A Latin Union

Less than two years ago, Spain’s Banco Bilbao Vizcaya Argentaria bought Brazil’s Banco Excel Econômico for less than a dollar. It has already spent nearly $500 million turning the distressed bank into a profitable operation.

And BBVA plans to lay down another $800 million to make it into one of Brazil’s largest banks, one that would serve as the cornerstone of an empire spanning Europe and the Americas.

BBVA already controls local banks in all of Latin America’s main markets -Argentina, Chile, Colombia, Mexico and Venezuela. Vicente Benedito Francés, the Spanish president of Banco Bilbao Vizcaya Brasil – as Banco Excel Econômico is now known – says BBVA is determined to meld these local banks into a single Latin American franchise that would complement the bank’s expansion in Europe.

Ultimately BBVA’s European and Latin banks would form a single franchise stretching from Greece to Chile. “These markets have 500 million consumers,” says Benedito. A new Internet banking business that BBVA is rolling out in Spain this year would underpin this vast empire.

However, BBVA faces a considerable challenge in turning its tiny toehold in Brazil into a sizeable business. BBVB, ranked as Brazil’s 18th bank-largest by assets, had a balance sheet of just $4.57 billion last June.

Brazil has the region’s largest and most competitive banking industry, but Benedito, who arrived in Brazil to take command of BBVB in 1998 shortly after the symbolic dollar purchase, says there are still plenty of opportunities for expansion. “Bank assets divided by GDP are only 27% in Brazil,” compared to 100% or more for European countries or the United States, he says. “The potential for growth is huge in Brazil.”

Benedito says BBVB plans to spend $800 million to rank among the four or five largest banks in Brazil within four years. One quarter of this would be spent on extending the branch network and the rest would be set aside for other uses – including acquisitions. The new spending is in addition to the $463.4 million BBVB has already spent capitalizing the bank.

Previous and planned investments in Brazil will reach at least $1.26 billion over five years.

Globals Wasting No Time
Like other Spanish banks and companies, BBVA is expanding into Latin America in response to competitive pressures in Europe. BBVA is Spain’s largest financial institution, but with equity equivalent to $9.15 billion.

However, some of the world’s biggest and most aggressive banks are also expanding in Brazil.

The UK’s HSBC Holdings PLC bought a distressed Brazilian bank in 1997 for $940 million, followed by Spain’s Banco Santander, which spent $703 million on two troubled banks.

Only the Netherland’s ABN AMRO, which paid $2.1 billion for fourth-ranked Banco Real in November 1998, acquired a healthy bank.

Meanwhile, Citibank looms high above local and international banks in the region with its well-established network of branches in Latin America and $50 billion in assets in the region. Citibankers say they intend to ramp up operations in Latin America this year, particularly in Brazil’s retail banking market.

Benedito lost valuable time last year dealing with the mess he inherited from Excel Econômico. Commentators say the Spaniards have taken longer and spent more than they expected to overhaul the bank and tighten controls. The expansive Benedito becomes irritated when asked about the condition he found the bank in. “This is in the past,” he snaps. “We had to be in Brazil. We bought a bank. We cleaned up the bank. We have a new bank. It’s history. Past. We look to the future.”

Since BBVB lacks the scale to compete in a market that has consolidated rapidly in recent years, it may decide to make a big acquisition. Benedito says he may decide to bid for Banespa, the Sao Paulo state bank scheduled to be privatized on May 16, a transaction that is likely to reshape the Brazilian banking industry. Banespa is the country’s fifth-largest bank and is heavily concentrated in Sãßo Paulo, the most populous and wealthiest state in Brazil. However, BBVB would have to outbid the big Brazilian banks and possibly Citibank or HSBC too. Banespa is expected to cost at least $500 million.

However, Benedito says he would prefer to grow through expansion rather than through acquisition. “Our preference is to open our own branches,” he says. “You open where you want to and you have the people you want.”

BBVB now has 263 branches but plans to open 200 more this year, mostly in São Paulo and Rio de Janeiro, Brazil’s two biggest cities.

And it plans to operate a total of 975 branches by mid-2002.

But HSBC’s Brazilian bank already has 1,000 branches and Banco Bradesco, Brazil’s financial juggernaut, has 2,200 branches.

Floris Deckers, ABN AMRO’s chief executive officer for Latin America and the Caribbean, describes BBVB, Santander and HSBC as Brazil’s “pigs in the middle” – too small to compete nationally but too large to be niche banks. They need to either spend heavily to expand or downsize, he says.

But Benedito is undaunted. “We are a multiple bank. The markets we intend to serve are retail, wholesale, capital markets, also insurance, treasury, private banking, corporate banking, everything that is done by BBVA worldwide,” he says. However, he plans to focus heavily on export-oriented small and medium enterprises.

Although restructuring the bank may have been frustrating, there are plenty of efficiency gains to be wrung out of BBVB. Benedito says when he arrived on the scene, about 60% of the employees were doing administrative work and 40% were in the front office dealing with customers. This year he wants no more than 10% of personnel to be in the back office and 90% be dealing with customers. “Everyone has to be selling. The teller, the manager, everyone,” he says.

Benedito refuses to specify BBVB’s goals for common bank measures such as return on average assets or return on equity. Although the bank reported a meager net profit of $87 million for the nine months ended last Sept. 30, it was a great improvement on the previous year’s huge losses.

However, Benedito says BBVA can achieve its growth plans by moving heavily into Internet banking. It has set up an Internet bank called Uno-e, which it wants to be the market leader in Latin America, southern Europe and in Spanish-speaking regions of the US. Uno-e is to begin in Spain this year and subsequently expand into Argentina, Brazil and Mexico with the goal of attracting one million clients by 2003.

BBVA is launching Uno-e in association with Terra Networks, the Internet company controlled by Telefonica de Espana. BBVA is selling Terra a 20% stake in Uno-e, which could be increased to 35% if regulators approve. BBVA has also bought 3% of Terra Networks.

Internet banking would allow BBVA to win over new younger and wealthier clients, distribute products more cheaply and cut the cost of providing banking services. If successful, Uno-e would diminish BBVA’s handicap of inadequate branch networks and narrow asset base in Latin America.

But Benedito does not sound entirely convinced that the Internet can substitute old-fashioned banking.

“If you want to buy a car, if you want to buy a house, if you want to make a sizeable investment, you don’t want to use the Internet,” he says. “Many clients want to see the face of the manager.” He says leading US online broker Charles Schwab&Co. still needs – and is opening – traditional branches.

However, Latin America’s high levels of wealth concentration may yet make the Internet a more effective financial tool than it is in the US.