HSBC ac­qui­si­tion poses big test for Brade­sco CEO

The Pak Banker - - COMPANIES/BOSS -

Banco Brade­sco SA (BBDC4.SA) sat on the side­lines for years while Brazil­ian bank­ing ri­vals bulked up through a se­ries of takeovers. On Mon­day, it made a grab for HSBC Hold­ings Plc's do­mes­tic busi­ness, one that will boost its as­sets by 16 per­cent.

Now comes the hard part - in­te­grat­ing that busi­ness, in­clud­ing HSBC's 851 branches, 5 mil­lion clients and 21,000 em­ploy­ees in Brazil, in the midst of the coun­try's worst eco­nomic down­turn in 25 years.

Chief Ex­ec­u­tive Of­fi­cer Luiz Car­los Trabuco Cappi, ea­ger to grab Brazil's last ma­jor bank­ing takeover tar­get, out­bid ri­vals by of­fer­ing to pay 17.6 bil­lion reais ($5.2 bil­lion) for the money-los­ing unit, valu­ing it at a hefty 1.8 times book value.

An­a­lysts and in­vestors said the ac­qui­si­tion, the largest in Brade­sco's 74-year history, will test Trabuco's abil­ity to ab­sorb large as­set man­age­ment, bank­ing and in­sur­ance as­sets at a time of high in­fla­tion, slump­ing de­mand for credit and ris­ing un­em­ploy­ment in Latin Amer­ica's largest econ­omy.

Brade­sco's prow­ess in mak­ing the hefty pur­chase price pay off de­pends on how fast Trabuco can achieve up to 6 bil­lion reais in promised cost sav­ings, an­a­lysts said. Those will de­pend largely on how Brade­sco cuts thou­sands of jobs with­out run­ning afoul of la­bor con­flicts and tough scru­tiny from politi­cians who could slow down the process.

Still, Trabuco, 63, has earned a rep­u­ta­tion for keep­ing costs down. The CEO comes from a work­ing-class back­ground, be­gan his ca­reer as an in­tern at the bank 40 years ago and is known to shun the spotlight.

Brade­sco's non-in­ter­est ex­penses grew be­low an­nual in­fla­tion over the past 14 quar­ters, ri­val­ing Itaú Uni­banco Hold­ing SA (ITUB4.SA), which an­a­lysts largely con­sider to be Brazil's most cost­ef­fi­cient bank.

Trabuco dodged ques­tions on whether job cuts were part of the sav­ings plan, although Brazil's largest fi­nan­cial in­dus­try union is al­ready plan­ning na­tion­wide demon­stra­tions to fight any at­tempt by Brade­sco to fire HSBC staff. He also has some con­vinc­ing to do when it comes to share­hold­ers: the bank's pre­ferred shares sank as much as 4.4 per­cent on Mon­day.

"Trabuco did a great job trumping the ri­vals that tra­di­tion­ally took the in­dus­try's hall­mark deals with them, but the task of in­te­grat­ing HSBC Brazil into Brade­sco's plat­form looks to me like an up­hill bat­tle," said Car­los Daniel Co­radi, a part­ner at São Paulo-based bank­ing con­sul­tancy firm EF&C. HSBC Brasil con­sis­tently un­der­per­formed peers in Brazil as bankers put re­la­tion­ships with cor­po­rate clients be­fore prof­itabil­ity, kept branches over­staffed and failed to pro­tect prof­its from a de­te­ri­o­rat­ing econ­omy. Ed­uardo Nishio, an an­a­lyst with Banco Brasil Plu­ral, re­cently es­ti­mated that as much as 40 per­cent of HSBC's Brazil pay­roll could have to be slashed to ex­tract size­able cost syn­er­gies.

Ex­tract­ing "syn­er­gies might be dif­fi­cult. De­liv­er­ing them will be key to make the deal ac­cre­tive," said Ed­uardo Ros­man, an an­a­lyst at Banco BTG Pac­tual SA. HSBC had about 157 bil­lion reais in as­sets at the end of June.

Trabuco said the deal fits his plan to ramp up the cross-sale of fi­nan­cial ser­vices such as money man­age­ment for the wealthy and cash man­age­ment for large cor­po­ra­tions. Apart from that, the ac­qui­si­tion helps Brade­sco close a size gap with Itaú as well as state-con­trolled banks Banco do Brasil SA (BBAS3.SA) and Caixa Econômica Fed­eral.

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