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Cover Story: Remains of the day

Sep 1, 2012

As western lenders pull back from markets once deemed vital to their future growth prospects, Latin America’s home-grown banks are swooping in to pick up the pieces

By Elliot Wilson

When speculation first emerged in August that troubled lender Royal Bank of Scotland was seeking to sell a highly prized US asset, Citizens Financial Group, heads nodded sagely.

The deal, priced at $16 billion by the British media outlets that broke the story, made good sense. It would allow the London-based bank, once a global giant, now hobbled and humbled, to redeem a portion of the UK government's 82% stake.

RBS downplayed the rumors: its chief executive Stephen Hester insisted that Citizens remained one of the bank's core assets. But analysts thought the sale would prove a boon for RBS: unloading the asset would give the UK lender a big, quick capital fix at a time when new regulations are forcing European banks to boost their cash reserves.

Yet curiously, one aspect of the story that was underplayed and even overlooked was Citizens' most likely new owner: the Brazilian banking group Itaú Unibanco.

Itaú, headed by veteran banker Roberto Setúbal, had not tendered a formal bid for Citizens when LatinFinance went to press and had denied media reports that one was in the offing. But market sources have identified no fewer than three likely US targets for the southern hemisphere's leading financial group. If the Citizens deal fails, they say, Itaú will look to buy one of two other regional lenders: Boston-headquartered Sovereign Bank, owned by Spain's Grupo Santander; or San Francisco-based Bank of the West, controlled by France's BNP Paribas.

New world order

Yet even if none of the deals goes ahead, and Itaú looks elsewhere (or internally) for growth, the mere fact that Latin American banks now play the role of the hunter rather than the hunted - as would have been the case decades past - shows how much the world has changed.

Latin American commercial and investment banks, including Brazilian names Itaú and São Paulo-based BTG Pactual, are on the lookout for assets both at home and overseas. Others, including Banco Bradesco and Banco de Brasil, are growing fast. At the same time, once-peripheral regional groups such as Davivienda and Grupo de Inversiones Suramericana (Grupo Sura), both based in Colombia, are snapping up valuable assets shed by European lenders as they retreat - some piecemeal, some aggressively - from the region.

The latter theme is part of a wider process of deleveraging where western banks in general, and European lenders specifically, have quit markets once deemed vital to future growth prospects.

Across central and eastern Europe, central Asia and Russia, and the Pacific Rim from Japan through to Australia, European lenders are selling assets or shutting up shop.

Capital earned through equity sales, or repatriated by cancelling or trimming credit lines, is being sequestered back home to comply with new regulations (Basel III rules demand Tier-1 capital levels of at least 9%) or to kowtow to local political pressure (RBS, along with other UK lenders, is under pressure to boost lending to British enterprises).

Wherever it happens, the effects of deleveraging are felt in different ways. In Asia, European banks are retreating reluctantly but en masse, allowing Asian lenders to regain lost territory. In central and eastern Europe, a region that relies far too heavily on western Europe for funding, the pain of deleveraging is felt more keenly.

Napoleonic retreat?

Across Latin America the picture is far more nuanced. In some cases European banks, facing problems at home, have simply cut and run. RBS exited its Brazil operations in 2011 as part, a bank spokesman insisted, "of our refocus of our Latin America business strategy". 'Refocus' is in this context merely a Napoleonic retreat in disguise: RBS has also 'refocused' its attention away from a host of other countries, abandoning the likes of Chile, Venezuela, Colombia, and Argentina.

That any bank would want to exit the world's 25th, 28th, 34th, and 43rd largest economies, along with Brazil, number seven on the list of world's largest industrial nations, all in less than a year, highlights the challenges facing Europe's lenders.

Others are departing, too. In September 2011, Davivienda, which had operations outside Colombia in Panama and Miami, paid $801 million to buy HSBC's units in Costa Rica, El Salvador and Honduras, gaining $4.3 billion in assets and $2.3 billion in loans. Three months later, Grupo Sura finalized a deal to buy the Latin American interests of the Netherlands' ING.

Even the biggest European operators in the region - Spanish groups Santander and BBVA - are allowing their empires to get nibbled away. In 2011, Santander, casting around for money, opted to sell its underperforming Colombia operations, which controlled just 3% of the local market. Executive chairman Emilio Botín concluded the sale, which allowed Santander to pocket a handy $1.225 billion, with the words: "Our market share in retail banking in Colombia was a long way from the 10% we aim to have in the markets in which we are present."

