Banco do Brasil, the largest government-owned bank in Brazil, acquired 51 percent of Argentina’s Banco Patagonia for US$470 million. (Photo: Jeff Belmonte)        Font Size ..... Small Normal Big Very Big

CHRONICLE SPECIAL
Knowledge@Wharton 

The charisma of Brazilian President Luiz Inácio Lula da Silva (otherwise known as Lula), the World Cup of 2014, and the 2016 Olympics – along with the country’s spectacular economic growth in recent years – have combined to make Brazil very much in vogue. At the same time, the country’s corporate sector has embraced globalization, and many Brazilian companies have chosen neighboring Argentina for their first foreign venture.

More than 400 Brazilian companies from a wide range of sectors have moved into Argentina, mostly by purchasing local companies. Just a few examples: Loma Negra, a cement company, was acquired in 2005 by Brazil’s Camargo Correa construction group; Pecom, an oil company, was purchased by Petrobras in 2002; and Quilmes, the Argentine brewery, was acquired by AmBev a few years ago.

The financial sector is now getting into the act, although the question is to what degree. Last March, Banco do Brasil, the largest government-owned bank in Brazil, acquired 51 percent of Argentina’s Banco Patagonia for US$470 million. And according to some accounts, Brazil’s Itaú Bank could be interested in acquiring the Argentine operations of South African-based Standard Bank if that institution ultimately decides to leave Argentina. Itaú Bank has been a leader in Brazil’s privately owned bank sector since merging with Unibanco, another Brazilian bank, two years ago.

“We still can’t say there’s a trend among Brazilian banks to go out and buy,” notes L. Felipe Monteiro, a professor of management at Wharton. Nevertheless, he adds, “they are growing enormously, profitability is incredible and now they have money. There are enough positive factors for going out and buying. In addition, the Brazilian real has gained value, and it would be appropriate to expand at this time because assets outside the country are cheaper in comparison with Brazilian assets.”

Still another reason for banks to go abroad is to give support to Brazilian companies already operating in Argentina, which employ some 200,000 people.“It is a strategy known as ‘follow sourcing,’ ”creating partnerships in step with a country’s corporate development in a foreign market, says Rodolfo Rapán, a professor of corporate finance in the economics department of the University of Palermo in Buenos Aires. He notes that “the flow of foreign direct investment from Brazil into Argentina has been constant and substantial. The banks are following the corporations in this process.” Since 2003, an average of about $4 billion in foreign funds has flowed into Argentina each year, and 40 percent of those funds have come from Brazil.

THE BRAZILIAN ADVANCE

Since Brazil devalued its currency in 1999 as a result of its ballooning budget deficit, it has experienced 11 straight years of stability and growth. Armed with the stronger real and supported by a huge domestic market, many Brazilian companies have heard the call to expand elsewhere in the region.

“The main Brazilian companies are the biggest in Latin America, and they compete with the Mexicans in the region – their industrial success and sizable investments in such countries as Argentina make them ‘multi-Latin’ companies,” says Enrique Dentice, a researcher at UNSAM, the National University of San Martín in Argentina. In his view, the driving factor in this expansion has been Brazil’s domestic market of 190 million people, which represents about 50 percent of the entire Latin American market.

Dentice adds that the choice of Argentina as the main destination for Brazilian investments stems from the fact that “prices are cheap there, especially since the crisis of 2002,” when Argentina went into default. In addition, “Brazilian companies have been earning profits equivalent to nine times those made by Argentine companies.” This higher rate of return is due to the greater scale of Brazilian companies, which are used to working in a market five times as large as the Argentine market.

Given the two countries’ “physical, cultural and institutional proximity, it makes sense for a Brazilian bank like Banco do Brasil to begin its global expansion from a nearby country like Argentina,” says Wharton’s Monteiro. “Argentina is nearby and this investment isn’t all that big if you take into account the size of Banco do Brasil; it’s better to think of it as a modest investment.”

