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Banco do Brasil Failed Deals Reward Investors: Corporate Brazil

Banco do Brasil SA Building
The Banco do Brasil SA building stands in the skyline of Rio de Janeiro. Photographer: Dado Galdieri/Bloomberg

Banco do Brasil SA’s failed attempts to expand through acquisitions are making the government-run lender the best-performing stock in the nation’s financial industry.

The bank has gained 14 percent including dividends in Sao Paulo trading since Aug. 20, the day before it postponed talks to increase its 50 percent stake in auto lender Banco Votorantim SA. Banco Daycoval SA, based in Sao Paulo, has the second-best return during that period, advancing 12 percent.

The Votorantim deal as well as proposed acquisitions in the U.S. would have consumed cash Brasilia-based Banco do Brasil needs to fund loan growth while reducing chances that the lender would increase its dividend, said analysts including Rodolfo Amstalden of Empiricus Research in Sao Paulo. Banco do Brasil would have funded the purchases with part of the 11.5 billion reais ($5.1 billion) it raised in April from the initial public offering of insurance unit BB Seguridade Participacoes SA.

“Investors were skeptical of Banco do Brasil making acquisitions as it has been growing its portfolio of loans at a very fast pace,” Amstalden said in a telephone interview Sept. 9. “We always have to calculate whether an acquisition is the best capital allocation.”

Banco do Brasil, Latin America’s largest lender by assets, increased its loan book 26 percent in the second quarter from a year earlier, according to filings. That compares with growth of 8 percent and 10 percent, respectively, for Itau Unibanco Holding SA and Banco Bradesco SA, the nation’s biggest banks by market value. The government-run firm paid 1.99 reais per share in dividends this year, the most among Brazilian banks, according to data compiled by Bloomberg.

U.S. Talks

Banco do Brasil sought to buy the preferred shares of Votorantim it didn’t already own and boost its stake in the company’s capital to 75 percent, two people with direct knowledge of the plan said in January. Votorantim would have remained a private company, allowing Banco do Brasil to use its brokerage to build an investment bank with a more flexible wage policy than state-owned firms must follow, the people said. Banco do Brasil, which paid 4.2 billion reais for its 50 percent stake in 2009, agreed last month to postpone the discussions indefinitely, according to a filing.

Spokesmen for Banco do Brasil and Banco Votorantim declined to comment in separate e-mailed statements. Sao Paulo-based Votorantim Financas SA, which owns the remaining half of Banco Votorantim, also declined to comment.

Banco do Brasil was in talks to make acquisitions in Florida and New Jersey to provide banking services to Brazilians living in those states, Paulo Rogerio Caffarelli, the firm’s vice-president for international business, said in January. He declined to name the companies involved.

‘Still Interested’

In May, Banco do Brasil was near a deal with Spanish lender Bankia SA to buy its City National Bank of Florida unit for about $900 million, two people familiar with the negotiations said at the time. It was beat out by Chile’s Banco de Credito e Inversiones, which agreed to pay $882.8 million for the Miami-based lender.

Chief Executive Officer Aldemir Bendine said last month that Banco do Brasil is “still interested” in a U.S. acquisition, though it’s being more “prudent” in its approach.

Had the U.S. and Votorantim deals been successful, it would have diverted Banco do Brasil from returning capital to shareholders while adding “unnecessary risks” to the bank’s auto-loan portfolio, said Henrique Kleine, head analyst at Sao Paulo-based brokerage Magliano SA. He calculates Banco do Brasil could pay about 6 billion reais in dividends this year.

Cash Injection

“Now Banco do Brasil is a very attractive stock for investors seeking dividends,” Kleine said in a telephone interview Sept. 10. “Banco do Brasil has a lot of cash.”

Votorantim posted eight straight quarterly losses through the three months ended June 30 as delinquency rates on its auto-loan portfolio increased, according to earnings statements. The losses led Banco do Brasil and Votorantim Financas to inject 1 billion reais each in the company last year. Banco do Brasil expects the auto-loan lender to post its first profit in more than two years by the fourth quarter, Chief Financial Officer Ivan Monteiro said last month.

Banco do Brasil’s shares are rising faster than those of privately owned competitors in Brazil because of its growth strategy, said Pedro Galdi, head strategist at SLW Corretora, a Sao Paulo-based brokerage.

‘Stealing’ Share

“Banco do Brasil and the other state-controlled banks are boosting credit and stealing market share from privately owned banks, which are restraining credit expansion,” Galdi said in a telephone interview Sept. 10. Improving economic indicators in China and the U.S. are also helping the firm’s shares, he said.

Expanding in the U.S. by buying City National would have been “irrelevant” when compared to Banco do Brasil’s size in its domestic market, Empiricus’s Amstalden said, while increasing its Votorantim stake “isn’t exactly a very good deal.”

“The money Banco do Brasil raised with the IPO of its insurance unit should finance organic growth, which is the biggest bet of Banco do Brasil,” Amstalden said.

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