BBVA also has problems of its own. In May 2012, Spain's second-largest bank by market value revealed that it was selling its pension fund management operations in Chile, Colombia, Mexico and Peru as it focuses on its "core" banking operations.

"Many of the large European financial groups are in the process of reducing their size and investment in the region," Ignacio Calle, Grupo Sura's chief financial officer, says in an interview with LatinFinance. This retreat has been forced on European lenders, Calle says, not by a lowering of their expectations across the region, or by poor investments, but because "some of them have been forced by their European regulators to decrease investment".

It's hard to argue against this point. European banks, increasingly pushed back inside their natural cultural borders by a welter of new legislation, are being forced to find all manner of ways to rationalize their piecemeal pullbacks.

Trimming the fat

Yet remove the solemn words and political spin, and all these divestments amount to the same thing: troubled old-world European lenders, short of capital at home, seeking to cut out some of the fat in a few, faraway markets (while raising a bit of handy cash) without being forced to hack off an entire limb.

"European banks are not yet selling off big core businesses [in the region]," says Cate Ambrose, president of the Latin American Private Equity & Venture Capital Association (LAVCA). "Until now, they have seemed content to sell off 'non-core' business, including pension funds, insurance businesses, and other assets."

One wonders how long that can continue. Five foreign lenders boast a sizeable regional presence. Citi is well established and highly profitable, particularly in Mexico, while Canada's Scotiabank continues to buy around the region: last year it bought a 51% stake in Colombia's Banco Colpatria for $1 billion.

It is the other three - HSBC, BBVA and Santander - that some analysts suggest are most likely to shed more assets. The latter two names in particular, are those most heavily invested in the region, and therefore the ones with most to win (in terms of short-term gains through asset fire sales) and lose (through the loss of regular returning income) were either to seriously consider leaving the region.

To take Santander as an example: Latin America represents 19% of the Spanish group's assets, earning 65% of attributed revenues, against just 27% from continental Europe. And there is no doubt that, as LAVCA's Ambrose puts it, some Spanish banks are "hurting" on the home front (See: 'A rock and a hard place', page 18).

A Santander spokesperson says the bank's position in the region is unshakable, noting: "Santander will be increasingly present in the region. We want to grow in Latin America, and we are going to. That means that we are focused on growing and not selling."

And Santander has charted a nifty course during the past few years, obviating the need to raise huge amounts of capital through asset sales, thanks to the timely and profitable $9 billion initial public offering of its Brazilian operations, in 2009. The Spanish group is considering pulling the same trick twice, through a flotation of its Mexican operations.

Of course, IPO cash doesn't last forever. And if push came to shove, some European banks may not have much choice: the decision to sell core assets might come to be a no-brainer for a struggling bank.

Huge appeal

Latin American financial assets are still wildly popular, and many investors are prepared, at least in the current climate, to pay over the odds to get a piece of the action. "Most banking assets are selling at one times book value around the world, and that is if you're lucky," says Marcos Brujis, chief investment officer at IFC Asset Management Company in Washington, a division of the private-sector arm of the World Bank.

"You can get very good valuations now for Latin American assets, with book valuations up to two times, three times. This might make global banks think again about selling Latin American assets while they can."

Such sales are proving popular, particularly among local players. Grupo Sura has ruled itself out of the running with regard to BBVA's assets: Calle says his bank, which has more than 50% of the pension funds business in Chile, Colombia, Mexico and Peru, would face anti-trust actions if it pursued that deal.

But the Colombian group's ING buy is unlikely to be its last. "The exit of European financial groups is being substituted by financial groups from Latin America and North America," says Calle, who notes that Grupo Sura remains "watchful for new opportunities that come our way", particularly in financial services, insurance, social security, savings, and investments.

The process of regional asset stripping, once it starts, is often hard to stop. Once one big deal happens, another two or three are expected every quarter, with ascribed valuations rising to the point where a deal is virtually forced onto the market by financial necessity. European lenders remain under almost overwhelming pressure to raise capital to boost lending in markets that are, in the case of Spain or Portugal, themselves virtually bankrupt.

