Cablegate: Brazilian Bank Merger Creates Largest in Southern

VZCZCXRO1998
RR RUEHRG
DE RUEHSO #0593 3081528
ZNR UUUUU ZZH
R 031528Z NOV 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8676
INFO RUEHBR/AMEMBASSY BRASILIA 9837
RUEHRG/AMCONSUL RECIFE 4236
RUEHRI/AMCONSUL RIO DE JANEIRO 8910
RUEHBU/AMEMBASSY BUENOS AIRES 3309
RUEHAC/AMEMBASSY ASUNCION 3556
RUEHMN/AMEMBASSY MONTEVIDEO 2800
RUEHSG/AMEMBASSY SANTIAGO 2556
RUEHLP/AMEMBASSY LA PAZ 3964
RUCPDOC/USDOC WASHDC 3195
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SAO PAULO 000593

SIPDIS
SENSITIVE

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN BR
SUBJECT: BRAZILIAN BANK MERGER CREATES LARGEST IN SOUTHERN
HEMISPHERE

SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY

1. (U) Unibanco and Itau announced the merger of their two
Brazilian banking institutions on November 3. The combined bank,
Itau Unibanco Holding SA, will become the largest private financial
institution in the Southern Hemisphere and among the top 20 banks
worldwide. Itau was previously the third largest Brazilian bank,
while Unibanco was the fifth largest. Itau's news release noted
that the negotiations had been ongoing for 15 months; however, the
financial crisis likely precipitated the merger. Though the merger
still requires the approval from the Brazilian Central Bank (BCB)
and the two companies' boards of directors, it is the first within
the Brazilian financial sector in the wake of the global financial
crisis. Initial investor reaction on Brazil's stock exchange was
positive with both companies' stock climbing double digits, and
analysts said the deal shows a return of confidence to the sector.
Finance Minister Guido Mantega said the merger should help improve
liquidity within the Brazilian banking system.

2. (U) According to Economatica, the new institution will be the
sixth largest in market value globally among all U.S. and Latin
American banks, ahead of Merrill Lynch and Goldman Sachs. The total
market value of the two institutions is approximately USD 274
billion. Together, they will have 14.5 million clients with
checking accounts and 4,800 banks, both representing approximately
18 percent of the market. They will jointly manage 19 percent of
the credit volume and 21 percent of deposits.

3. (SBU) For Unibanco, the merger offers an opportunity to recover
from the impact that AIG's U.S. losses had on the company. AIG had
been an integral part of Unibanco's insurance arm. (Note: In 1997,
AIG bought 50 percent of equity in Unibanco's insurance division.
End Note.) Unibanco had been the biggest player by far for large
corporate insurance policies and had about 30 percent market share
in the Brazilian insurance business. Unibanco also held shares in
several other companies, including the Brazilian Reinsurance
Institute (IRB), which was a recently privatized bank that had held
a monopoly on reinsurance in Brazil. The BCB's Director for
Economic Policy Mario Mesquita told the U.S. Treasury Attache that
Unibanco wanted the merger because of an internal concern about who
would take over the company after Pedro Moreira Salles retired.

4. (U) Itau had in turn been connected to derivatives contracts
that have hit many Brazilian firms. As the larger bank, many view
the merger as more of a take-over by Itau than a traditional merger.
Indeed, Itau's CEO, Roberto Setubal will become the new head of
Itau Unibanco Holding SA.

5. (SBU) Comment: The merger represents the first major corporate
banking fusion since the financial crisis hit the Brazilian
financial sector. The Brazilian banking sector was already
extremely concentrated and further concentration, especially among
Brazil's small and medium banks, is expected. Under normal
circumstances, investors might have rejected the merger; however, in
today's uncertain global financial climate they are likely to
welcome any action that strengthens institutions. That being said,
the merger could mean significant layoffs and unions are likely to
be unhappy. End Comment.

6. (U) This cable was coordinated/cleared by Embassy Brasilia and
the U.S. Treasury Attache in Sao Paulo.

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