Itaú-Unibanco: Riding High on Bank Consolidation

Includes: BBD, ITU, SAN, UBB
by: Paul Harper

Following the merger between the number four and number two banks in Brazil last November, the newly forged conglomerate, Itaú-Unibanco (ITU) is the frontrunner in a race for consolidation in the Brazilian banking market.

As a result of the merger, Itaú-Unibanco is now 13% larger than Banco do Brasil and 58% larger than the other two main rivals, Bradesco (NYSE:BBD) & Spain’s Santander (STD). At current prices, Itaú-Unibanco’s combined assets total $201 billion, while Banco do Brasil holds $178 billion and Bradesco $128 billion, only $1 billion ahead of Santander.

In the credit card segment, Itaú-Unibanco serves an estimated 30% of all credit cards issued in Brazil, which brings about 36% of all credit card revenues, making them far and away the market leader almost 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 and Bradesco), and two foreign banks (Santander and HSBC).

Since January this year, ITU has enjoyed a 29% rise in its stock price on the NYSE and looks set to keep following the trend as Brazil still holds one of the highest interest rates at 11.3%.

Disclosure: Author is long ITU