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EBX default ‘no problem’ for Brazil banks: Setúbal

Aug 5, 2013

Growing problems at the Eike Batista empire won’t hurt Brazil’s banking sector, even in the case of a default, Itaú’s chief tells LatinFinance

The financial crisis at Brazil’s embattled EBX Group will not have a major impact on the country’s banking sector even in the "worst case" of a default, Itaú-Unibano CEO Roberto Setúbal has said.

In an interview with LatinFinance, Setúbal also confirmed speculation that regional expansion was on the cards for Brazil’s largest private sector lender.

Setúbal said that there was "no need" for his bank to increase provisions in the event of losses from exposure to the industrial conglomerate, as expectations grow that EBX will have to restructure its debt.

"Given the level of exposure of banks in Brazil to EBX group, it is not really a problem at all in terms of systemic risk," he said.

"In the worst case scenario [of a default] we would not change our guidance in terms of provisions or losses. Even in the worst case scenario, we would stay inside the range we have given, so it’s not really a problem," Setúbal said.

Itaú expects to post provisions between 19 billion reais ($9.2 billion) and 22 billion reais ($10.7 billion) for loan losses in 2013.

Setúbal did not elaborate on his bank’s exposure to the group, although the sector as a whole has lent some $6 billion to companies controlled by EBX, according to S&P. Other analysts put that sum as high as $11 billion.

But he said he was nevertheless confident that the EBX, run by beleaguered businessman Eike Batista, would meet its obligations to its lenders. "We believe that they will over time sell their holdings and pay the banks. They are in the process of doing it."

He added that Brazilian banks had "little to no" exposure to EBX’s OGX, the oil company at the center of group’s decline. "Basically that company has big debt that is on the heads of bondholders," he said. "We have no exposure to OGX and banks in Brazil in general have very low or zero exposure to that company."

Setúbal acknowledged that the dramatic collapse of the EBX Group had taken its toll on investor perceptions of Brazil. "Eike Batista was pretty much associated with an image of a new Brazil as a very high growth country with a lot of potential where things could happen quite fast. And the failure of Eike [Batista’s company] definitely goes against this perception," he said. "This is definitely not good for Brazil."

Setúbal’s comments followed the release last week of Itaú’s second quarter earnings report, in which the firm’s profits of 3.62 billon reais beat analysts’ expectations for the quarter.

The veteran banker confirmed that his bank would make an acquisition of a "top five" bank in a strategic market in Latin America as a key core part of its medium-term strategy.

"In order to keep on growing we need to go abroad because we cannot really acquire many things in the Brazilian market and the banking sector in Brazil is pretty much consolidated anyway," he said. "We are still looking for opportunities to acquire banks across the region and we believe this should be possible in the coming years."

Setúbal ruled out buying investment banking franchises in the region, but said that expansion into "Mercosur makes a lot of sense, given the Brazilian relationships in those countries." He acknowledged the bank was looking at options in Chile, Uruguay, Paraguay and Argentina as well as Colombia and Peru.  "Mexico is also something that interests us," he said. "We would like something that is at least top five in order for it to be interesting."

He said his bank was "not really looking at the US market at this point" although it remained attractive.  

Setúbal said that Itaú’s improved performance did not mean the lender was ready to take on more risk. "We are not really considering at all changing our risk policy at this point," he said. "Two years ago we announced that we were changing our risk appetite, that we would move out of higher risk segments and that the benefits of this strategy would be down the road. In this quarter we delivered the results."

A sharp slowdown in Latin America’s largest economy has taken its toll on the domestic credit market, with a surge in loan delinquencies over the past two years. But Setúbal said the banking sector had now turned the corner on bad debt. "The worst of the problem is behind us, we are moving to a better and more controlled level of delinquency in general, so this is not a problem any more," he said.

Itaú ’s delinquency rate declined to 4.2% in the second quarter from 4.5% in the first quarter and 5.2% a year earlier.LF

The full interview with Itaú-Unibanco CEO Roberto Setúbal will be published this month in LatinFinance’s 25-Year issue.

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  • Carolina Aug 6, 2013

    The ebx failure shouldn't be a surprise. The management didn't apply the rule of "under promise - over deliver" unfortunately a charismatic leader was successful selling big dreams

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