HSBC acquisition poses big test for Bradesco CEO

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.