Nov. 4 (Bloomberg) -- Brazilian bank shares rallied for a second day after Banco Itau Holding Financeira SA's takeover of Uniao de Bancos Brasileiros SA spurred speculation that consolidation in the industry will accelerate.

Banks were among the biggest gainers in the benchmark Bovespa index with Itau surging as much as 10 percent -- the largest rise among the eight companies in the MSCI Brazil Financials Index -- and Unibanco jumping 8 percent. Banco Nossa Caixa SA rose to the highest in a month on anticipation that competition to buy the Sao Paulo state-controlled lender will intensify.

With the acquisition, Itau will bump federally-owned Banco do Brasil SA from its top ranking among Latin American banks by assets. Investors expect further combinations after local credit markets dried up and Brazil's central bank injected more than 100 billion reais in the banking system since Sept. 24 to spur lending and prevent smaller institutions from failing.

``The merger between Itau and Unibanco will increase the level of competition and accelerate the consolidation process in the Brazilian banking sector,'' Raymond James & Associates analysts, including Frederico Ray Marino, wrote in a note to clients today. ``In the mid term, we see lower interest spreads resulting from fiercer competition.''

Overreaction

Banco do Brasil, based in Brasilia, was excluded from yesterday's rally in Brazilian banks on concern the merger of the country' second- and third-largest lenders would force it to pay more for its acquisitions. The combination of Itau and Unibanco creates a lender with 575 billion reais ($261.4 billion) in assets, compared with 358 billion reais for Banco do Brasil, according to Bloomberg data.

Itau gained 7 percent to 28.99 reais at 4 p.m. local time in Sao Paulo trading, while Unibanco rose 7.6 percent to 16.10 reais. Banco Bradesco SA, which will lose its rank as the biggest non-state Brazilian bank once Itau buys Unibanco, rose 6.9 percent to 27.99 reais.

Nossa Caixa Climbed 8.7 percent to 38.17 reais and Banco do Brasil climbed 9.6 percent at 15.70 reais. Banco do Brasil said in an e-mailed statement to Bloomberg News it won't comment on acquisitions.

``Investors overreacted yesterday selling off Banco do Brasil,'' said Pedro Fonseca, an analyst at Keefe, Bruyette & Woods Ltd. in London. ``Their prospects are not much worse after this merger and don't change the business model of Banco do Brasil. At the end of the day, Banco do Brasil is a very big bank with an incredible customer reach.''

Prized Catch

Itau's acquisition of Unibanco will prompt Banco Bradesco SA to vie with Banco do Brasil for Nossa Caixa, Fonseca said.

``Bradesco must be putting a lot of political pressure to have a crack at Nossa Caixa,'' he said. ``There's not a lot more to buy as the Brazilian banking system has gone through an amazing amount of consolidation, so Nossa Caixa has relative value.''

A competitive bidding process for Nossa Caixa is being discussed in Congress as part of negotiations to pass a measure for Banco do Brasil and Caixa Economica Federal to buy stakes in financial firms that need cash amid a credit squeeze, O Estado de S. Paulo reported on Oct. 31, citing Finance Minister Guido Mantega.

Itau Unibanco Holding SA, the bank created by the acquisition, will have an accounting benefit of 7.9 billion reais, including goodwill amortization, while Itau's parent company, Itausa Investimentos SA - known as Itausa, will benefit by 2.5 billion reais, Itau's Senior Executive Vice President Alfredo Setubal told analysts in a conference call today.

Cross-Selling

Itau and Unibanco will be able to increase revenue by selling each other's products to their clients and will also cut costs such as those related to technology, Itau's Chief Executive Officer Roberto Egydio Setubal said in the conference call. The banks don't have a forecast for cost-savings resulting from integration.

Analysts at Morgan Stanley estimated in a note today that Itau's acquisition will add about 15.5 billion reais ($7.9 billion) in value to the combined company. The deal also puts the combined bank in a better position to compete after the purchase of ABN Amro Holding NV's Banco Real Brazilian unit by Banco Santander SA of Spain.

``At least 15 percent of the combined cost base can be eliminated,'' they wrote. ``The merger of Itau and Unibanco is a preemptive move in the face of increased competition likely coming from the Santander/ABN Amro combination in Brazil.''

Expansion Abroad

Once the integration is complete the combined bank ``will be more comfortable to look abroad,'' Unibanco Chief Executive Pedro Moreira Salles said in the call. Latin America is the ``natural'' course for expansion, Setubal said. The bank plans to expand in Chile, Colombia, Peru and Mexico and doesn't rule out expansion outside Latin America, Setubal said.

The talks between Itau and Unibanco started in August 2007, Itau CEO Setubal said yesterday. The outlook of slower earnings growth at both banks probably accelerated the transaction, Deutsche Bank AG analyst Mario Pierry wrote in a report. Potential savings from the deal could reach 1.7 billion reais before tax, Pierry said.

``We view this merger positively for Itau given significant synergies and for the system due to increased consolidation,'' Pierry wrote.

After Unibanco's acquisition and the Santander's ABN Amro deal, the five largest companies will control 72 percent of Brazil's financial assets, up from 61 percent at the end of June, Pierry estimates.

To contact the reporters on this story: Fabio Alves in New York at falves3@bloomberg.net; Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net

Last Updated: November 4, 2008 13:36 EST