When Renato Cuoco started working in the 1950s at the bank that was to become Itau, he was an archivist in the company’s paper-based filing system. Now, as head of information technology, Cuoco has overseen Itau’s transformation into the most state-of-the-art bank in the region. With a budget this year of about $170 million, Cuoco continues to push the limits of the company’s architecture, demanding constant improvement in the back office, and, where it counts the most, in dealings with Itau’s clients.

After more than 40 years with Itau, Cuoco is among the bank’s top managers who have devoted their careers to the company. Itau’s management team, starting with President and CEO Roberto Setubal, is replete with veteran employees who have painstakingly turned the bank into a dominant force in Brazilian banking.

Analysts and industry insiders throughout the region recognize Itau’s efforts and extol the virtues of the bank’s management, its transparency, and its commitment to technological excellence. And its easy to see why. In the second quarter of this year, the bank provided investors a return on equity of 24.9%, higher than any major bank in Latin America and a full 10 points above local rivals Bradesco and Unibanco. High profits, and the bank’s stability during years of economic turmoil, have made Itau’s shares a staple for many foreign investment funds.

“The market pays 1.9 times book value for Banco Itau for a reason,” said Joao Paulo Tucci, bank analyst at São Paulo’s Banco Fator. “It is the most focused, the best-managed. Today, Banco Itau is the benchmark for Brazilian banks.”

Anchor Operations
Banco Itau is part of an integrated financial institution controlled by Investimentos Itau SA, the second largest private company in Brazil and Fortune magazine’s 372nd largest conglomerate in the world. The group’s financial wing alone includes 17 companies in the areas of commercial banking, leasing, insurance, credit cards, brokerage and private pension management. Abroad, the group controls Banco Itau Argentina, Luxembourg-based Banco Itau Europa, and a 10% participation in Portuguese investment bank BPI.

Banco Itau itself has been expanding aggressively over the past five years. In 1995, the bank acquired Banco Frances e Brasileiro, incorporating its 33 branches and 40,000 largely upscale clients. Two years later, Itau won the privatization auction for Rio de Janeiro state bank Banerj, which brought an additional 1.1 million clients into the bank’s fold. Then in 1998, Itau bought Banco del Buen Ayre in Argentina to boost its greenfield investment, Banco Itau Argentina.

Later in the year, Itau won the auction for Minas Gerais state bank, Bemge, and a million more customers that came with it.

In order to take advantage of buying opportunities, the bank has opted over the past several years to keep its balance sheet highly liquid. In the first half of this year, for example, investment securities made up 34% of the bank’s earning assets. The bank held 21% in cash and 14% in interbank deposits.

That position paid off in January, when the bank was primed to take advantage of foreign exchange gains and the subsequent high interest rates after the devaluation of the real. In the first half of 1999, Itau made R$535 million in non-recurring profits from its treasury operations. Since then, the bank has shifted the composition of its securities portfolio, moving away from variable and exchange pegged public securities into fixed-rate bonds as Brazil’s interest rates fall.

Itau continues to build its liquid war chest by keeping its investments in short-terms securities and cash to bid for the highly coveted Brazilian state bank, Banespa, which is expected to be privatized early next year.

Analysts say chances are good that Itau will win the auction of the prized bank, which would add another 3 million clients and $13 billion in assets to the group, practically doubling its size. If Itau buys Banespa, the consolidated bank would become the second largest financial institution in the country in terms of assets, pulling slightly ahead of local monolith Banco Bradesco.

Seamless Transitions
One of Itau’s greatest successes has been its ability to integrate its purchases quickly and smoothly, while still improving the overall quality of the bank. The challenges have been greatest in terms of information technology, where Cuoco and his staff of about 2,000 have had their work cut out for them. Not only have the techies had to wire up four new banks in four years, but they’ve also had to continue to develop cutting-edge technology and upgrade Itau’s basic transactions and accounting systems.

In the back office, Itau is developing its data warehousing and data mining capabilities in order to compile thorough profiles on its almost seven million clients. On average, Itau’s customer base-which is largely middle class or wealthier-uses 3.8 of the bank’s products. Management hopes to increase that number even more by targeted cross-selling.

