Santander shakes up Brazil

Santander’s takeover of ABN Amro Banco Real has changed Brazil’s banking landscape, but the integration process may not be easy.

Santander’s acquisition of ABN AMRO Banco Real in Brazil has catapulted it into an elite trio of top banks, ranked by branch network and loans. The Spanish bank trumpets the benefits in terms of enhanced economies of scale, synergies and the complementary nature of the two businesses. However, first there is the tricky question of integrating the banks, a task that has tripped Santander up in the past in Brazil.

The October 17 announcement that Santander had won the battle for ABN AMRO in Brazil sent shivers down the spine of commercial bankers at Brazil’s major financial institutions. The new bank will be in the top three in terms of loans and deposits. If it works smoothly, the new entity will combine Santander’s strength in personal loans, particularly credit cards, and boost the bank’s prospects of being number one in the fast-growing real estate banking sector, as well as bringing together ABN AMRO’s strengths in investment and private banking, where Santander has been weaker.

The takeover could create a winning force in corporate finance, where both banks are strong, although some corporate clients that had exposure to both ABN and Santander for diversification will presumably now look to spread risk again by picking another bank.

This mostly rosy scenario assumes a smooth
integration process, which is asking rather a lot. This is Santander’s most ambitious and tricky take over to date and its reputation for integration is not strong in Brazil, following the protracted absorption of Banespa, the state bank of São Paulo, which it bought in 2000.

“Santander was not that brilliant at integrating Banespa,” says Celina Vansetti-Hutchins, senior analyst at Moody’s in New York. Difficulties in combining the two banks’ systems and cultures, together with government-imposed guarantees for many workers’ jobs, diluted the effectiveness of the combination.

Santander may have learned from its mistakes this time round. It claims that the ABN AMRO deal has low integration risk. The “fully scalable IT system is prepared for the migration of Banco Real”, the bank spelled out in its May offer announcement.

Intangible problem

Santander has said it will extract as much as $1bn in synergies from its share of the ABN AMRO acquisition. Observers believe the process side of the integration will be better handled. Even so, they point out that Santander still faces the more intangible problem of merging two very different cultures: one stemming from a traditional, upper-crust private bank in the shape of ABN’s own acquisition, Banco Real, the other from state-owned Banespa.

One headhunter says Santander has promised to lock in some key staff for two years, although it is unclear just how many are covered. That might give the bank time to create a harmonious operation. Moreover, as Santander sees Brazil as one of its key markets and is betting on significant growth, senior redundancies should be limited, giving comfort to staff.

The new, bigger organisation may even offer enhanced opportunities for ABN staff, says Luiz Carlos Mendonça de Barros, founder and partner of Quest Investments in São Paulo. After all, many Bank Boston staff fared very well after the bank’s Brazilian operations were taken over by Banco Itaú.

But Mr Mendonça de Barros warns that if the Spanish bank drags its heels, ABN staff will slowly bleed away. He predicts that overall, on past form, an effective fusion will take Santander at least two years. If he is right, other Brazilian banks, flush with cash from record profits and circling for blood, will be able to come in for the kill.

“Clients have been asking me to map out the firm and find the best talent,” says one senior head-hunter. He adds that many ABN staff are willing to meet him and some believe they should get out before the market gets too crowded. The number of senior staff to depart will greatly depend on the fate of Fabio Barbosa, ABN’s CEO and president in Brazil, who commands huge loyalty among his senior staff.

“Many of them are waiting to see if Fabio jumps and will only make a decision when he does,” the head-hunter says. Mr Barbosa is thought to be in talks with Unibanco, which has lagged behind in key areas such as investment and private banking and has long been seen as the most likely of the large banks to be turned around or put on the block. That could present an interesting challenge for Mr Barbosa.

Less autonomy

A new challenge might be just the ticket as Santander’s corporate culture is seen as providing less freedom for senior managers in the regions, says the senior head-hunter. ABN’s collegiate approach emphasises getting the majority on board before making a decision; Santander has a top-down approach, with Madrid playing a key role in decision-making and granting less autonomy to overseas units. That is likely to rankle.

Even if the integration of ABN proves to be more of a headache than Santander believes (or publicly admits), then the long-term effects of the merger on the Brazilian banking landscape should be profound. Before the merger was concluded, Roberto Setúbal, president of Itaú, admitted: “The merger 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 remain competitive.”

Ms Vansetti-Hutchins, who previously worked with ABN, adds: “The deal is significant in raising the bar for all Brazilian banks. Itaú, Bradesco and Unibanco will need to react to a more threatening player”.

Santander has already proved itself adept at launching products that capture the public imagination, including an instant-hit credit card, Santander Light, which dispensed with annual fees.

The entrance of foreign banks has made clients more demanding. “The dynamics have changed since the arrival of the first foreign banks. Now the banking sector is more open,” says Ms Vansetti-Hutchins. Brazilian banks’ huge profits also suggest plenty of scope for rates to be cut.
The expanded Santander will be breathing down the necks of banks in consumer lending and particularly real estate, Brazil’s next big battleground. Its track record there is likely to be its trump card, says Mr Mendonça de Barros.

Brazil is just entering what promises to be a property boom. Property lending accounts for just 2% of gross domestic product compared with as much as 40% in developed economies. The Spanish bank has long and broad experience, which could prove particularly effective. Its experience has been gained in the boom markets of Spain, and more recently the UK through its acquisition of Abbey in 2004.

Property weakness

Santander’s experience is particularly compelling because domestic private Brazilian banks have proven weak and vacillating in the property sector. In the 1980s and 1990s, they lost a lot of money in property lending, which has created a climate of fear. The acquisition leaves Bradesco in second place and Itaú third in the property finance sector – not a comfortable position for Itaú, which has prided itself on its aggressive foray in consumer lending. “The big dispute will be in this area and Bradesco is better positioned. It has recuperated a lot in recent years,” says Mr Mendonça de Barros.

To inject a note of caution, the ABN-Banco Real acquisition does not immediately bring huge benefits in property finance because the Dutch subsidiary was more focused on personal lending, particularly car loans. There is also the prospect that one or both of the two state behemoths, Banco do Brasil or Caixa Econômica Federal, will get their act together and compete more aggressively in the property finance sector, perhaps including using lower fees.

Soul searching

The acquisition may also trigger some soul searching by Brazilian banks on their size at home and global presence. Banco Itaú already has a partnership with Bank of America but Bradesco has tended to be a stay-at-home.
Unibanco, always the Cinderella of the three in terms of size, looks more vulnerable to a takeover than ever. Its fate will be the deciding factor in the market, so if one of its larger rivals were to attempt a takeover it could ask whatever price it wants, believes Ms Vansetti-Hutchins. Unibanco has always insisted that it is not for sale, but the question now is whether its go-it-alone model is sustainable.

“Do we need five large banks in Brazil? Perhaps not,” muses Ms Vansetti-Hutchins.

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