ABN AMRO has been operating in Brazil, Latin America’s largest market, for nearly a century, but it was only about a decade ago that the business began to gather pace. “We’ve always been doing things in other Latin American countries, but for us this market is Brazil, Brazil and Brazil,” says Ron Teerlink, a member of the bank’s managing board with responsibility for Latin American operations.
In 1998, Dutch giant ABN AMRO acquired a majority stake in Banco Real, a long-established powerhouse among Brazilian financial institutions. Last September, it bought out Italian bank Banca Intesa’s remaining 3.86% holding in Banco Real for E233m. Intesa had acquired an 11.58% stake in Banco Real in 2003 in partial consideration for the sale that year of its Banco Sudameris Brasil to the Dutch bank.
This makes ABN AMRO sole owner of a bank that, according to UBS analyst Gert van Rooyen, is considered “one of the prized assets within the group”. Mr Van Rooyen says that local banks in Brazil rate Banco Real as “the best international player with the number one franchise”.
Banco Real is now the third privately-owned Brazilian bank in the league tables, with a credit market share of 6.6%, behind Bradesco and Itaú. It is third in deposits among the privately owned banks and operates 1900 branches, with a staff of 28,000 people and 6500 sales outlets.
Big on Brazil
ABN AMRO has smaller operations in other Latin American countries, but in reality Brazil accounts for about 95% of its business in the region. “We have a branch in Mexico that supports our international clients, but we didn’t want to do a large acquisition in Mexico,” says Mr Teerlink. “We had a sizeable consumer business in Argentina, which we sold before the crisis, not because we saw it coming but [because] we wanted to focus completely on the consumer business in Brazil.”
Winning support: ABN AMRO expects the re-elected president to continue with his stabilising policies
The Dutch bank’s Brazilian business is considered to be well placed to take advantage of the economic and social reform programme that is being implemented by Brazilian President Luiz Ignácio Lula da Silva. It is not often that an international banker sings the praises of a political leader who has risen to power on a left-wing, trade unionist platform. But Mr Lula da Silva’s reforms seem to be just what the doctor ordered, as far as the banking world is concerned.
“There have just been a number of reforms announced in Brazil,” says Mr Van Rooyen. “As of next year, for the first time Brazil will have a positive credit bureau, and legislation has been put in place enabling lenders to repossess assets. In addition, the government is pushing for fixed rate mortgages to help get the mortgage market off the ground. It’s still small for Brazil, at only 1.6% of GDP [gross domestic product], but it’s an area that will grow. The legislation on repossession has, however, not yet been tested and banks will have to make sure they don’t overheat the market.”
Positive sentiment
Mr Teerlink acknowledges that the first Lula term of office brought a degree of nervousness to the capital markets, fearing his labour union and left-leaning background. Those fears have been proven unwarranted. “We have seen very decent fiscal, social and economic policies in the first four years of his government,” says Mr Teerlink. “The Brazilian economy has stabilised and investment sentiment is very positive. Slowly but surely the country is opening up and becoming more sophisticated in terms of financial products.
“We expect Mr Lula to continue the same policies, which will have a stabilising effect on the country’s economy. We’re very focused on Brazil and we’re quite impressed by what Mr Lula has done over the past four years. He looks at income differentials and that stabilises the country. It also increases the banking wallet because obviously as poor people become richer, they need a bank account. We believe he’s doing absolutely the right thing and the country is moving away from Latin America’s historical volatility,” he says.
The mortgage market is very much at the forefront of most Brazilian bankers’ strategy and Banco Real is aware of its huge potential. “The mortgage business is on the verge of taking off,” says Mr Teerlink. “The Brazilian mortgage portfolio is 2% of GDP, a very low number. In Mexico, for instance, the figure is 11% of GDP. The Brazilian government is putting legislation in place that allows banks to develop that business and remove some of the regulatory hurdles. If the mortgage business takes off, we believe the banking wallet will grow faster than the single-digit growth that the government is forecasting for the economy as a whole.”
Room for growth
Brazil’s undeveloped mortgage market is a higher risk business, with provision levels of 400-450 basis points, but also with double-digit interest margins. In terms of net credit spread, which is interest margin after provisions, it is a highly lucrative business.
With the reform and growing sophistication of Brazil’s financial markets, Banco Real aims to develop its capital markets and investment banking business. “We see the gradual development of the capital markets side of the business in Brazil,” says Mr Teerlink. “The investment banking market is maturing quickly at the moment. We are hiring investment bankers and we have the expertise, which we export out of New York and London.”
Mr Van Rooyen says that all the foreign banks operating in Brazil are planning to grow their capital markets and investment banking business in preparation for Brazil becoming investment grade.
“UBS recently expanded its operations when it bought an investment bank in Brazil; and Santander and HSBC are also looking to expand in this area,” he says.
ABN AMRO’s franchise, however, is viewed as superior to that of its competitors, Spain’s Grupo Santander and HSBC. The Spanish bank was a combination of a number of acquisitions and HSBC still has a very small market share of 2.8%, less than half that of ABN AMRO.
ABN AMRO’s Brazilian strategy is focused on organic growth and alliances, according to Mr Teerlink. But the market believes a strategy shift may take place in a couple of years’ time. Another round of consolidation could start once Brazil gets its investment grade rating. If so, the Dutch bank might be faced with a Citibank or other global player moving in to acquire local institutions like Itaú or Unibanco, challenging Banco Real’s leading position among foreign players.