On the credit front, Itau is working to modernize its risk-analysis software. “Itau wants credit to be more and more controlled-more directed-to know which clients qualify for a certain level of risk,” said Cuoco.”Once we can verify that clients meet risk standards, we will be able to serve a larger number of clients in a larger share of the market.”

Scrupulous Lending
Itau is notorious for its tight credit policy. Over the past two years, the bank has slowed loan growth to a trickle in order to head off an increase in nonperformance. Loans amounted to only 24.9% of the bank’s assets in the second quarter of 1999, compared to 33.3% for Bradesco and 41.3% for Unibanco. The strategy has worked, since past due loans have held steady at 2% of total loans since the beginning of the year. But the bank hopes to return to the credit market soon. It already has begun to offer limited amounts of pre-approved consumer credit, in an effort to make the credit approval process more accessible-and less daunting-to clients.

“We are going to slowly grow our portfolio as the Brazilian economy stabilizes and the interest rates fall,” said investor relations director Alfredo Setubal. “We have started that process a little bit since the devaluation of the real.” Loan operations grew from about $14 billion to $15 billion over the year ending in June 1999, an 8%increase.

Itau is also trying to provide its customers with the most modern and sophisticated means of conducting business. The company’s Internet and call-based Bankline system processed 48.3 million transactions during the first half of this year, compared to the 34.7 million during the same period in 1998. During that time, the percentage of Internet traffic through the system grew to 18% from 9% of total transactions processed. The company also has a network of more than 10,000 ATM machines throughout Brazil and Argentina and is continuously expanding its network of debit card participants.

“It is a constant process of revising the client services to make them more efficient and cheaper,” said Cuoco.

Employee Emphasis
In order to keep up with the company’s technological improvements, Itau Human Resources Director Luiz Cristiano de Lima Alves says that the bank spends “dozens of millions” of dollars each year in training programs for its almost 40,000 employees.

Every year, Itau also sends around 10 qualified employees to MBA programs in the United States and Europe.

As the Brazilian financial sector demands better educated personnel, Itau has shifted its hiring practices. More than 50% of the bank’s employees have a college degree or higher. English language skills are becoming a standard requirement. To get top quality employees, the bank aggressively recruits recent graduates of Brazil’s top business and economics programs. Cristiano says that the bank is also considering recruitment programs at business schools abroad.

Itau’s commitment to results comes partially in response to the bank’s profit-sharing program. Under a 1995 change to Brazilian law, banks were required to distribute a portion of profits to employees. Itau has expanded on the system, and plans to do even more in the future.

“This is becoming a larger and larger part of the bank’s remuneration policy,” said Cristiano. “It is much more logical to pay employees based on the results of the bank because they are getting paid for the effort that they make.”

Perhaps the most innovative of Itau’s human resources strategies is a program that the bank recently launched to settle employee disputes internally. Brazil is a country with rigid labor laws, and companies can spend millions of dollars a year in litigation with former workers. Itau reached an agreement with its workers’ union two years ago that allows complaints to be resolved by a committee of two bank employees, two union representatives and the contesting employee. For Itau, which has folded three local banks into its operation in the past three years, the cost savings have been enormous.

“We are investing a lot in this process of resolving our problems directly,” said Cristiano. “We have had a significant number of ex-employees go through this process with great success.”

Along with the bank’s outstanding management and top-notch technology, bank analysts the world around praise the high level of disclosure that Itau provides to the market. “They again have provided extreme disclosure and transparency to the system, far beyond any other bank in the country,” said Paul Bydalek, president of local bank watchdog Atlantic Rating. “They are the leaders in terms of providing information about what they are doing.”

Since non-Brazilian investors hold almost 25% of the bank’s shares, Itau makes a conscientious effort to meet international standards for disclosure. The bank’s website (www.bancoitau.com.br) is crammed with information about the company in English, Spanish and Portuguese. This year, the company complied (with a suggestion from analysts) and published its first semester report with an expansive explanatory letter from its Executive Board.