Beyond that, Banco do Brasil is hardly new to the Argentine financial market. It has had offices in that country for more than 40 years. Its acquisition of Banco Patagonia is part of a major commitment to a global vision. “This institution has offices all over the world, including the U.S.,” Monteiro notes. “But until now, it had a limited presence; like embassies, it has played a supporting role. The big difference is that with the purchase of Banco Patagonia a new trans-national expansion is beginning.”

The main goal is to transfer a model for successful businesses to the host country. The idea is to take financial products, technology, risk analysis, marketing strategy and other tools for success that have been proven to work in  Brazil and adapt them to the new market.

“In the specific case of Banco do Brasil, its size and the availability of its resources give it an enormous advantage in Argentina -- remember that its total assets are 3.5 times larger than the total assets of the Argentine financial system,” notes Palermo’s Rapán. Dentice adds that Banco do Brasil’s assets “are worth more than $400 billion, and its loan portfolio is three times higher than all of Argentina’s, at $172.7 billion. Banco do Brasil has 113,000 employees, compared with 97,000 in the Argentine banking system.”

In contrast, Banco Patagonia owns assets worth $2.5 billion, loans of $1.2 billion, deposits of $1.7 billion and net assets of $448 million. It has more than 775,000 customers, 155 retail locations, 417 automatic cash machines and 2,660 employees.

Because of its scale, the Brazilian financial market has been able to make its way through various economic challenges and to develop sophisticated, specialized banking services. To achieve that goal, Monteiro notes, Brazilian banks have invested heavily in technology. “Actually, it is easier to make a transfer of funds in Brazil than it is in the U.S. The state banking sector is quite efficient and sophisticated for its customers. Banco do Brasil is comparable to first-rate commercial banks such as Santander and Bank of America.”

A TROUBLED NEIGHBOR

The Argentine financial system has undergone serious problems since the country’s economic and social crisis erupted at the end of 2001. That’s when many banks began to leave the market.

Although credit markets have not entirely recovered, consumer purchasing is one of the main engines of the Argentine financial system nowadays. “Over the past three years, the level of irregular portfolios – which measures the quality of loan portfolios – has been maintained at 3 percent, compared with 2002, when it was 38%,” notes Rapán. “The liquidity rate of 33 percent is the highest it’s been in the last 15 years. Improvements in efficiency have led to an average return on equity of about 20 percent. Risk management is an area where medium-term improvements will surely be implemented.”

Monteiro stresses that ever since the crisis of 2002, Argentina’s financial sector has been trying “to re-win the confidence of its customers. There are some people who are not totally convinced of the sector’s trustworthiness, which is a situation that doesn’t exist in Brazil. The world looks at Brazil and trusts it. There are lots of expectations about Brazil and so far that hasn’t led to excessive confidence. Meanwhile, people see Argentina as a ‘stand by’ situation; there has not been any strong change in the progress of its politics and its economy.” In his view, what’s lacking in Argentina is a long-term vision.

Argentina is capable of delivering a better performance, Monteiro says. “It has lots of potential and quality in its human resources, so it has what it takes to grow a lot more.” Rapán agrees, adding, “For those who know how to look, Argentina offers excellent business opportunities in many sectors. The economic indicators have shown strength during the current international crisis. Natural and human resources are key factors for the development of many businesses. Consumption has its own, strong dynamic.”

One of the ways to ensure the continued growth of Brazilian and Argentine companies, he says, is to strengthen Mercosur, the common market that brings those two countries together with Paraguay, Uruguay and Venezuela. In recent months, Brazil and Argentina have imposed barriers on trade in a dozen products, including food, health products, auto parts, shoes and appliances.

The problems within Mercosur are only short-term, in Monteiro’s view. “They have to do with political questions, and I don’t believe that this situation will continue along the same path. I have great expectations that the situation will improve and trade volumes will be strong. The companies that invest in both countries do so for the long term.” Expressing his optimism, he notes that both Brazil and Argentina “are emerging countries; they still haven’t gotten everything ready, and they have to continue negotiating some aspects of their relationship. But the prospects for the region are very good.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.