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Big Wins.

In the race for market share, Banco Santander Central Hispano and Banco Bilbao Vizcaya are running out of time.

THE FLAMING-RED LOGO OF BANCO SANTANDER Central Hispano and the more discreet white-on-blue stars of Banco Bilbao Vizcaya have sprouted on prominent street corners in Sao Paulo, Rio de Janeiro, Salvador and other Brazilian cities over the past 12 months. Despite their growing visibility, the Spanish banks are up against mammoth challenges in Brazil to break into the top tier of retail banking. Both banks vow to be among the five leading banking institutions, but it will bean uphill battle.

Having spent billions to acquire medium-sized banks, Santander and BBV have just about put their houses in order--cleaning up bad debt, overhauling computer systems and dealing with some unexpected skeletons in the closet. Santander turned a profit of US$31 million in 1998, slightly higher than the previous year. BBV, on the other hand, which purchased failed Excel Economico in mid-year, registered a massive loss of $883 million, compared with a loss of $40 million in 1997. In the first quarter of 1999, profits improved as both banks made a killing from foreign-exchange operations during the real devaluation. Santander reported a first-quarter profit of $16 million and BBV, $49 million.

The banks are now lathe process of luring new customers from among the estimated 6 million Brazilians that enter the banking market each year, as well as to entice clients away from other banks. However, with market shares in the neighorhood of 1%-2% in terms of deposits and assets, neither bank has a significant presence in Brazil.

Each insists it is poised for expansion. 'With our current structure, we can easily double or triple our volume of operations," says Walter Shinomata, vice president of Banco Santander Brasil. However, the jury is still out on whether either Santander or BBV can grow fast enough to challenge frontrunners Banco Bradesco, Banco Itau, Unibanco and the biggest foreign bank in Brazil, Banco Real, purchased last year by Holland's ABN Amro. "Up till now, neither Santander nor BBV has shown what they are made of," says Erivelto Rodrigues, director of Austin Asis, a bank rating firm in Sao Paulo. A recent report on the Brazilian banking sector by Moody's Investors Service arrives at the same conclusion: "The ability of the new foreign banks in Brazil to adapt and grow their franchises in order to compete with the local powerhouses still remains to be seen."

Unlike other Latin American countries, in which two or three private banks dominate, the massive Brazilian market is still largely controlled by state-owned institutions Banco do Brasil and Caixa Economica Federal, which together account for roughly 40% of total deposits and assets. By comparison, Bradesco, Latin America's largest private bank, accounts for a mere 9% of total deposits in Brazil and 7% of total assets.

Room for how many? The arrival of foreign banks in Brazil has stimulated an all-out push by the local giants to improve efficiencies. "Santander and BBV brought with them the concept of scale and low-cost operations," says Rodrigues of Austin Asis, noting that the local banks were quick to rise to the challenge. With the local banks leaner and meaner, however, analysts question whether Santander or BBV have the wherewithal to compete.

Despite some progress, the Spanish banks "haven't managed to become efficient yet," says Rodrigues. BBV has been handicapped by the purchase of troubled Excel Economico "BBV bought a bank with very low-quality assets," says Rodrigues. "Excel Economico was synonymous with failure."

Santander faced the additional task of combining two different banks (Banco Geral de Comercio and Banco Noroeste), creating compatible systems and a common culture. It cleared one major hurdle in March of this year when the computer systems at the two banks were finally merged. Yet to be completed, however, is the legal merger of Santander's three operations in Brazil--Banco Santander Noroeste (formerly Banco Noroeste), Banco Santander Brasil (formerly Banco Geral de Comercio) and Banco Santander de Negocios, which represents the parent company's operations. Shinomata says that task will be accomplished by the end of the year, allowing Santander to finally consolidate its three separate balance sheets.

While Santander and BBV struggle to reduce costs and increase efficiencies, Bradesco and Itau continue to gobble up smaller banks. Bradesco bought BCN, the country's seventh-largest bank in 1997, and in late June purchased Baneb, the Bahia state bank, while Itau bought Banco Frances e Brasileiro (formerly Credit Lyonnais), as well as Banerj and Bemge, the state banks of Rio and Minas Gerais.

Consolidation is expected to continue at a furious pace. "In most developed markets there are very few leading banks and tremendous concentration. There is no reason why Brazil should be any different," says Paul Bydalek of Atlantic Rating. Most analysts expect the battle for supremacy in Brazil to reduce the field to 10 major retail banks, with five or six in the mega-bank category.

Neither Santander nor BBV intend to be among the also-rans. But Brazilian analysts aren't so sure. "It's unlikely that they will be able to compete on the same level as Bradesco and Itau," says Rodrigues of Austin Asis, who expects Santander and BBV to remain in the medium-sized category.

Certainly, at their present size, Santander and BBV do not pose much of a threat. "They may be a source of concern, but they aren't bothering anyone yet." says Rodrigues. But both banks intend to bother the big boys and are rolling out ambitious expansion plans.

