High Labor Costs Complicate HSBC's Asset Sale in Brazil

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Potential bidders for HSBC Holdings Plc’s money-losing Brazil unit are demanding price cuts as they tally the costs of firing workers, people with knowledge of the matter said. The bank’s dental-hygiene memos to employees aren’t helping either.

With a staff of 20,488 in Brazil as of December, London-based HSBC has a higher worker-to-asset ratio than all of the nation’s non-government-owned banks. That figure will have to drop after a merger, leaving any future buyer grappling with Brazil’s costly labor-protection laws, said the people, who asked not to be identified because the acquisition talks are private.

“Firing people in Brazil is very expensive because we have a national mandatory severance that gets bigger with each year the employee is with the firm,” Vilma Kutomi, an attorney for labor and employment matters at Mattos Filho, Veiga Filho, Marrey Jr. & Quiroga Advogados, said in a telephone interview from Sao Paulo. Kutomi isn’t involved in the HSBC matters.

Adding to those expenses are lawsuits from unions that say HSBC got a little too involved in workers’ personal lives, including one class-action case filed by unions and a separate one from prosecutors.

“Employees must take showers and brush their teeth,” the bank reminded its staff in internal memos, at least one of the cases alleges, according to Elias Jordao, the president of the bank workers’ union in Curitiba, which is involved in cases against HSBC.

Legal Provision

HSBC has set aside almost 600 million reais ($198 million) to cover labor claims, a sum that potential bidders are concerned won’t be enough, the people said. Heidi Ashley, a spokeswoman for the bank in London, declined to comment on the sale process or the firm’s relationship with its employees in Brazil, where its subsidiary is the seventh-largest by assets.

The provisions also cover a case involving allegations that private investigators broke into the homes of workers who took medical leave, and that the bank received reports based on those actions for two years. HSBC has previously said it was legally obligated to check whether employees filing for medical leave had legitimate reasons to do so.

“Workers have used the bathing and toothbrushing directives in individual actions, and our union’s legal department always reminds employees leaving the bank that they can file moral-damage cases against the company using this episode,” Jordao said in a telephone interview from Maringa, Brazil.

Any employee who was at the bank when the memos were sent can sue for moral damages, according to attorneys who handle such cases.

Preferred Bidder

HSBC will probably select a preferred bidder as soon as June in a sale that may raise about $4 billion, two people with knowledge of the plan said earlier this month.

Companies interested in the operation include Banco Bradesco SA and Bank of Nova Scotia, the people said. Banco Santander Brasil SA is studying the company as well, Chief Executive Officer Jesus Zabalza told reporters Tuesday in Sao Paulo.

Representatives of Bradesco and Scotiabank declined to comment on talks with HSBC.

HSBC’s Brazil unit had about 146 billion reais in assets as of December 2014, giving it a ratio of 140 employees per billion reais in assets, according to its financial statements. That compares with a ratio of about 108 at Banco Bradesco, Brazil’s second-largest bank by market value, and about 123 at Santander Brasil SA, the sixth-biggest by assets, according to the banks’ first-quarter financial statements.

Severance Policies

Mandatory severance in Brazil includes at least 30 days salary plus three days extra per year of work until the limit of 90 days, Kutomi said. Employers must also pay a fine of 50 percent of the so-called FGTS, an employee-savings guarantee fund, she said.

“If a firm plans to fire a large number of people or close a whole business or regional office, the best strategy would be to negotiate with the union to avoid labor claims and even more severance demands,” she said.

After HSBC tried last year to fire about 800 workers in Brazil, the bank agreed to extend health-care benefits for dismissed workers and raise its severance package, said Nasser Ahmad Allan, an attorney at Declatra in Curitiba, Brazil, which represents some of HSBC’s employees in employment suits. The accord was reached as federal labor prosecutors in Parana state recommended the dismissals be suspended, he said in a telephone interview last week.

Private Investigators

A court in Parana said in September that HSBC must pay 2 million reais for spying on Brazilian employees, after prosecutors said it used private investigators to look into 152 workers on medical leave between 1999 and 2003. Investigators entered some employees’ houses without permission, filming and taking pictures, according to the sentence.

“HSBC has been seeking to settle labor claims more aggressively in the last months,” said Allan, adding that court decisions in such cases can take more than five years to conclude.

The company’s 5.9 billion reais of bad debt in Brazil may also be a focus for potential acquirers, according to a report by Arjun Bowry and Jonathan Tyce, analysts at Bloomberg Intelligence. The figure represents a bad-debt ratio of 8.7 percent of total loans, compared with the 3.6 percent non-performing loan ratio for private Brazilian banks in general, according to the analysts’ report.