Monday, February 14, 2011

The purchase of a troubled retail lender does not end the risk of further fallout from Brazil’s credit boom.

André Esteves has cemented his status as a star in the Brazilian banking world. The chief executive of investment bank BTG Pactual, a 42-year-old self-made billionaire, announced the purchase of retail lender Banco PanAmericano on January 31st. Although the deal offers a swift close to an unhappy chapter in Brazilian banking, thorny questions remain about the implications of the country’s recent credit boom.

The retail bank was propped up by a R2.5bn (US$1.5bn) emergency loan from Brazil’s deposit-protection fund, arranged late last year when the bank was found to be insolvent. A probe into alleged fraud is ongoing, with the focus on PanAmericano’s accounting treatment of its loan portfolios.

The deal marks BTG Pactual’s first foray outside of investment banking. The purchase brings the bank consumer finance and mid-market lending businesses (with a particular strength in auto financing), as well as a new partner in Caixa Econômica Federal (CEF), a state-owned bank that will remain a major shareholder in PanAmericano. Despite this apparently happy ending to the PanAmericano drama, the episode leaves unresolved issues related to the solidity of Brazil’s banking system.

Sorry saga

Brazil’s Central Bank revealed a hole in PanAmericano’s accounts in November 2010, prompting an emergency injection by the Credit Guarantee Fund (FGC). The founder and main owner of the bank, Senor Abravanel, a media mogul and television personality better known as Silvio Santos, pledged most of his business assets as a guarantee for the FGC loan. However, recent press reports suggest that the actual loss at the bank may have been around R4bn, or two-thirds more than previously estimated.

The deeper loss and suspicions of fraud pushed Mr Abravanel to sell his 37.6% stake (representing 51% of the voting shares) in PanAmericano to BTG Pactual. The acquirer will assume responsibility for PanAmericano’s R3.8bn, 17-year loan from the FGC in exchange for the stake, making the net present value of the acquisition worth R450m. CEF will maintain its 36.6% stake in PanAmericano (49% of the voting shares).

BTG Pactual will shortly launch a tender offer for the remaining shares at the equivalent of the price set in the acquisition of Mr Abravanel’s stake (R4.89 per share). With shares currently trading around R6, it may need to offer more to entice PanAmericano’s minority shareholders to sell.

Reports suggest that BTG Pactual and CEF may inject an extra R14bn in Panamericano, primarily via loan purchases, to recapitalise the lender. The lower funding costs that will result from the bank’s new ownership will allow it to offer better financing rates, according to José Luiz Acar Pedro, PanAmericano’s new chief executive. The partnership with CEF, which is particularly strong in the mortgage market, will be expanded, with more products and services offered via the banks’ various retail distribution channels.

Grand designs

The PanAmericano acquisition is only one illustration of BTG Pactual’s growing ambitions. In December, the bank received an investment worth US$1.8bn from a group that included sovereign wealth funds from China, Singapore and Abu Dhabi. The bank is expected to leverage its connections with European firms–it was part of UBS (Switzerland) from 2006-09–to generate advisory business related to takeovers and listings in Brazil.

Trading in PanAmericano’s shares ahead of the announcement of its takeover is also under scrutiny. Brazil’s securities regulator is investigating heavy trading volumes and large jumps in the bank’s share price in the days before the deal was revealed (see chart).

More fundamentally, the PanAmericano saga is a reminder of the vulnerability of Brazil’s financial firms despite, or because of, the country’s recent credit boom. Overly generous lending policies and lax controls may yet bring repercussions at other banks, particularly the smaller, less-diversified lenders. The lessons of PanAmericano cannot be swept under the carpet.

A service of YellowBrix, Inc.

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