HSBC joins Citigroup, SocGen in Brazil foreign-bank graveyard

[SAO PAULO] HSBC Holdings Plc this week became the third foreign retail bank to abandon or scale back in Brazil in the past two years, leaving the South American nation with just two still doing business there.

Citigroup Inc agreed to sell its credit-card and consumer- finance unit two years ago and Societe General SA decided to close its consumer-finance operation in February. Also giving up on the South American nation: Bank of America Corp, Spain's Banco Bilbao Vizcaya Argentaria SA, Italy's Intesa Sanpaolo SA and France's Credit Lyonnais SA, which shuttered their Brazil retail banks in the past two decades.

Brazil, geographically the world's fifth-biggest country, is a punishing place for retail banks trying to break in or expand, and is already home to Latin America's biggest lender by market value, Itau Unibanco Holding SA, and its largest by assets, Banco do Brasil SA. As opportunities to purchase smaller rivals passed it by in recent years, London-based HSBC also fell victim to new regulatory capital requirements after the 2008 global financial crisis.

"To grow in an economy like Brazil, given the size of its territory, banks need to expand geographically," Henrique Kleine, head equity analyst at brokerage Magliano SA in Sao Paulo, said in a telephone interview Tuesday. "HSBC lost the opportunity to gain scale. The conditions don't exist to grow in Brazil anymore." An official at HSBC declined to comment on the Brazil decision.

Brazil was home to at least eight foreign lenders offering retail banking in 2002. After HSBC's departure, there will be two: Banco Santander Brasil SA, a unit of Spain's biggest bank, and New York-based Citigroup, which maintained its Citibank unit in the country after selling the Credicard business.

Most of the companies left after a US$91.3 billion wave of acquisitions since December 2002, according to data compiled by Bloomberg. Domestic lenders Itau, Banco Bradesco SA and Banco do Brasil were the most active buyers in the period, accounting for about half of the transactions.

HSBC spent US$951 million in the period, including the US$815 million acquisition of Lloyds TSB Group Plc's consumer-finance unit, Losango, in 2003. The bank hired JPMorgan Chase & Co to sell the business in 2011, and never found a buyer.

That compares with Itau's US$27.9 billion in acquisitions, led by the US$12.5 billion purchase of Uniao de Bancos Brasileiros SA, or Unibanco, in 2008.

While Brazilian banks strengthened their positions, foreign-owned banks were hit by the global financial crisis and tougher regulatory and capital requirements, said Alexandre Nobre, founder of RCB Investimentos, a Sao Paulo-based firm that specialises in buying loan portfolios.

Foreign lenders' share of Brazil's 3.1 trillion-real (US$1 trillion) credit market fell to 14.5 per cent in April from a 22 per cent stake in March 2007, according to central bank data.

"You need to have scale to compete in Brazil, gaining efficiency with acquisitions," Mr Nobre said in a telephone interview from Sao Paulo Tuesday. "The regulatory requirements make it almost impossible for banks to operate globally."

HSBC said this week it aims to sell its retail business in Brazil after being fined for currency manipulation and getting entangled in a money-laundering scandal linked to Swiss accounts. The bank also plans to sell its operation in Turkey and eliminate as many as 25,000 jobs.

Though it's selling the Brazilian unit, which had a net loss of 549.1 million reais last year, the bank said it will "maintain a presence" there to serve large corporate clients. Bradesco will probably buy HSBC's unit for about US$3.2 billion to US$4 billion, people with direct knowledge of the matter said this week. Officials at Bradesco and HSBC declined to comment on sale talks.

Banco Bilbao Vizcaya Argentaria is also interested in buying HSBC's units in Brazil and Turkey, Mexico City daily El Financiero reported Wednesday.

The bank started its retail operation in Brazil in 1997, when it acquired Banco Bamerindus do Brasil SA for US$940 million. Michael Geoghegan, Bamerindus's chief executive officer at the time, said the business was "a unique opportunity for HSBC Group to establish a major retail banking franchise."

Foreign-owned banks in Brazil have struggled to balance the local culture with their headquarters' standards, said Claudio Mauch, a former central bank director of banking supervision who helped oversee the sale of cash-strapped Bamerindus to HSBC in 1997.

"Banks can't just come in and bring their culture over here," Mr Mauch said in a telephone interview Tuesday from Porto Alegre, Brazil. "They need to understand what a British costumer wants from its bank and what a Brazilian wants."

BLOOMBERG