Privatization in the Brazilian Banking Sector

Privatization in the Privatization in the Brazilian Banking SectorBrazilian Banking Sector

Tadeu Nunes

Marcio Passos

Diane Nakayama-Shapiro

Terence Tong

Debbie Vann

AgendaAgenda

IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem


EconomyEconomy

BrazilBrazilBrazil

• 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: EconomyBrazil: Economy

BackgroundBackground Recent HistoryRecent History

– Real Plan Real Plan introduced in 1994introduced in 1994– Currency devalued in Jan. 1999Currency devalued in Jan. 1999

ForecastForecast– GDP growth at 4-4.5% for next 3 yearsGDP growth at 4-4.5% for next 3 years– FX Rate stable (market forecasts)FX Rate stable (market forecasts)– Presidential Elections in 2002Presidential Elections in 2002– Still with the “Emerging Markets” labelStill with the “Emerging Markets” label– Rating is B1 by Moody’s and BB- by S&PRating is B1 by Moody’s and BB- by S&P

Montlhy Inflation in Brazil (%)

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Jun

-89

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

IGP-M CPI

Brazil: InflationBrazil: Inflation

Long history of high inflation and not successful economic plans

Monthly Inflation Post Real Plan

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Aug-9

4

Dec-9

4

Apr-9

5

Aug-9

5

Dec-9

5

Apr-9

6

Aug-9

6

Dec-9

6

Apr-9

7

Aug-9

7

Dec-9

7

Apr-9

8

Aug-9

8

Dec-9

8

Apr-9

9

Aug-9

9

Dec-9

9

Apr-0

0

Aug-0

0

IGPM CPI

Since the Real Plan inflation has been under control, reaching very low average yearly inflation (5%)


Banking SectorBanking Sector

Brazilian Banking SectorBrazilian Banking Sector

FederalFederal– Owns the 2 largest Brazilian InstitutionsOwns the 2 largest Brazilian Institutions

State OwnedState Owned– Each state used to have its own “financial institution”Each state used to have its own “financial institution”

– Vast majority have been privatizedVast majority have been privatized

PrivatePrivate– Largely dominated by 3 Brazilian institutionsLargely dominated by 3 Brazilian institutions

– Over 70 foreign banksOver 70 foreign banks

Brazilian Banking SectorBrazilian Banking SectorBanking Sector by Assets

Private Banks – 52%

State Banks – 48%

Bradesco, Itau & Unibanco – 20%

Foreign Institutions – 23%

Others – 9%

Most Recent TransactionMost Recent Transaction Banestado, on Oct 20Banestado, on Oct 20thth

– Largest privatization to dateLargest privatization to date– Set the stage for Banespa’s Set the stage for Banespa’s

auctionauction– 377 branches, 92% in Parana 377 branches, 92% in Parana

StateState

– 550,000 clients550,000 clients Metric USD MM

Equity 248 Auction Price 878 P / BV 4 P / Branch 2.65 P / Client 1,815 Customers 550 Branch Coverage 573 (92% in Parana State)

Most Recent TransactionMost Recent Transaction

Banestado Auction

384

676

819 824 851 854 878

200300400500600700800900

1000

US

D M

illi

on

Had Itau paid USD 846 (USD 27 million more), they would have saved USD 32 million by avoiding the “live auction”

Sealed Bid Live Auction

Recent M&A ActivityRecent M&A Activity

Over 40 transactions since 1995.


BanespaBanespa

Banespa’s vital statisticsBanespa’s vital statisticsLargest state owned bank and 5th largest in Brazil in Deposit

Share and 40th “largest” in Net Income

Bank Asset Share Deposit Share # Branches # Employees

Banespa 3.70% 3.50% 571 20,098 Bradesco 10.3% 11.6% 2,438 47,521 Itau 6.7% 7.2% 1,674 29,982 Unibanco 4.6% 2.9% 701 N/ABoston 2.3% 0.9% 64 4,178 Citibank 1.7% 0.5% 51 1,978 HSBC 1.7% 2.0% 981 18,845 Santander 1.6% 1.2% 180 4,248

Source: Morgan Stanley Dean Witter, Nov 17 2000

PrivatizationPrivatization

November 20, 2000November 20, 2000

Rio de Janeiro Stock ExchangeRio de Janeiro Stock Exchange

60% voting capital x 30% total capital60% voting capital x 30% total capital

BRL 1.85 billion (USD 990 million)BRL 1.85 billion (USD 990 million)


CompetitionCompetition

Potential BiddersPotential Bidders


What is a reasonable bid?What is a reasonable bid?

