No bank in Brazil can rival Banco Itaú’s focus on earnings, the transparency of its financial statements or the professionalism of its management team. Itaú’s President Roberto Setúbal, a member of one of the two families that control the bank, has earned a reputation as one of Brazil’s shrewdest bankers, willing to take calculated risks.

The bank has built up one of the most solid balance sheets in the business, with conservative capitalization and liquidity ratios that exceed minimum regulatory requirements. This approach ensured the bank’s strong performance during the turbulent 1990s. As Setúbal says: “If we had stuck to central bank rules, we would not be here today.”

Itaú is the most profitable of Latin America’s large listed banks, with a 24% return on equity in the first half of the year. Yolanda Courtines, a bank analyst at JP Morgan, comments that “Itaú’s earnings are not only the highest, but should also be the most sustainable and the lowest-risk” among Brazil’s big banks. It has the highest capitalization ratio, with a Bank for International Settlement (BIS) ratio of 19.6%, all of it in Tier I capital. Although problem loans are growing, Itaú’s loan book is cleaner than any of its immediate competitors.

Time for a Change
Itaú earned a record $1.07 billion profit last year by going long on dollars prior to the real’s devaluation in January 1999. Setúbal prepared the bank for the subsequent collapse in domestic interest rates by buying government paper aggressively while yields were high. The central bank’s benchmark interest rate has declined to 16% from 45% in the last 18 months.

Setúbal believes that banks need to lend more to individuals and companies and less to the government. “Banks are underleveraged, so we can grow assets,” he says. “I see it as very natural that banks reduce spreads, which are still high.”

Setúbal is confident that Itaú has the systems and highly trained staff it needs to increase lending without a rerun of the excess of the mid-1990s, when a slide in inflation sparked a boom in consumer demand. Many banks were unable to manage the surge in loans and went out of business when the market turned down. Setúbal says that since Brazilian banks have long operated as financial supermarkets, this diversity should help them lend more and strongly increase fee-based services.

“Brazilian banks are unusual because they offer insurance, retirement, credit cards, investment funds, and loans,” he explains. “We have a strong brand with a very wide range of income, not just from loans.”

In spite of Setúbal’s optimism, some bank analysts say that Itaú’s profitability is showing signs of fatigue. Pedro Guimarães of Santander Central Hispano Investment in São Paulo notes that although Itaú racked up a second quarter net profit of $230 million, a 23% increase over the same period a year earlier, it had to use part of the $1 billion in excess provisions it had salted away over the years to maintain its profitability ratios.

Itaú also faces growing competition as the Brazilian banking system consolidates, foreign groups build up their presence and old rivals start catching up. With the privatization of Banespa, the São Paulo state bank, on track again, Itaú and half a dozen Brazilian and foreign competitors will probably bid for the bank. Whoever wins Banespa, the country’s fifth-biggest bank, is likely to become a real power.

Although Brazil is the only Latin American market to escape domination by foreign-owned banks, pressure from their big balance sheets and economies of scale is bound to grow. Citibank, for example, is preparing a big push into Brazil.

Banco Bradesco, the biggest private bank by assets and Itaú’s main competitor, is also making a remarkable comeback. Although its performance still lags behind Itaú, Bradesco’s new management has streamlined operations and launched a successful Internet banking business, which Itaú has so far failed to do.

The stock market has taken note of the new, reinvigorated Bradesco by bidding its share price up by 66% this year. Itaú’s premium over Bradesco is still large, but is declining.

Web Strategy Questioned
Setúbal’s decision not to develop an independent Internet strategy and instead hook up with America Online Latin America is controversial. Itaú took a 12% stake in AOL Latin America in exchange for using the portal as its Internet banking platform. However, AOL entered the region’s Internet market late and its August IPO in New York was a disappointment.

Setúbal disagrees that his Internet strategy is in trouble: “We are only at the beginning of a marathon. It is too early to predict the result. The Internet will have a gigantic impact on banks, but there will be no impact on the banks’ results in the next two or three years.” LF