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Privatization in the Brazilian Banking Sector

Privatization in the Brazilian Banking Sector. Tadeu Nunes Marcio Passos Diane Nakayama-Shapiro Terence Tong Debbie Vann. Agenda. Introduction Brazil’s Economy Brazil’s Banking Sector Banespa Potential Bidders Our valuation Post Mortem. Economy. Introduction Brazil’s Economy

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Privatization in the Brazilian Banking Sector

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  1. Privatization in the Brazilian Banking Sector Tadeu Nunes Marcio Passos Diane Nakayama-Shapiro Terence Tong Debbie Vann

  2. Agenda • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  3. Economy • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  4. Brazil • Brazil • 8th largest economy in the World • 53% of Latin America’s GDP • 170 million inhabitants • São Paulo • 35% of Brazil’s GDP • 36 million inhabitants

  5. Brazil: Economy • Background • Recent History • Real Plan introduced in 1994 • Currency devalued in Jan. 1999 • Forecast • GDP growth at 4-4.5% for next 3 years • FX Rate stable (market forecasts) • Presidential Elections in 2002 • Still with the “Emerging Markets” label • Rating is B1 by Moody’s and BB- by S&P

  6. Since the Real Plan inflation has been under control, reaching very low average yearly inflation (5%) Brazil: Inflation Long history of high inflation and not successful economic plans

  7. Banking Sector • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  8. Brazilian Banking Sector • Federal • Owns the 2 largest Brazilian Institutions • State Owned • Each state used to have its own “financial institution” • Vast majority have been privatized • Private • Largely dominated by 3 Brazilian institutions • Over 70 foreign banks

  9. Brazilian Banking Sector Banking Sector by Assets Private Banks – 52% Others – 9% State Banks – 48% Bradesco, Itau & Unibanco – 20% Foreign Institutions – 23%

  10. Most Recent Transaction • Banestado, on Oct 20th • Largest privatization to date • Set the stage for Banespa’s auction • 377 branches, 92% in Parana State • 550,000 clients

  11. Most Recent Transaction Sealed Bid Live Auction Had Itau paid USD 846 (USD 27 million more), they would have saved USD 32 million by avoiding the “live auction”

  12. Recent M&A Activity Over 40 transactions since 1995.

  13. Banespa • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  14. Banespa’s vital statistics Largest state owned bank and 5th largest in Brazil in Deposit Share and 40th “largest” in Net Income

  15. Privatization • November 20, 2000 • Rio de Janeiro Stock Exchange • 60% voting capital x 30% total capital • BRL 1.85 billion (USD 990 million)

  16. Competition • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  17. Potential Bidders

  18. What is a reasonable bid? • Introduction • Brazil’s Economy • Brazil’s Banking Sector • Banespa • Potential Bidders • Our valuation • Post Mortem

  19. Cost of Capital • Risk Adjustments • Concentration risk • Government bond portfolio • Exposure to inflation and FX

  20. Valuation (USD) Some +ve skew

  21. Revenue & FX Revenue upside potential, and capped downside to reflect growth opportunity Inflation effects in model seen in the exchange rate distribution

  22. Sensitivity Analysis (USD) (million) rE 16.00% 16.80% 18.00% 19.00% 20.00% Size 90% 5,640.846 5,174.751 4,561.749 4,113.857 3,711.652 Premium 80% 5,563.087 5,096.992 4,483.990 4,036.098 3,633.893 5,019.233 Probability 70% 5,485.329 4,406.232 3,958.339 3,556.134 60% 5,407.570 4,941.474 4,328.473 3,880.580 3,478.375 50% 5,329.811 4,863.715 4,250.714 3,802.821 3,400.617

  23. Valuation Matrix (BRL) What would you bid?

  24. So, what happened? • BBVA, Citibank, Fleet Boston,Itau & HSBC did not submit bids • Bradesco bid BRL 1.86 billion • Unibanco bid BRL 2.10 billion Santander bid BRL 7.05 billion – 281% premium over reserve price

  25. Valuation Matrix (BRL) What was the bid?

  26. Santander Rationale • Project America • Sao Paulo is key to project success and they have very little presence in the region. • Banespa is a “perfect match” for the current Santander branch network

  27. Location & # of branches

  28. Santander Rationale • Project America • Sao Paulo is key to project success and they have very little presence in the region. • Banespa is a “perfect match” for the current Santander branch network • If they did not acquire Banespa, they would lose the best growth opportunity • Control premium to ensure priority on minority share tender

  29. Market Reaction Auction Date Santander IBEX – Madrid Index

  30. Q&A

  31. Market Reaction Banespa Auction date

  32. Expected synergies

  33. Minority shares • January 2, 2001 • Santander tendered offer of BRL 2.5 billion • 58.6% premium over December 28th closing price • Expected close in March-April 2001

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