Cost of CapitalCost of Capital

Risk AdjustmentsRisk Adjustments– Concentration riskConcentration risk– Government bond portfolioGovernment bond portfolio– Exposure to inflation and FXExposure to inflation and FX

ICCRC Sept 2001Country rE 23.8%Modify:

Bank risk -4.0%Forex and inflation risk -3.0%

rE* 16.8%

rD 7.0%Target D/V 78%

TC 35.0%WACC 7.2%

Valuation (USD)Valuation (USD)

Frequency Chart

.000

.006

.013

.019

.025

0

6.25

12.5

18.75

25

4,048,543 4,576,120 5,103,696 5,631,273 6,158,850

1,000 Trials 7 Outliers

Forecast: After Size Premium Equity Value

Frequency Chart

.000

.006

.012

.018

.024

0

6

12

18

24

3,527,087 4,040,848 4,554,609 5,068,370 5,582,131


Forecast: Base BESP Equity Value

Some +ve skew

(million)FCF Residual Income

Base BESP 12,458.702 4,474.920 Size Premium 544.313 544.313 BESP Value to Santander 13,003.014 5,019.233 Adj. P/BV 5.07 1.96

Revenue & FXRevenue & FX

Frequency Chart

.000

.007

.014

.020

.027

0

6.75

13.5

20.25

27

1.90 2.17 2.43 2.69 2.95


Forecast: Forex BRL/USD 2005

Frequency Chart

.000

.007

.013

.020

.026

0

6.5

13

19.5

26

1,051,529 1,193,242 1,334,956 1,476,669 1,618,382


Forecast: General Credit Rev enue 2005

Revenue upside potential, and capped downside to reflect growth opportunity

Inflation effects in model seen in the exchange rate distribution

Sensitivity Analysis (USD)Sensitivity Analysis (USD)

rE16.00% 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

Probability 70% 5,485.329 5,019.233 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

(million)

Valuation Matrix (BRL)Valuation Matrix (BRL)

What would you bid?

(million)Stage 1 Stage 2Auction P/BV Minority Shares Premium P/BV

30% 70%8,215.024 5.70 1,572.480 0% 0.47 7,900.528 5.49 1,886.976 20% 0.56 7,586.032 5.27 2,201.472 40% 0.66 7,271.536 5.05 2,515.968 60% 0.75 6,957.040 4.83 2,830.464 80% 0.84 6,642.544 4.61 3,144.960 100% 0.94 6,328.048 4.39 3,459.456 120% 1.03

So, what happened?So, what happened?

BBVA, Citibank, Fleet Boston,Itau & BBVA, Citibank, Fleet Boston,Itau & HSBC did not submit bidsHSBC did not submit bids

Bradesco bid BRL 1.86 billionBradesco bid BRL 1.86 billion Unibanco bid BRL 2.10 billionUnibanco bid BRL 2.10 billion

Santander bid BRL 7.05 billion – Santander bid BRL 7.05 billion – 281% premium over reserve price281% premium over reserve price

Valuation Matrix (BRL)Valuation Matrix (BRL)

What was the bid?

(million)Stage 1 Stage 2Auction P/BV Minority Shares Premium P/BV

30% 70%8,215.024 5.70 1,572.480 0% 0.47 7,900.528 5.49 1,886.976 20% 0.56 7,586.032 5.27 2,201.472 40% 0.66 7,271.536 5.05 2,515.968 60% 0.75 6,957.040 4.83 2,830.464 80% 0.84 6,642.544 4.61 3,144.960 100% 0.94 6,328.048 4.39 3,459.456 120% 1.03

Santander RationaleSantander Rationale

Project AmericaProject America– Sao Paulo is key to project success and Sao Paulo is key to project success and

they have very little presence in the region.they have very little presence in the region. Banespa is a “perfect match” for the Banespa is a “perfect match” for the

current Santander branch networkcurrent Santander branch network

Location & # of branchesLocation & # of branches

Number of BranchesBSCH 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 RationaleSantander Rationale

Project AmericaProject America– Sao Paulo is key to project success and they have Sao Paulo is key to project success and they have

very little presence in the region.very little presence in the region. Banespa is a “perfect match” for the current Banespa is a “perfect match” for the current

Santander branch networkSantander branch network

If they did not acquire Banespa, they If they did not acquire Banespa, they would lose the best growth opportunity would lose the best growth opportunity

Control premium to ensure priority on Control premium to ensure priority on minority share tenderminority share tender

Market ReactionMarket Reaction

Santander

Auction Date

IBEX – Madrid Index

Q&AQ&A

Market ReactionMarket Reaction

Banespa Auction date

Expected synergiesExpected synergies

Efficiency Ratios

0

5

10

15

20

25

30

35

40

45

Peer Brazil Banespa BSCH Brazil BSCH Latam

num

ber o

f em

plo

yee

s

0%

10%

20%

30%

40%

50%

60%

70%

80%

Efficiency Employee

Minority sharesMinority shares

January 2, 2001January 2, 2001– Santander tendered offer of BRL 2.5 billionSantander tendered offer of BRL 2.5 billion– 58.6% premium over December 2858.6% premium over December 28thth

closing priceclosing price– Expected close in March-April 2001Expected close in March-April 2001

Documents

Privatization in the Brazilian Banking Sector