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AmericasJuly 3 2005

Buyers poised to move in on Latin banks

Monica Campbell takes a close look at which banks are likely to snap up Brazilian, Mexican and Central American banks for sale.
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While Latin America’s banking sector has experienced tremendous consolidation in recent years, there is still plenty of turf to explore. Think Brazil and Mexico, with large populations and many people still unbanked. Also consider the sub-region of Central America, where financial institutions are strengthening amid better regulations and alliances.

And in the background throughout all of Latin America is the remittance market, one of the banking world’s more potent areas, partly because it provides a way for medium-sized players (particularly from the US) to get a foothold in the region.

All of this has the world’s bankers, from big, small and mammoth institutions, chatting about what to do next in Latin America. Although most financiers are notoriously tight-lipped when it comes to their next moves, it is not too difficult to spot where they might strike next.

The usual suspects

The usual suspects, including US-based Citigroup, Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (BCH), along with the UK’s HSBC and the US-based Bank of America, will continue to increase their presence in Latin America. For the most part, foreign banks are doing well in the region. For instance, in the first quarter of 2005, BBVA posted a record 20% profit gain when compared to the same period in 2004. The company cites Mexico, where BBVA controls Bancomer, the country’s largest bank, as a particularly solid market and credits it as a profit driver.

BBVA also made gains throughout the region on the retail front, and most market watchers expect the Spanish bank to remain an active player in Latin America.

Speculation over Citigroup’s next moves abounds. Some higher-ups at the bank – an institution that has seen its share of highs and lows in Latin America – say that they might prefer to increase their investment in high-growth Asia and limit their exposure in Latin America until they see more stabilisation in the region.

At the same time, Citigroup brass – from its new Latin America banking chief, Manuel Medina Mora, to its head of operations, Bob Willumstad – are mentioning Brazil, Chile and Colombia as good markets for expansion. Currently eclipsed in Latin America by its Spanish counterparts, namely Santander and BBVA, insiders now say that Citigroup is ready to reposition itself as a leader in Latin America (and wipe clean a scandal-plagued image it has yet to shake in the region).

Meanwhile, Bank of America, headquartered in North Carolina, is an emerging force. It has moved up over the years to become Mexico’s seventh-largest bank, largely thanks to its $1.6bn purchase in December 2002 of 25% of the Santander-Serfin financial group. The deal has given Bank of America a bigger slice of Mexico’s remittance market, and nobody expects the US bank to sit still. Watch for moves further south of Mexico.

California-based Wells Fargo, the fifth-largest US bank, is another increasingly active player in Latin America. Like Bank of America, it is attempting to strike the right money-transfer formula that will let it snatch market share from Western Union and MoneyGram, the US-based market leaders.

Down Mexico way

So where might new sell-offs, mergers and acquisitions take place? In Mexico, Banorte, the country’s fourth-biggest bank, is one to watch. The Monterrey-based institution is the only nationwide commercial bank left in local hands. In the first quarter of this year, the bank’s profits moved up 87%, reaching $97m, thanks mostly to earnings from consumer loans. The bank also saw returns from its shares hit record highs.

Banorte is also tightening its relationship with the US, hoping to forge lasting relationships with Mexicans there. Late last year, it partnered with Wells Fargo in order to capture a bigger slice of the larger money transfer business between the two countries. Last year Mexico received nearly 40% of the $45bn in remittances sent to Latin America.

Privately, some analysts do not discount the idea that Citigroup, which already owns Banamex, Mexico’s second-largest bank, might snap up Banorte. Adding to the Banorte rumour mill, Richard Waugh, head of the Bank of Nova Scotia, Canada’s third-largest bank, recently said that he was taking a closer look at Latin America, especially Mexico and Central America. He hinted at snapping up Banorte, but did not offer specifics.

Yet analysts also stress that no major moves should be expected in Mexico’s banking sector until after the 2006 presidential elections. First, Mexico has a history of wild economic rides around election time. Second, the number one candidate for the 2006 contest is Andrés Manuel López Obrador, the fiery leftist mayor of Mexico City, and it is uncertain how he may set economic policies.

But smaller, more conservative deals might be struck with regional Mexican banks, namely Banco del Bajío. The bank is strategically located in northern Mexico and can offer remittance services, along with products catering to the manufacturing industry (largely concentrated in the same area). So far, Barcelona-based Sabadell already owns 10% of Bajío and recently announced that it would take an additional 10%. Sabadell, which holds shares in the Dominican Republic’s Banco BHD and also controls Banco Atlántico in Panama, is moving cautiously in Mexico. But a larger Sabadell-led purchase of Bajío in coming years is not out of the question.

