Latin Finance - November/December 2009 - 32

2009 Merger to End All Rivalry by Dan Shirai risis is unlikely to be a word historians will choose to describe what Brazil has undergone in the 12 months through October. A dizzying cascade of good tidings – serial oil discoveries, promotion to investment grade ratings, selection for the 2016 Olympics, and swift emergence from recession – make up a seemingly endless and, some would argue, long overdue streak of good luck for Brazil, which for decades has been plagued by economic ills. A handful of mega deals – the merger of Itaú and Unibanco, JBS’s leap to the top of the global beef sector, Perdigão’s purchase of Sadia to forge a leading world poultry producer, VCP’s acquisition of Aracruz and Santander Brazil’s jumbo IPO – show how the country’s top assets are in the hands of a savvy cadre of managers. In November 2008, Roberto Setubal and Pedro Moreira Salles, CEOs of Itaú and Unibanco, respectively, made history when they unveiled a deal to create the country’s largest private sector bank by assets, among the world’s largest financial institutions by market capitalization. The marriage creates what is categorically seen by analysts as a stronger institution that combines the best of both and offers the possibility of major synergies. “We see significant opportunities from the combination of Itaú and Unibanco in terms of its cost base,” says Barclays Capital in a September report on Brazilian banking. “We expect potential upside surprise in overall profitability from revenue synergy gains from the combination of Itaú and Unibanco’s strengths; cross-selling opportunities; loan origination; improvements in Unibanco’s branch network profitability; the application of Itaú’s best practices in process/transactions,” it adds. Itaú Unibanco’s total assets at the end Mindful of competition at home, Brazil’s newly minted banking behemoth is bolstering domestic business while readying a push overseas. Itaú Unibanco is poised to take on the world. The Bank of the Year Itaú Unibanco of the first half of 2009 stood at 596.4 billion reais, marking a 15% rise over the corresponding period of 2008, on a consolidated basis. Bradesco’s assets rose 20% in the same period to 482.5 billion reais. In terms of deposits, Itaú Unibanco had 268.2 billion reais at the halfway mark, a 24% rise, compared to Bradesco’s 167.5 billion reais, a 36% increase. As of June 30, Itaú Unibanco and Bradesco were competing head to head on performance. Annualized return on equity (ROE) for the Itau Unibanco was 22.3%, while return on assets (ROA) stood at 1.7%. Bradesco’s corresponding figures were 23.7% and 1.7%, respectively. Bradesco’s efficiency index is slightly better, clocking in at 42.0%, while Itaú Unibanco’s stood at 44.8%. And Bradesco’s NPL ratio is also lower, reflecting a more aggressive strategy on the part of the latter to extend credit – 5.6% for 60 days past due loans, versus 6.7% for Itaú Unibanco. Compared to other similarly-sized banks by market cap, it is indeed an outperformer. In mid-October, Itaú Unibanco’s market cap stood at $96 billion, while Bradesco’s stood at $66 billion. Barclays, with a market cap of $67 billion, had ROE of 10.1% in the first half. BBVA, a $70 billion market cap bank, boasted a South America ROE of 42.8% in the first half, though ROE for its global operations came in at 21.5%. BBVA’s NPLs stood at 3.2% for the period, globally. Looking ahead, Itaú Unibanco is seen outperforming the competition. Barclays, for one, has an overweight recommendation on the bank’s shares, with a 2010 year-end estimate of 43 reais, implying a P/E ratio of 14.7x and P/BV of 3.3x. ROE in coming five years should be 23%-25%, according to the shop. Bradesco, meanwhile, is rated equalweight with a 2010 target of 39 reais, implying P/E of 13.2x and P/BV of 2.6x, and ROEs ranging in the 20%-22% over the course of the coming five years. ADRs for Bradesco and Itaú Unibanco were both trading in the mid $21 area mid-October, having risen 53% and 44%, respectively, in the previous three months. Integration First Setubal and Moreira Salles, who assumed the roles of CEO and chairman of the board, respectively, have been busy integrating their two massive banking empires – no small feat given the new combined workforce tops 105,000. “Conceptually, we are 90% through the integration,” Moreira Salles tells LatinFinance in early October, referring to the process of mapping out the new organization’s businesses, merging the two banks’ cultures and establishing ranks of managers from the top tier and board, and down several levels. The treasuries of the combined bank 32 LatinFinance November/December 2009
Latin Finance - November/December 2009

Table of Contents for the Digital Edition of Latin Finance - November/December 2009