This has brought yet more investors and capital to a region that, until a decade ago, was still regarded as a basket case. Now, it's widely seen as an emerging-markets success story, despite a mounting economic slowdown, especially in Brazil. Latin America has become a region dotted with western banks pondering sales of their high-value assets at a reasonable price.

Itching for a sale

The buyers are lining up, from foreign investment banks and regional banking giants to private equity firms, eyeing a rare good deal.

Even the Chinese have made it here, thanks to Industrial and Commercial Bank of China's $600 million deal last year to buy the Argentine operations of South Africa's Standard Bank.

"The big picture here is that there is a huge amount of capital looking for deals in Latin America," says LAVCA's Ambrose. "The chance to acquire a big group of assets from a European or a US strategic player in the region is a big attractive opportunity, and I would expect to see more deals on the table in the future."

For sure, not all is doom and gloom for western lenders in Latin America. The region remains a highly profitable market, including for the likes of Citi, which is particularly strong in Mexico. Scotiabank's October 2011 Colombia acquisition was its 20th across the region in the past six years; it now operates in 13 countries around the region, with 820 branches.

Others, including the occasional European name, continue to buy in judiciously. UBS invested just over $500 million in Grupo Sura shortly before the Medellín-based bank's ING acquisition, to help boost the latter's numbers.

The baseline figures for the region aren't all bad, either. In a survey on emerging market bank lending, the Institute of International Finance (IIF), which represents the world's largest banks, noted that "strong demand" for credit in Latin America continued to rise. In other words, European bank retrenchment isn't, at least superficially, crimping the ability to raise capital across the region.

That school of thought is backed by recent data from the Bank for International Settlements (BIS). In the first three months of 2012, cross-border claims by UK banks in Latin America were $161 billion, up from $151 billion in the last three months of 2011, and the first rise in three quarters.

Spanish lending into the region was also up over this period, rising to $480 billion, according to the BIS, again the first substantial rise in three quarters, while claims by international banks rose above $1.2 trillion for the first time in nearly a year.

"I would certainly caution European banks against unloading their Latin assets in any across-the-board fashion"
Charles Dallara, IIF

This may to some extent temper fears voiced by many, including LAVCA's Ambrose, that the eurozone crisis would lead to a vast withdrawal of liquidity. "There has been a fear across the region, as the European crisis has unfolded, that the likes of a Santander or a BBVA would repatriate or suck a lot of its capital out of these markets," she says.

But others note that the full impact of private sector deleveraging is only just beginning to be felt. IIF chairman Charles Dallara tells LatinFinance that the twin impact of the eurozone crisis and tighter regulation in Europe has "clearly accelerated the process of deleveraging" across emerging markets, including in Latin America.

Western banks have so far avoided making big asset sales in the region unless it became absolutely necessary. Throughout the financial crisis, Latin America has remained a vital source of recurring revenues to the West's ailing lenders.

But much will depend on how the eurozone crisis unfolds. Some believe that European banks are past the worst. "European banks have so far avoided selling the crown jewels," says the IFC's Brujis. "Unless there is a total disaster in Europe, you're unlikely to see big asset sales by European banks in Latin America."

If true, that would be good news for the stability of Latin America's banking industry, which has benefited enormously from European technology over the past two decades, and for increasingly credit-hungry Latin American corporates, whose fortunes have waxed over the past half-decade as the West's have waned.

But not all are so confident in the ability of European policymakers to avoid a spiralling of their financial crisis. The IIF's Dallara, who has had a prominent role representing private creditors throughout the crisis, says: "What worries me most is that the efforts to solve the problems in a fundamental sense are still not coming together." The result, he says, is a scenario that risks leaving Europe "in a quagmire of recession."

"The rather mild relief we've been given in global markets over the last few weeks is likely to disappear fairly soon," Dallara warns.

Still, he cautions against any hasty moves by lenders. "I would certainly caution European banks against unloading their Latin assets in any across-the-board fashion," he says. "Over the next decade or two those institutions that have positioned themselves well to compete in the local markets are going to find those positions pay substantial dividends. I'm rather convinced of that."

Yet Europe, however you cut the facts, is on the retreat. The Reconquista has been reversed in Latin America's favor. And as European banks straggle home, it's the local banking groups that are swooping in to pick up the pieces. LF

Additional reporting by Taimur Ahmad



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