Summary
Santander Brazil has succeeded in executing the largest IPO year to date. How soon will that translate into strong profits?
Analysis
Banco Santander Brasil (SANB11) raised BRL 14.1 billion to add to its existing equity of BRL 51 billion against assets of BRL 288 billion. Now what.
The bank grew in Brazil through the acquisitions of Banco Geral, Banco Noroeste, Meridional, Banespa in 2000 and Banco Real in 2008. Now they have ammunition to grow organically. The once criticized buy of Banespa at 4 times book gave them a solid retail base and a large number of branches. As of the IPO the bank had 2,091 branches, but still lags the larger banks; Bradesco (3,046), Banco do Brasil (3,155 plus 9,227 points), and Itau (3,708). According to the magazine Exame, Santander intends to use a good part of the proceeds to open 600 new branches by 2013. The bank currently has 15.9% of the branches in the more prosperous southeast region. In the country as a whole it has 10.2% of assets and 10.7% of deposits. The top ten banks control 94% of bank branches. Funding is the name of the game in Brazil with the medium and smaller banks lacking retail deposits.
Santander's stated focus is on the upper and middle class segments (the latter earning BRL 1,200 to BRL 4,000 a month). This should translate into higher margins.
Note that though its first half ROA of 1.7% was in line with Bradesco, its ROE was 9.9%.
Santander's sectors are commercial and wholesale banking, asset management, and insurance.
Its stated strengths are its relationship with Grupo Santander (the multinational client base for one), its good demographics, a successful history of mergers (Abbey National), and its market position.
Conceptually the bank should do well organically in a fast growing and under banked economy. Bank spreads in personal credit and middle market lending are obscene, with Santander rates for the former at 3.38% a month and 1.95% a month for working capital for the latter (source Banco Central do Brasil). Citing mortgage lending given Santander Spain and Abbey National is not where the bacon is given measly spreads of just above 1% a year. However ancillary business such as construction financing and future capital markets activity will feed to the group's strengths.
In Brazil bank consolidation has played out with Real, Unibanco, BBA, Nossa Caixa, and half of Votorantim swallowed up. Growth for the top banks will now be organic.
Let's see how well Santander executes into what is an extremely favorable market. It intends to roll out a lot of new products. Let's see how quickly that translates into profits.
(Just to note their free float is 17.3%, and they have promised to meet the market requirement of 25%. Also the share is trading at 22.94 below the offer of 23.50)
