Slow Convergence for Santander Brazil, Says CFO

Santander’s Brazil unit, which went public via a BRL14bn IPO in October 2009, will likely take up to 2 years or more to see its valuations converge with its larger peers Bradesco and Itau Unibanco, says CFO Carlos Galan. “To expect to converge [with other banks’ valuations] this year would be unrealistic,” he tells LatinFinance. “As we gradually fulfill our objectives, I expect we will converge and capture the differential we have with [Bradesco and Itaú],” says Galán. The statement is a departure from what at least some bankers and Santander executives sought going into the IPO process last year. At the time, some of the more bullish expectations included a valuation on par with or above Bradesco’s, though investors were unanimous in demanding a discount to compensate for the lack of a track record. The touted IPO was priced at the BRL23.50 midpoint of the stated range, but quickly traded down. As of yesterday it was 5.6% below its issue price. The deal came at 2.7x price to tangible book and a P/E of 10.7x, substantially below Bradesco. Earlier this week, Santander units were trading at a discount to Bradesco’s preferred shares of over 20% on a P/E and 20% on a P/BV basis, according to Economatica. Discounts to Itaú Unibanco PNs were approximately 35% and 40% for P/E and P/BV, respectively. While the bank expects strong growth in a number of products, integration remains the chief concern and Galan expects that to be wrapped up by Q3. The unti’s first 2 quarters have failed to impress some analysts. “We found weaker margins and the stagnant asset quality disappointing,” says Goldman Sachs in a report following Santander’s Q4 earnings announcement earlier this month. The shop, which was the first to initiate coverage of Santander’s Brazil-listing, has a neutral recommendation on the stock. “They promised a lot of things during the IPO and are having trouble delivering them,” says a São Paulo-based banks analyst at a European shop, referring to overall performance o