And Braga believes a merger will make little difference to fees. He says Brazilians are inert about changing accounts and thinks it unlikely that a new entrant would want to compete on fees when the market is under-served and growing so fast.