Banks in Hock
More than 50 years after its creation, Banco Nacional, the
seventh largest financial institution in Brazil
went bankrupt. This was just the latest link on a
chain that has been decimating the bank system in
the country. Since July 1994, 15 banks were
liquidated by the Central Bank and other six
including São Paulo’s and Rio’s state banks
were placed under federal intervention. After the end-of-the-eighties’
boom comes the bust.
The end of 1995 was marked by political and economic tension in the Brazilian
Parliament. Political scandals as the “Pink Folder” affair
or the SIVAM (Amazon surveillance project) telephone tapping case, and the financial crisis
were shaking hard the Real Plan named for the new Brazilian currency. The plan which made
a monster 50% a month inflation into a tame yearly 16% is forcing banks to change to a
new market structure. In a normal economy, the banking
system functions as a link between investors and savers.
Under an inflationary economy, it becomes a mere inflation
tax collector due to the loss of value in money deposited
in banking accounts.
The Real economic stabilization plan of July 1994
has generated chaos in the financial system. This in turn
is pressuring the government to create a new set of rules
to stimulate restructuring and therefore strengthening
the banking institutions. Brazil has 246 banks more
than Canada and France and according to the economy
minister Pedro Malan this is not a good sign. There are too
many banks for too little money, he argues. Malan believes that
the new economic environment in Brazil will cut this number
in half by the end of the century.
In 1988, Brazil had 100 domestic banks and the
new constitution loosening the requirements to open up
such institutions paved the road to a boom in the financial
system. Inflation fueled an easy way to make profits and
banking became a good business. For example, banks
would act as government agents collecting water and
energy bills from the population but those funds would
only be passed to the government three days later.
At the time, Brazil was running an average
80% monthly inflation rate and three days represented an 8% easy gain.
In 1993, the 40 biggest banks earned $9.1 billion from this floating
money 26% of the banks’ total receipts added to the $2.1 billion in
profits. But in the first six months of 1995, this number had declined
to $203 million accounting for less than 1% of their total receipts and
followed a $1.4 billion drop in profits. The inflation was profitable
for the banks but left them weak administratively and laggard in
adapting to a new stable economy.
The Central Bank’s president, Gustavo Loyola, defends the idea that banking
mergers are essential to strengthen Brazil’s
financial system. Usually, these banks for sale are in
bad shape and the government needs to create a mechanism to stimulate other financial
institutions to take over these white elephants.
The PROER, Program of Stimulus to Restructure
and Strengthen the National Financial System, was put
together by the Cardoso government to help banks merge and
acquire one another. Loyola believes that “the program is not
to benefit a single system but the whole economy.” He
sees banks as a heart in the economy pumping
investments into all sectors. The PROER has the full support of
two former economic ministers, Mário Henrique Simonsen
and Ernane Galvêas, who see an urgent need to adjust
the country’s financial system to a new era.
The restructuring of financial systems is not a
Brazilian phenomenon, but a global occurrence. It’s continually
happening in the US. In Japan, the Bank of Tokyo merged
with the Mitsubishi Bank, and in Hong Kong, the Bank of
East Asia merged with the United Chinese Bank. The Dutch
ING Bank acquiring the bankrupted British Barings reinforces
the phenomenon. The globalization increases
competition which forces banks to increase receipts and decrease costs.
This justifies the changes in many international banks. The
Crédit Commercial de France merged with the Bank
of Montreal, the Itamarati Bank acquired the
Crefisul, the Itaú Bank bought the Banco
Francês-Brasileiro, and the Hong Kong
Shangai Bank associated with the Bamerindus Bank which
in turn sold 6% to the Midland Bank.
Since July 1994, the Brazilian Central Bank liquidated 15 banks and
intervened in another six. The Banerj (Bank of the
State of Rio de Janeiro) and the Banespa (Bank of the
State of São Paulo) are two large state-owned banks
under intervention due to bad administration and
politics. In this interventionist process, the Bank
Bozano, Simonsen won a bid to administer and then
privatize the Banerj, under the Central Bank since
the end of 1994. The Bozano, Simonsen has been an aggressive player in the process of privatization of state
owned enterprises and thus has a vast experience in
cleaning bankrupt businesses turning them into
profitable ones.
This innovative process of intervention and privatization
used by the Central Bank opens up avenues to a new way of
dealing with problematic institutions, delegating the
cleaning-up job to the private sector. Even though
the Banerj is to be privatized, the São Paulo state
government has been reluctant to do the same with
Banespa. Moreover, a larger bomb dropped in the country’s
financial market was the Banco Econômico. Econômico,
an old private Brazilian bank, was put under the
Central Bank intervention after a $3.5 billion shortfall.
The Econômico had to be split into two:
the profitable side of it was sold to the much
smaller Excell Bank and the other is under the
government intervention for eventual liquidation. The
Excell has been required to inject $309 million to
increase the capital of the new bank. Despite the
financial crisis, the Banco Excell bid to buy the
Econômico had the Swiss Bank support, a sign of confidence
in the Brazilian banking system.
Banco Nacional, created in 1944 in the state of Minas Gerais, was the latest financial institution
to go belly up. It was Brazil’s seventh largest
bank. The Nacional was acquired by another bank
from Minas, the Unibanco, the sixth largest Brazilian bank,
which was founded in 1924. These two institutions represent
traditional Brazilian families running business as small shops.
The deal generated the third largest Brazilian bank.
Citibank and the Bank of Boston bought the left-over agencies from
the Nacional. The merger represents a $500 million reduction in
expenses for the two banks involved. This figure
represents more than the two institutions were expecting to profit in
one year.
According to a Lloyds Private Bank’s consultant, the Brazilian economy
can handle no more than 150 banks, a little over half
of the existing number. Mergers and acquisitions
will continue. The merging of institutions result in
huge gains from economies of scale and reduction
in costs.
The rules of acquisition
1. Banks acquiring other banks will have an
official line of credit to re-organize the new bank.
This line of credit will have a lower interest rate than
those charged in the market. The funds come from the
state to the entrepreneur.
2. The buying bank may deduct the loss of the other institution in the income tax of the new bank.
3. The stocks of the sold institution held by private investors will have to be traded in the
market to a value 40% lower or sold to the new institution
at a price stated in the bank’s last annual
fictitious balance-sheet. These will no longer be accepted
by the new bank at its current value.
4. The $10 billion funds come from the Central Bank, Banco do Brasil and the Caixa
Econômica Federal.
