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

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
Brazil’s Banking Sector
 Banespa
 Potential Bidders
 Our valuation
 Post Mortem

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
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
Brazil: Inflation
Montlhy Inflation in Brazil (% )
90%
80%
Since the Real Plan inflation has
been under control, reaching very
low average yearly inflation (5%)
70%
60%
50%
40%
30%
20%
10%
IGP-M
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
Jun-90
-10%
Jun-89
0%
Monthly Inflation Post Real Plan
CPI
9%
8%
4
ec
-9
Ap 4
r-9
Au 5
gD 95
ec
-9
Ap 5
r-9
Au 6
gD 96
ec
-9
Ap 6
r-9
Au 7
gD 97
ec
-9
Ap 7
r-9
Au 8
gD 98
ec
-9
Ap 8
r-9
Au 9
gD 99
ec
-9
Ap 9
r-0
Au 0
g00
g9
D
Au
Long history of high
inflation and not
successful economic
plans
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
IGPM
CPI
Banking Sector
Introduction
 Brazil’s Economy

 Brazil’s
Banking Sector
Banespa
 Potential Bidders
 Our valuation
 Post Mortem

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
Brazilian Banking Sector
Banking Sector by Assets
Private Banks – 52%
State Banks – 48%
Others – 9%
Bradesco, Itau &
Unibanco – 20%
Foreign Institutions – 23%
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
Metric
Equity
Auction Price
P / BV
P / Branch
P / Client
Customers
Branch Coverage
(92% in Parana State)
USD MM
248
878
4
2.65
1,815
550
573
Most Recent Transaction
Live Auction
878
854
851
824
819
676
u
Ita
ba
nc
o
Un
i
u
Ita
ba
nc
o
Un
i
u
Ita
ba
nc
o
384
Un
i
1000
900
800
700
600
500
400
300
200
Sealed Bid
Br
ad
es
co
USD Million
Banestado Auction
Had Itau paid USD 846 (USD 27 million more), they would
have saved USD 32 million by avoiding the “live auction”
Recent M&A Activity
Over 40 transactions since 1995.
Banespa
Introduction
 Brazil’s Economy
 Brazil’s Banking Sector

 Banespa
Potential Bidders
 Our valuation
 Post Mortem

Banespa’s vital statistics
Largest state owned bank and 5th largest in Brazil in
Deposit Share and 40th “largest” in Net Income
Bank
Banespa
Bradesco
Itau
Unibanco
Boston
Citibank
HSBC
Santander
Asset Share
3.70%
10.3%
6.7%
4.6%
2.3%
1.7%
1.7%
1.6%
Deposit Share
# Branches
# Employees
571
2,438
1,674
701
64
51
981
180
20,098
47,521
29,982
N/A
4,178
1,978
18,845
4,248
3.50%
11.6%
7.2%
2.9%
0.9%
0.5%
2.0%
1.2%
Source: Morgan Stanley Dean Witter, Nov 17 2000
Privatization

November 20, 2000

Rio de Janeiro Stock Exchange

60% voting capital x 30% total capital

BRL 1.85 billion (USD 990 million)
Competition
Introduction
 Brazil’s Economy
 Brazil’s Banking Sector
 Banespa

 Potential
Bidders
Our valuation
 Post Mortem

Potential Bidders
What is a reasonable bid?
Introduction
 Brazil’s Economy
 Brazil’s Banking Sector
 Banespa
 Potential Bidders

 Our

valuation
Post Mortem
Cost of Capital

Risk Adjustments
– Concentration risk
– Government bond portfolio
– Exposure to inflation and FX
ICCRC Sept 2001
Country rE
Modify:
Bank risk
Forex and inflation risk
rE*
rD
Target D/V
TC
WACC
23.8%
-4.0%
-3.0%
16.8%
7.0%
78%
35.0%
7.2%
Valuation (USD)
Base BESP
Size Premium
BESP Value to Santander
Adj. P/BV
(million)
FCF
Residual Income
12,458.702
4,474.920
544.313
544.313
13,003.014
5,019.233
5.07
1.96
Forecast: After Size Premium Equity Value
Forecast: Base BESP Equity Value
1,000 Trials
Frequency Chart
7 Outliers 1,000 Trials
Frequency Chart
6 Outliers
.025
25
.024
24
.019
18.75
.018
18
.013
12.5
.012
12
.006
6.25
.006
6
.000
0
.000
0
4,048,543
4,576,120
5,103,696
5,631,273
6,158,850
3,527,087
Some +ve skew
4,040,848
4,554,609
5,068,370
5,582,131
Revenue & FX
Forecast: General Credit Rev enue 2005
1,000 Trials
Frequency Chart
.026
26
.020
19.5
.013
13
.007
6.5
.000
0
1,051,529
1,193,242
1,334,956
Revenue upside
potential, and capped
downside to reflect
growth opportunity
14 Outliers
1,476,669
1,618,382
Forecast: Forex BRL/USD 2005
1,000 Trials
Inflation effects in
model seen in the
exchange rate
distribution
Frequency Chart
42 Outliers
.027
27
.020
20.25
.014
13.5
.007
6.75
.000
0
1.90
2.17
2.43
2.69
2.95
Sensitivity Analysis (USD)
(million)
Size 90%
Premium 80%
Probability 70%
60%
50%
16.00%
5,640.846
5,563.087
5,485.329
5,407.570
5,329.811
16.80%
5,174.751
5,096.992
5,019.233
4,941.474
4,863.715
rE
18.00%
4,561.749
4,483.990
4,406.232
4,328.473
4,250.714
19.00%
4,113.857
4,036.098
3,958.339
3,880.580
3,802.821
20.00%
3,711.652
3,633.893
3,556.134
3,478.375
3,400.617
Valuation Matrix (BRL)
What would you bid?
Stage 1
Auction
30%
8,215.024
7,900.528
7,586.032
7,271.536
6,957.040
6,642.544
6,328.048
P/BV
5.70
5.49
5.27
5.05
4.83
4.61
4.39
(million)
Stage 2
Minority Shares Premium
70%
1,572.480
0%
1,886.976
20%
2,201.472
40%
2,515.968
60%
2,830.464
80%
3,144.960
100%
3,459.456
120%
P/BV
0.47
0.56
0.66
0.75
0.84
0.94
1.03
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
Valuation Matrix (BRL)
What was the bid?
Stage 1
Auction
30%
8,215.024
7,900.528
7,586.032
7,271.536
6,957.040
6,642.544
6,328.048
P/BV
5.70
5.49
5.27
5.05
4.83
4.61
4.39
(million)
Stage 2
Minority Shares Premium
70%
1,572.480
0%
1,886.976
20%
2,201.472
40%
2,515.968
60%
2,830.464
80%
3,144.960
100%
3,459.456
120%
P/BV
0.47
0.56
0.66
0.75
0.84
0.94
1.03
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
Location & # of branches
Number of Branches
BSCH Banespa New BSCH Bradesco Itau
Unibanco
Sao Paulo
145
531
676
885
500
314
Rio de Janeiro
25
10
35
226
267
191
Minas Gerais
14
4
18
253
532
87
South
149
15
164
348
498
107
Other States
16
13
29
763
164
106
Total
349
573
922
2,475 1,961
805
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
Market Reaction
Auction Date
Santander
IBEX – Madrid Index
Q&A
Market Reaction
Banespa
Auction date
Expected synergies
numbe r of employee s
Efficiency Ratios
45
40
35
80%
30
25
20
15
50%
10
5
20%
0
0%
70%
60%
40%
30%
10%
Peer Brazil
Banespa
Efficiency
BSCH Brazil
Employee
BSCH Latam
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