Brazilian banking, a two horse race

Brazilian banks have been on a tear this year, with both Itau-Unibanco & Banco de Bradesca returning more than 100% year to date. As the “B” in BRIC, Brazil is thought  to be coming out of it’s recession, with The Economist stating that the country could see a return to 4%-5% in 2010, as Brazil is less dependant on the US as an export market & is forging ties in Asia, notably with China on energy accords.

Over the last month however, ITUB & Bradesco, the number 1 & 2 private banks, have been dragging, with ITUB being hit yesterday by the general market malaise, shedding 2.3% over the session. The overall negative sentiment on Brazil in August was not helped by President Lula’s much discussed plan for the government to take greater control of oil reserves via the worlds fourth largest oil company Petrobras, which has seen some investors pulling back on Brazilian ADRs.

There are reasons to be bullish however, as Finance Minister Guido Mantega commented last week that Moody’s Investors Service is signalling that it may upgrade Brazil to investment grade. The banking system has been going through a wave of consolidation, with state owned Banco de Brasil jostling with ITUB & Bradesco for the top spot, all helped along by an 8.5% interest rate.

Bradesco has done well with it’s half year results, beating analyst estimates, mainly propped up by it’s sale of a partial stake in VisaNet, the Brazilian Visa affiliate, which provided the bank with a much needed $1.5Bn cash injection. Bradesco still retains a 26.5% stake in VisaNet after the IPO.

“The worst might be over in terms of defaults,” Chief Executive Luiz Carlos Trabuco Cappi said in a conference call with journalists. “With the formal economy and wages growing, the trend for default rates after reaching the peak is to edge lower.”

Similarly, Itau-Unibanco had a healthier than expected half year, with profits only dropping by 14%, mainy due to bad debt provisions,, which had doubled on 2008. Lending is expected to expand 10% to 15% in 2009 and should grow as much as 25% next year as Brazil emerges from recession, Chief Financial Officer Silvio de Carvalho said in a conference call with journalists.

“We have clear signs that credit has become an important factor in the economic recovery now underway,” Carvalho said. “Everything leads us to believe that the crisis is behind us.”

Looking at both of these stocks, they have both been recording higher lows & higher highs for the last 6 months, which to me makes them aln attractive prospect. Add in the positive sentiment from Moody’s, Fitch & Standard & Poor regards the Brazilian economy & there is certainly a feeling of comfort there.

Looking at ITUB in particular, their ambitions to become a full service provider in all aspects of financial services took a step further last week when the bank merged it’s fledgling insurance business with specialist firm Porto Seguro, allowing it to now offer health & life insurance products to it’s 50 million customer base, this only 3 days after Bradesco & Porto had ended similar talks.

“The two companies have a lot to explore together,” said Kelly Trentin, a banking analyst at the SLW brokerage in Sao Paulo. “Financial stability in Brazil and rising family income make it more likely that people will look for more insurance products.”

So for me, Itau-Unibanco is the horse to back in this race right now.

HSBC banking on BRIC & Emerging Markets

HSBC has reacted strongly to retail customer demand in New Zealand by launching four new funds, entirely focused on Emerging Markets. The four NZ$ denominated funds in which customers can invest are the China Fund, India Fund, BRIC Fund & the Asia ex Japan Fund. New Zealand investors have been looking for opportunities to take advantage of the phenomenal growth in emerging markets where we have seen EEM, EWZ, FXI & IFN realising returns between 41% – 70% year to date. These markets are widely acknowledged to be the fastest growing in the world.

“We are delighted to make this further investment in our business in New Zealand.” said New Zealand CEO, David Griffiths ”This expansion of our offering also helps to further deepen our position within New Zealand.”

Last year, HSBC relaunched their Premier Banking service in order to offer Global Unit Trust products to retail investors in a number of territories. The strategy would seem to be paying off, as it allows customers to indulge in investing into new & emerging markets via the existing HSBC global network of 86 countries.

“We are excited to be a part of bringing the funds to New Zealand investors” said HSBC’s CEO Asia-Pacific Rudolf Apenbrink ”providing them with the opportunity to invest in emerging markets that may typically be difficult to enter.”

The “broader reach” of HSBC would seem to be paying dividends for the bank when compared to its peers. Barclays Capital H1 2009 profits almost doubled to $1.35bn whilst HSBC Global Banking & Markets reported record H1 profits of $6.2bn against $2.7bn last year, an, encouraging seven fold increase on H2 2008. Asia contributed about 90 % of the group’s profit in the first half.

Meanwhile, HSBC is looking to be the first non-Chinese bank to gain a listing on the Shanghia stock exchange & has started the process for an IPO, timing is still unclear according to Vincent Cheng, Executive Director & Chairman for Asia-Pacific.

“Emerging markets’ contribution will account for about 60 % of the total after the U.S. market returns to profit. This is our target and, of course, we would not mind if the portion from emerging markets is bigger.”

As HSBC has a long history with & is inimically tied to Hong Kong, I can see it being able to achieve it’s aim, the choice of partner will remain open for some time. Amy successful IPO combined with the potential of Chinese retail investors to access HSBC’s global network, would have a massive impact on revenues & profitability. A big ask at the moment, but I for one will be placing a reasonable bet if & when the IPO gets clearance.

