Brazilian and Portuguese banks sign agreement to plan expansion in Africa

Brazil's Financial Minister Guido Mantega have announced that the state-controlled Banco do Brasil and private-sector Banco Bradesco have signed a memorandum of understanding with the Portuguese bank Banco Espírito Santo (BES) to create a new company to expand their business in Africa.

The deal may include just the acquisition of a participation of BES existing holding in Africa by the Brazilian banks. The three banks are expected to strengthen and increase their presence in Africa, opening new branches and considering the acquisition of additional financial institutions. Minister Mantega said that the government is interested in encouraging the international expansion of the Brazilian banks regardless of whether they are public or private institutions; additionally, he stated that President Luiz Inácio Lula da Silva is particularly interested in strengthening the country's links with Africa. Banco do Brasil and Banco Bradesco are the first and third largest banks by assets in Brazil while BES is the second largest institution in Portugal.

Good Moment

The announcement comes during a moment of extraordinary expansion for Brazilian banks. Although not all banks have released their results, larger banks have showed credit expansion above 10 per cent over the first six months of 2010; as a result, credit growth at the end of the year is likely to exceed their initial estimates of 20 per cent. Additionally, they are showing record-high historical profits driven by their lending expansion and by the improvement in their asset quality ratios .

BES has been operating in Africa for almost a century and has a significant branch network in Angola and Cape Verde. It has connections with local banks in Mozambique; in addition, it has presence in Morocco, Libya, and Algeria. According to the president of BES, Ricardo Salgado, the alliance will be very positive since the growth potential in Africa is immense. According to Salgado, in some African countries just 15 per cent of the population has currently at least one banking product. The alliance will allow the banks to offer their products to African, Portuguese, and Brazilian companies in Africa. Indeed, in July Brazilian president Lula visited Cape Verde, Equatorial Guinea, Kenya, Tanzania, Zambia, and South Africa to boost trade exchanges between Brazil and these countries. A number of Brazilian companies have invested actively in Africa in sectors such as oil, mining, agriculture, and livestock industries. Therefore, the banks will be able to provide funding to a number of projects and individuals in these countries.

 

Fresh Capital and International Acquisitions

To continue with their expansion, Brazilian banks are raising fresh capital. Banco Bradesco offered US$1 bn in dollar-denominated bonds on the international markets this week. In June, Banco do Brasil raised 9.76 bn reais (US$5.54 bn) in an equity offer. The funds raised by the Brazilian banks have allowed them to continue their lending expansion and to consider a number of acquisitions overseas; it is evident that Brazilian banks are currently developing an aggressive expansion strategy overseas through acquisitions or alliances. In April Banco do Brasil acquired a controlling stake in Argentina's Banco Patagonia. In addition, according to Minister Mantega Banco do Brasil is studying the acquisition of a mid-sized bank in the United States; indeed, the media had speculated that yesterday's press conference was to announce such an acquisition, according to Buenos Aires Económico. In January, Banco Bradesco announced the acquisition of the mid-sized Mexican bank IBI Mexico.

 

Outlook and Implications

This alliance will be mutually beneficial for the Brazilian and Portuguese banks. Whereas the Brazilian banks have the capital to continue growing, the Portuguese bank has experience in the African market. In addition, as the African economies are now more stable, their growth potential is significant and would allow the Brazilian banks to continue to diversify their businesses. Some other banks such as Itaú-Unibanco are expected to look for alliances with banks already operating in Africa to expand their businesses there. In addition, the Brazilian government, regardless of the outcome of the presidential election in October, is expected to maintain its support for the expansion of Brazilian companies overseas. Initially the alliance formed by the Brazilian and Portuguese banks is likely to focus its operations in Angola, Cape Verde, Morocco, Mozambique, Algeria, and South Africa.

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