Brazil’s state banks

In Brazil, state banks are expected to grab more attention. The central bank recently announced that Brazil’s Banco Bradesco, Banco Itaú, Unibanco and US-based GE Capital have all qualified for the auction of Ceara, one of three state banks still in government hands.

Bradesco, Brazil’s largest private bank, has been particularly busy buying smaller banks and is seen as a strong contender to win the bid. At the same time Itaú is in strong financial shape and could be ready to show more muscle.

Another possibility for the auction block is Banco do Estado de Santa Catarina (BESC). The government recently tried to sell it but the sale was blocked because of a row over the right to maintain state workers’ bank accounts after privatisation. Yet the bank is located in one of Brazil’s wealthier states and is seen as a coveted acquisition target. One possible BESC suitor is Spain’s Santander. Top executives at the bank, which is already present in 11 Latin American markets, say that they prefer to remain focused on retail banking in Brazil and aim to build a critical mass of deposits.

“You’ve got so much activity centred around São Paulo, that competition is building for stakes in other large urban areas,” says Dan Schatt, an analyst with Celent Communications, a Boston-based consultancy.

Still, some of the foreign banks most likely to broaden their presence in Brazil may hold tight. In the past few years, Santander local unit Banespa, and Netherlands-based ABN AMRO have carried out costly acquisitions, which are still taking a toll on their bottom lines. In 2004, total profits posted by the leading Brazilian-run banks, Bradesco, Itaú and Unibanco, came to $3.3bn, while Santander, ABN and HSBC together reported $1.4bn in profits. But at least for Santander, 2006 may mark the passage of time needed in order to start investing again – indeed, analysts emphasise Santander is the foreign player to watch in Brazil.

Central American M&As

Movement in the form of mergers and acquisitions can also be expected in Central America. Not unlike Mexico, the region is a burgeoning remittance market. In all, the sub-region accounts for about 25% (or $10bn) of Latin American remittances, and foreign banks are now waking up to the idea of using remittances as a passageway to the area. “There is a heightened awareness of what money transfers can offer. It’s one of the drivers that will allow smaller banks to compete with large banks,” Mr Schatt told The Banker. Indeed, a March 2005 report by Celent acknowledges that most remitters still head to traditional non-bank money senders, but also stresses that this tendency is now changing.

Improving economic bases, including better debt management and fiscal policies, are pushing along interest in Central America. The outlook for trade financing is also improving, thanks mostly to the possibility of the Central America Free Agreement, which would tighten trade ties between the US and Guatemala, Honduras, El Salvador, Costa Rica, Nicaragua and the Dominican Republic. The improvement of supervisory and regulatory practices is also good news.

“I’d expect more activity in Central America now that the economies there are getting stronger. El Salvador, with its banks in shape and a large inflow of remittances, is particularly attractive,” says Mr Schatt. In El Salvador, Wells Fargo has just struck a joint venture with Banco Agricola, the country’s largest bank in terms of assets, in order to offer its InterCuenta money transfer card, which allows customers to remit up to $3000 a day. Spotting more openings in Central America, Wells Fargo also has teamed with Banco Industrial and Banco de Desarollo Rural (Banrural) in Guatemala.

Bigger market share

Toronto-based Scotiabank is also taking Central America seriously. It recently got the green light from local regulators to spend $178m to become the majority shareholder of El Salvador’s Banco de Comercio (BanCo), the country’s fourth-largest bank with about 17% local market share. Now, Scotiabank will merge BanCo with Scotiabank El Salvador, the country’s fifth-largest bank, thus consolidating the Canadian bank’s position in the country.

Panama’s Corporación UBC Internacional (UBCI) is also increasingly active. Already, it enjoys a majority stake in Banco Cuscatlán, El Salvador’s second-largest bank. That deal gives UBCI interests in banks that operate under the Cuscatlán brand in Costa Rica, Panama, Honduras and Guatemala.

Along with a large untapped market, growing remittances, and the chance to offer cross-border products (namely with the US), there is another reason for outsiders to remain interested in Latin America. Interest rates are rising in a several local markets – but so is loan growth, according to recent reports by Morgan Stanley, the US investment bank.

Indeed, Brazil’s Unibanco, one of the country’s largest banks, saw its first-quarter 2005 profit rise 45%, and attributed part of that growth to higher returns on loans.

Considering this trend, Mario Pierry, an analyst at Deutsche Ixe in New York, said that “conditions for banks are pretty good at the moment” in Latin America. Yet Mr Pierry also warns banks to curb their excitement over the higher rates/more loans combo, as it could also trigger loan defaults if economic times toughen.

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