Directors, as a matter of company policy, carry out all of the bank’s investor relations. Alfredo Setubal, the company’s investor relations director, and the two other board members assigned to the task, field phone calls from investors daily. The bank usually hosts two or three groups of analysts weekly, and board members travel to six of Brazil’s state capitals once a year to make presentations to local brokers. Setubal and his colleagues also travel to the United States three or four times a year for conferences and individual meetings with investors.

“Over the past six or seven years, we have significantly bettered the relationship that we have with analysts and companies,” said Setubal. “We believe that it is important, given the consolidation of the financial sector, to have a high market value, and for the market to perceive the difference between Itau and its competitors.”

Offshoots Expand
While the bank continues to fine-tune its commercial operations, analysts say Itau’s subsidiary operations will drive its growth.

Itau’s insurance venture, Itau Seguros, is expected to be a principal part of that success. Insurance is still a nascent phenomenon in Brazil, but industry experts expect that premiums will skyrocket in the coming years as the country’s disposable income grows. Itau Seguros is already well-positioned, with 8% of the general insurance market share and a 10% market share if health is excluded. In the meantime, though, this year’s slowdown in auto sales cut deeply into the company’s first semester profits, which were down 20.8%. The company relies heavily on auto premiums, which make up about 53% of all policies.

While the company waits for the economy to recover, management is working to streamline underwriting techniques and the liquidation of automobile claims.

“We are going back to basics and doing a better job in what is the essence of insurance,” said Luiz de Campos Salles, president of Itau Seguros, and 30-year employee of Itau. “We are using scoring systems now to do our automobile underwriting.

We are concentrating a tremendous effort in improving our command over expenses in claims handling.” The company is also in the final stages of implementation of a call center that would improve both the quality and the quantity of customer service.

The majority of insurance sales-about 80%-are still made through brokers, who charge commissions of up to 30%, compared to competitive international rates of less than 5%. In order to reduce the costs of such sales, the company is beginning to develop other points of sale, including cross-selling inside Itau branches. This month, the bank is launching a concentrated campaign to market auto insurance in an effort to increase insurance sales to bank clients.

“For the future, we want to become more and more flexible in terms of distribution channels,” said Campos Salles. “Like most of the major insurance companies in the world, we have to have other alternatives-direct selling, affinity, worksite marketing.”

Campos Salles says that Itau Seguros has been talking with potential foreign partners for the last two years, but that no deals are in the works. Rather than mining for capital, Itau is looking for a partner that can bring technological know-how to the company.

However, it hasn’t found a candidate able to make the technological transfer.

“The technology issue is basic for us,” said Campos Salles. “If we don’t get it, we will continue to buy from abroad instead of going into a joint venture.”

Itau’s credit card operations are also expected to be a growth area for the bank, as Brazil’s interest rates continue to come down.

The bank has about 1.8 million of its own cards in circulation, as well as 5 million accounts through Credicard, a joint venture with Citibank and Unibanco. Itau’s own cards have captured about 10% of the credit card market.

Itau is also trying to expand its corporate business. The bank is a leader in Brazil in trade financing, with a market share of about 10% in both import and export financing. The bank also has a significant presence in the structured finance market, which was virtually unaffected during Brazil’s recent economic troubles.

“From the structure of the bank and from our relationship with the market, we didn’t have any problem with lack of short-term lines of funding,” said Alberto Barretto, senior vice president in charge of international corporate operations. “We have a wide network of correspondent banks, and Grupo Itau has a base of $1.3 billion of its own resources.”

As the markets recover both in Brazil and in Asia, Itau expects corporate business to pick up. Toward that end, the bank opened a representative office in Frankfurt last month to be close to the European market. Itau also conducts Mercosur-based investment banking out of Banco Itau Argentina and US operations through New York. The bank has also applied for US approval to open a representative office in Miami.

With all of the good news coming out of Itau these days, analysts worry that the bank’s performance is too high to be sustainable and that stock holders have pushed up valuations in a general flight to quality in a time of economic distress. As the bank continues to grow, though, management sees very few obstacles ahead that can’t be overcome.