"In a market like Brazil, a bank has to have scale," says BBV Brasil's vice president, Spaniard Carlos Bedia. BBV currently has 252 branches, most of them concentrated in Salvador, Bahia, site of the bank's headquarters, and the Rio-Sao Paulo axis, but the bank plans to increase that number to 975. This year, BBV will inaugurate up to 50 new branches and next year nearly 700, though analysts question the feasibility of that plan.

Santander also plans to grow its branch network "To be a player in Brazil, you need at least 800 branches," says Santander's Shinomata, who acknowledges that 300 branches, the bank's current size, "is not sufficient." According to Shinomata, Santander, which has Central Bank authorization to open a limited number of new branches, is inaugurating 2-3 branches each month, but is also looking at additional acquisitions. "Organic growth is more cost efficient, but it's slow. The big virtue of acquisition is speed. We are analyzing every opportunity," says Shinomata.

Wild card. For the moment, everybody is watching Banespa, the state bank of Sao Paulo, due to be sold in October. Whoever wins this prize will either consolidate its leadership or suddenly leap into the top ranks.

Both Bradesco and Ita'u are sure to battle for Banespa. And most analysts expect Santander and BBV to join the fray. "Banespa would help these banks in terms of scale,' says Joao Paulo Tucci, a banking sector analyst at Banco Fator in Sao Paulo, adding that there aren't many other options for that kind of quick growth.

The question, however, is whether the banks' shareholders will agree to another shopping spree in Brazil. "Both Spanish banks face structural problems at home," observes Bydalek of Atlantic Rating, and "shareholders might not stand for putting more megabucks in Brazil."

While Banespa is the most visible prize, Unibanco, the country's third-largest private bank, is a frequent source of takeover rumors that have a foreign hank snapping it up to quickly gain market share and a broad distribution network. "If there is an opportunity to buy another bank, we'll take a look at it. That's for sure," says BBV's Bedia.

Whatever the outcome of the Banespa sale and further consolidation, most analysts point to 2000 as a decisive year for both BBV and Santander. It will be a tough battle in the retail market, says Rodrigues of Austin Asis, "with margins and profits from treasury operations on the decline and tougher competition." His conclusior is that the Spanish banks will have to fight to steal clients away from other banks.

Santander and BBV have both shown their readiness to fight. In June 1998, San tander introduced its Supercheque, which offered declining interest rates to heavy and recurrent users of its overdraft facility an attempt to increase customer loyalty by inducing clients to concentrate their overdraft operations at Santander. Other banks swiftly launched similar products to compete. This month, Santander followed up with its Supercartao, a fidelity credit card.

BBV has recently started to follow suit. In March, it rolled out giveaways to lure new savings account customers. And in June, BBV launched its Hyperconta, which combines the advantages of a checking account, a savings account and an overdraft service.

Santander and BBV, both traditionally strong in credit operations, have been busy implementing sophisticated credit analysis systems. But with high interest rates and deteriorating business conditions, "they don't exactly have an ideal scenario for their operations," says Tucci of Banco Fator.

Another common weakness is the lack of a broad distribution network to deliver other fast-growing financial products, such as insurance, private pension funds and asset management. Not only do Santander and BBV lack the physical branch networks of the bigger Brazilian banks, "They also lack the same level of electronic banking services as the major Brazilian banks," observes Rodrigues.

Both banks need to add a lot of muscle and reach to compete with Brazil's top-tier banks. As long as the Spaniards are willing to pour a lot more money into Brazil and to attack the market aggressively, there's a chance of cementing positions among the leading banks. But there is no guarantee of success. While Moody's Investors Service foresees foreign participation in the Brazilian banking sector increasing, it also foresees some potential casualties along the way. "In the medium term, those smaller foreign banks that lack scale could also lose out in the consolidation process."

Cutting Edge

When Banco Santander Central Hispano purchased control of Colombia's Bancoquia two years ago, the Spanish bank swiftly slashed costs and began anew. Pink slips flew from the top on down, while hefty losses hit approximately US$65 million in 1997. However, Gabriel Jaramillo, the bank's president, says the purge has paid off.

"It is clear that the decision to implement the [changes] positioned us well for the difficult environment that [the banking sector] experienced in 1998," says Jaramillo. The bank posted net profits of about $14 million last year and is now making money at a time when others are posting losses.

The Colombian banking system's past-due loans as a percentage of total loans have more than doubled to 14% over the last 18 months. Bad loans continue to pile up at a rate of $300 million a month, while the overall loan portfolio has shrunk by more than 7% in real terms during the last year.

Against that backdrop, Banco Santander Colombia looks good. During the first four months of this year, the bank posted profits of $2.2 million after adjusting for inflation. Yet the bank has not got off entirely. Deposits shrank 10% between January and the end of March, while the loan portfolio fell 8%.

Adam Thomson

Model Operation

How many banks do you know that have had a supermodel pushing its credit cards? As evidenced by it use of Claudia Schiffer as chief spokesperson, former state bank Banco Continental has been anything but staid in its efforts to build business since Banco Bilbao Vizcaya took over in May1995.

Since then Continental has surged into second place in terms of deposits--behind locally owned Bancode Credito--with a host of promotional schemes.

