Bradesco to acquire HSBC Brazil unit for $5.2 billion, biggest ever buy

Banco Bradesco SA has agreed to buy HSBC Holdings' Brazilian unit for a surprisingly high 17.6 billion reais ($5.2 billion), narrowing the gap with larger rivals while boosting its base of affluent customers in Latin America's largest economy.

The deal between Bradesco and Europe's largest bank includes the latter's Brazilian retail banking and insurance units. The agreement, which still requires regulatory approval and was sealed on July 31, could close by June.

The all-cash acquisition will allow Bradesco to close the asset gap with larger rivals Itau Unibanco Holding SA and state-controlled banks Banco do Brasil SA and Caixa Economica Federal. HSBC Brasil's focus on high-income customers fits well into Bradesco's plan to ramp up sales of specialised financial services for the wealthy and larger corporations.

The purchase price, which could change to reflect the net asset value of both businesses, is equivalent to 1.8 times book value, far above what analysts expected and above Bradesco's own valuation. Reuters reported on July 20 that Bradesco had entered exclusive talks with HSBC after offering to pay about 12 billion reais, or 1.2 times book value.

Shares of Bradesco posted their steepest drop since July 23, shedding as much as 4.4 percent in Sao Paulo on Monday. The bank's American depositary receipt lost 3.5 per cent in New York.

"Too expensive," said Frederico Mesnik, a partner with Humaita Investimentos in Sao Paulo. "They bought the bank in order to keep the competition from taking it and they are paying a high price for it."

The takeover, Bradesco's first since the 2009 purchase of Banco Ibi SA, will increase its assets by 16 per cent, number of branches by 18 per cent and staff by 23 per cent. Bradesco expects the purchase to contribute to earnings starting in 2017.

"The transaction makes strategic and financial sense for Bradesco and represents an opportunity to deploy more effectively the excess capital it was prone to accumulate in light of Brazil's poor credit growth outlook in the years to come," said Marcelo Telles, an analyst with Credit Suisse Securities.

STRATEGY MISSTEPS

Bradesco paid 10.4 billion reais for HSBC Bank Brazil, 4.7 billion reais for the HSBC Servicos insurance unit and 2.5 billion reais for a measure of future additional revenues or scale gains, it said in a presentation.

Following the acquisition, Bradesco's capital regulatory ratio, a measure of solvency strength, will decline to 9.9 per cent from 12.8 per cent currently.

Chief Executive Officer Luiz Carlos Trabuco, speaking on a conference call, promised to integrate HSBC Brazil fully into Bradesco's retail banking insurance platform within the next three to four years.

Analysts, who estimated that Bradesco could deduct as much as 6.5 billion reais in goodwill from the HSBC acquisition, were sceptical of the goal. Francisco Kops, an analyst with J Safra Corretora, said it will take at least five years for HSBC assets to be fully integrated into Bradesco.

On the other hand, HSBC's sale of its Brazilian business represents a retreat from the second-largest emerging market economy after years of disappointing performance.

HSBC, which arrived in Brazil late in the 1990s, never gained enough size to pose a real threat to Itau, Bradesco or Banco do Brasil, the nation's top lender by assets. HSBC Brasil has 854 branches and 21,000 employees. Its assets of about 170 billion reais represent about 2.3 per cent of the total for Brazil's banking system.

HSBC, Europe's largest bank by market value, was advised on the deal by its own investment banking unit and Goldman Sachs Group. Bradesco was advised by its Bradesco BBI investment banking unit, as well as JPMorgan Chase & Co and NM Rothschild & Sons.

(Reuters)