The Brazilian banking bet

October 7, 2009

Santander Brasil’s $8 billion de facto IPO may have disappointed investors looking for a quick gain, but it’s still a compelling bet on Brazil.

The shares fell slightly today when they began trading in New York, but that’s hardly surprising given the sheer size of the deal — a record for Brazil and the largest globally since March 2008.

With its investment-grade ratings, its economic rebound and its potential to be a major oil producer, Brazil has become one of the preferred destinations for international funds that have been plowing back into emerging markets. The strength of the Brazilian currency, in contrast to the beating of the dollar, certainly doesn’t hurt.

And the banking sector in Brazil, unlike most developed markets, offers great potential for growth as the nation transforms itself from emerging market to one that has emerged. Brazil is still grossly underbanked: Its ratio of credit to gross domestic product is 50 percent, compared with 169 percent for the United States.

There are, of course, two other publicly-traded local banks, Banco Bradesco and Itau Unibanco, that can also compete for investor dollars, but Santander’s international reach is a better fit for businesses that share the nation’s own global aspirations.Valuation may have been a factor in today’s trading debut. The shares priced the previous day at 23.5 reais and $13.5 for those trading in the United States. Morningstar bank analyst Maclovio Pina, for one, reckons fair value is slightly lower at $13.

Still, some investors were sure to be lured by Santander’s price to book value, which stood around 2.7 based on the $13.5 share price, well below that of Bradesco and Itau.

More important, the share offering gives Santander Brasil the luxury of having enough capital to fight aggressively for market share without having to return to capital markets (or its parent) for a helping hand.

That should comfort anyone discouraged by the shares’ first-day slump.

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‘Its ratio of credit to gross domestic product is 50 percent, compared with 169 percent for the United States.’ See graphic: iles/2009/09/public-and-private-debt-bur den.jpg

Are your numbers for US correct ?

I just had a thought – are we comparing apples with apples ? Credit/GDP, we are dividing a ‘cumulative position’ by a ‘period result’, i.e. balance sheet/ income statement, should it not be Credit turnover for the year/GDP for the year ?


What would the ideal ratio be then ? 50% credit and 50% cash ? 169% doesn’t sound right, hence the credit crisis.

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