Outstandingly successful was Continental's Super-deposito, raffling cars, apartments and foreign holidays to encourage savers into time deposits. "Three years later, we still have 150,000 people in that scheme," says Jose Carlos Pla, general manager of Banco Continental. Prizes are daily now and cash has substituted for cars, but Pla says savers are also attracted by the bank's reputation.

In another image change from government days, Continental launched its own credit card with a glitzy campaign that plastered Schiffer all over the country.

Macro-economic conditions have changed sharply since BBV bought in. Then, Peru looked to be on target for 5%-plus sustained annual growth. Yet, El Nino and susbsequent global crises caused growth rates to slump, to 2.7% in 1997 and just 0.7% last year. The economy expanded early in 1999, but this year promises to be tough, favoring consolidation rather than expansion, says Pla.

Banking profits in Peru fell sharply in 1998, by 32.7% from the previous year, largely due to stiffer reserve levels required by banking authorities. BBV Continental's returns fell slightly less than the system average--by a quarter to about $25 million. Nonetheless, most analysts give Pla high marks for his work at Continental.

"BBV definitely turned Continental around: it was a pretty mediocre bank before," says Raquel Lizarraga, banking analyst in Lima for Fleming Latin Pacific. "Now it has one of the strongest balance sheets in the system. In asset quality and systems it has come a long way."

Sally Bowen

Branching Out

Since Vitalino Nafria Aznar, a veteran of some 20 years with Banco Bilbao Vizcaya (BBV), arrived in Mexico last year, the Spanish bank has been going gangbusters. Its share of deposits now stands at 7% of the market, profits were up by almost half to almost US$14 million in the first quarter of 1999 and the number of bank branches swelled 131 to 549 in just 15 months. LATIN TRADE correspondent John Watling spoke to the director general of BBV Mexico about his plans.


On growth prospects ...

"Mexico is under-banked and that provides us with enormous opportunities. In Spain there is a branch for approximately every 1,000 people while here in Mexico it's more like a branch for every 18,000 people. Total loans in Spain represent approximately 80% of the GDP while in Mexico the figure is just 20%; 40% if you include all the outstanding Fobaproa notes (past-due loans conditionally assumed by the government)."

On working off so-called Fobaproa notes ...

"Three years ago Fobaproa notes represented around 80% [of deposits], while at the end of the first quarter 1999 the percentage had dropped to 45%. As the number of deposits and clients continues to grow, that percentage will continue to decline. Still, we have some more work to do."

On the purchase of two small local banks, Banoriente and Banco Cremi...

"When we bought the two banks, they were effectively empty, with very few clients. All we really bought was the sign outside the branches, but the purchase nearly doubled the number of branches."

On branch profitability...

"Some 45% of the [5491 branches are less than a year old and they account for less than 10% of current business. Within 17-18 months, these branches will start to break even. We are aiming for 1,000 branches nationwide by the year 2000."

On future acquisitions...

"We have spoken with the government about possible purchases [Banca Serfin or Bancrecer]. We will be studying the alternatives, It really depends on the price/quality equation."

Depositing Confidence

Venezuelan banks have been submerged in one of the worst economic crises of its history, with gross domestic product (GDP) expected to fall up to 6% this year. Already profits at Banco Provincial-controlled by Banco Bilbao Vizcaya (BBV)-are down 20% during the first five months of 1999, compared to the same period last year. "This is a tremendously tough year," says Juan Carlos Zorrilla, chief executive of Banco Provincial. "There's no credit demand."

Nonetheless, both Banco Santander Central Hispano and Banco Bilbao Vizcaya (BBV) have overhauled the inefficient banks they bought only a few years ago. When Santander took over Banco de Venezuela, the third-largest bank, in December 1996, it had more than three times as many employees per branch than Santander's Spanish operations. BBV faced similar problems with Banco Provincial, the country's largest bank, also over-staffed and inefficient.

At BBV's Provincial, personnel training and a new computer platform have cut average customer waiting times from 45 minutes to 12 minutes. "Service is still not where we want it but it has improved considerably," says Zorrilla. Previously each transaction (check cashing, withdrawals, etc.) required a separate computer terminal, database and bank teller. Now, a single teller performs all transactions on a single system.

Santander, on the other hand, "underestimated the work required to overhaul the bank," according to Michel Goguikian, chief executive of Banco de Venezuela.

While the Iberian bankers were temporarily successful in attracting new customers through their raffles and other promotions, the long-term impact was less impressive, says Jose Grasso of Softline Consultores, a financial consultancy. "When the foreign banks arrived here in late 1996 customers had large expectations that service would improve considerably," he says. "When it didn't, they began losing customers." Small and medium-sized banks have also regained market share by offering more competitive rates than the Spaniards.

Banco Provincial's market share fell four points to 18.6% of total deposits in two years, while Banco de Venezuela managed to increase its share marginally from 9.3% to 10.7% over the same period.

Zorrilla insists that market share is not everything. "There is a tradeoff between returns and market share. There comes a point where results are more important than the market quota," he says.

Raymond Colitt
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Title Annotation:Spanish banks in Brazil
Publication:Latin Trade
Geographic Code:3BRAZ
Date:Sep 1, 1999
Next Article:WINNERS & LOSERS.

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