Swedbank opens kimono on Baltic Lending … not a pretty sight

Swedbank, Sweden’s fourth largest lender & one of the biggest banks in the Baltic region, revealed the full scale of Swedish exposure to economic turmoil in Eastern Europe last week. The bank posted dismal figures due to large losses on loans made to firms in the troubled Baltic region.

Swedbank was the first in a series of Swedish and other Nordic banks scheduled to announce results in coming days as the region’s lenders count the cost of aggressive expansion in Latvia, Lithuania and Estonia. Nordic banks piled into the former Soviet states after their entry into the European Union in 2004 and initially prospered from rapid growth in the region.

The bank revealed a surge in bad loans from the Baltic States and Ukraine. Investors were reassured by the bank’s insistence that it could weather the storm without raising fresh capital, pushing the stock up more than 11 % after a day of volatile trading. At the same time, it announced that it would slash 16% of its workforce. However, it closed on Friday up 21.5% as investors were reassured that it would not raise extra capital.

The worse-than-expected second-quarter losses show that Sweden’s banking sector is still facing a barrage of bad loans from the Baltic States, even as the country is hailed as a financial role model after its recovery from a banking crisis in the 1990s. Bank’s aggressive lending has backfired in recent months as the Baltic economies have plunged deeper into recession than anywhere else in the EU.

Swedbank, the largest lender in the Baltics, posted net losses of SKr 2, 01bn ($257m), compared with net profits of SKr 3,6 bn a year earlier. It was the bank’s second consecutive quarterly loss and much worse than the SKr 1,27 bn deficit forecast by analysts. Loan losses soared from SKr 423 mln a year ago to SKr 6,67 bn, with about two-thirds of the amount in the Baltic States and a third in Ukraine. In response, the bank said it planned to reduce staff by 3,600, about 16 % of its workforce, by this time next year, with most of the cutbacks in the Baltic States.

“The most recent quarter has been marred by continued uncertainty about the future of the economy,” the bank’s Chief Executive, Michael Wolf, said in a statement. “The recession is now making itself more visible, and all signs are that the downward trend will continue for some time.”

Faced with mounting losses on loans in recession-hit economies, where bad loans have shot to highs of 18% of total lending in Latvia and 24% in Ukraine, Swedbank is trying to cut costs and lower its risk profile to secure funding and ride out the storm. Swedbank will continue to close branches and increase staff cuts as it takes a defensive stance, in anticipation of further economic hardship in the region, having followed a more aggressive path of expansion, the bank will be returning to more traditional practices.

“We are taking the necessary steps to right-size business units to reflect the lower economic activity in the banking sector as a whole,”  said Wolf  “We expect impaired loans to increase in the second half but it will be less than in the first half”

The negative results came after a mission from the International Monetary Fund visited Latvia recently in order to negotiate the release of a € 200 mln ($283m) tranche of a €7.5bn emergency loan agreed late last year. The IMF has held back the funds while it seeks commitments from the Latvian government over structural reforms, increasing nervousness that the rescue package could unravel.

Swedbank assured investors that it was strong enough to absorb its Baltic losses, quashing fears it would have to raise fresh capital. The bank’s chief financial officer, said the bank had “a very resilient capital situation”

Another Swedish bank – SEB, the second-biggest banking group in the Baltic region after Swedbank, is to report activity results next week. Analysts forecast that its operating profits will be down more than 40 %.

Brazil’s Itaú-Unibanco rides wave of banking consolidation

Following last years merger between the number four & number two banks in Brazil last November, the newly forged conglomerate, Itaú-Unibanco (NYSE : ITU) is the frontrunner in a race for consolidation in the Brazilian banking market. The result being that Itaú-Unibanco is now 13% larger than Banco do Brasil and 58% than the other two main rivals, Bradesco (NYSE : BBD) & Spain’s Santander (NYSE : STD). At current prices, Itaú-Unibanco’s combined assets total $201 billion, while Banco do Brasil holds $178 billion and Bradesco $128 billion, only one billion ahead of Santander.

In the credit card segment, Itaú-Unibanco serves an estimated 30% of all credit cards issued in Brazil, which brings circa 36% of all cc revenues, making them far & away the market leader overnight. Unibanco brought a number of strategic assets with it in the November deal, notably Wealth Management with more than R$32.7 billion in assets under management, 14,356 points of service and 17.5 million customers.

Although there are obvious challenges in merging two large companies such as these, Itaú-Unibanco’s Chairman Pedro Moreira Salles remains bullish on expansion. Company executives are rumoured to be looking for international acquistion targets, Mexico being one of the favoured target countries.

“We want to be a bank that has the skill to operate around the world. We aspire to have a global scale” said Salles.

Sector watchers claim that Brazil’s banking consolidation will continue apace in 2009, the expectation being, in three to five years, five banking giants will control 85 percent of the market, with a balance between one public bank (Banco do Brasil), two private Brazilian banks (Itaú-Unibanco & Bradesco), with two foreign banks (Santander & HSBC).