- The Washington Times - Tuesday, January 28, 2003

RIO DE JANEIRO, Brazil, Jan. 28 (UPI) — Bradesco, Brazil's biggest private bank, said Tuesday it is buying the Brazilian asset management arm of J.P. Morgan Chase & Co., which oversees some $1.94 billion in funds.

It is the latest aggressive move by Bradesco in buying out a foreign competitor in what analysts say is shaping up to be another dismal year for Latin America's financial services sector.

The transfer of funds from JP Morgan Fleming Asset Management to Bradesco will take place within 60 days and will bring the total amount managed by Bradesco Asset Management — or BRAM — to $16.6 billion.

Bradesco didn't say how much it paid for JP Morgan Fleming, nor did it indicate if it would unveil the numbers in the future. But local analysts have said the deal is likely worth about $70 million, or between 3.5 percent and 4 percent of total assets Bradesco will take over.

Government statistics indicate that BRAM is Brazil's second-largest asset manager, but the Rio de Janeiro-based investment bank Pactual reports this move puts Bradesco ahead of the state-owned Banco do Brasil as the country's leader in the business.

"This is another step in the consolidation process observed in the asset management industry, and BRAM has been the most active player so far," Pactual economist Gustavo Hungria wrote in a Tuesday report.

Despite the announcement, JP Morgan underscored that it is not planning an exit of Brazil, saying it remains confident in the country.

But Tuesday's action is the latest in a series of moves by foreign banks to reduce exposure in Latin America, especially, of late, in Brazil.

Although a disastrous economic year has been seen across the region, Ursula Wilhelm, director of Latin American bank credit ratings at Standard & Poor's in Mexico City, said in Brazil's case the recent moves aren't just based on fears the economy will tank further.

"A lot of the acquisitions have been related to improving scale," Wilhelm said. "The ones that have exited — it is because they didn't have the scale to service that business profitably."

"It's not because they think Brazil is a good or bad opportunity, it is more related to what the business requires in terms of investments."

As an example, Wilhelm cited Spain's No. 2 bank BBVA, which two weeks ago retreated from Brazil by selling its subsidiary there to Bradesco.

"They only sold the institution they had in Brazil, they haven't announced any intentions to sell any of the other investments in Peru, Colombia, Venezuela, Mexico or Argentina," Wilhelm said.

"BBVA's bank (in Brazil) was in the middle — it wasn't a large or small bank. To compete with large banks, they would have had to make a significant investment."

Which is where the real problem lies: foreign banks have zero appetite to dump any more cash into Latin America, and instead of stagnating in the middle of the sector they are opting to cut their losses and run.

BBVA, for instance, had invested some $10 billion in Latin America in the past decade before deciding it couldn't stomach any more of Brazil's volatility.

How much longer will it be, some analysts ask, before the bank decides to exit other countries in the region?

In the last decade foreign banks' market share in Latin America has grown from 10 percent to 50 percent. Yet as the economic woes of the past few years begin to drive them out of the region, domestic institutions have seemed willing to pick up their assets.

The latest Bradesco deal comes one year after it took over Deutsche Bank's asset management arm and its $600 million in funds.

Banks such as Bradesco — with its 14.5 million clients — and Banco Itau are far more widespread across Brazil than their foreign competitors, the latter of whom rarely penetrate beyond the country's most populated and richest areas.

The economic situation in Brazil — while improving — is unlikely to tempt any foreign banks to make the investments needed to catch up with domestic institutions, analysts say.

The local currency — the real — shed about 35 percent of its value in the past year as the election of the leftist Lula rattled markets. The main stock index lost some 18 percent in 2002.

Both have rebounded somewhat, but with the continuing political standoff in oil-rich Venezuela, and the threat of war in Iraq, nobody is ready to crown Brazil with emerging-market darling status just yet.

Wilhelm said that it is too early to tell how the banking sector will fare under Lula.

"I was just in Brazil last week and I heard everybody saying that 'he had a good beginning, but the big issues are yet to come,'" she said.

Brazil's banks, like many in Latin America, are extremely susceptible to shifts in governmental policy, largely because of significant holdings in sovereign securities.

This becomes a problem, analysts say, when banks have only one entity — Brazil's government, for instance — as a main debtor.

"This poses significant risks in terms of what's going to be the government's intention regarding domestic debt, whether they plan to reschedule it or change the terms and conditions," Wilhelm said.

Which is a main concern for those watching the progression of Brazil's new government — whether it will stick to fiscal austerity and moderate policies unveiled in the first month of Lula's rule, or if some regression on economic reforms awaits investors.

As for what the Latin American banking sector can expect in 2003 following the brutal year it just came through, Wilhelm was decidedly pessimistic.

"In Venezuela — the economy is completely paralyzed. You now have foreign exchange controls that are harming banks. If you look at Argentina there are still unresolved issues — the banking system has completely lost creditability with the population," she said.

Everybody remains cautious on Brazil, Wilhelm said, while Mexico and Chile are the most stable — though not particularly attractive — destinations for foreign capital in the region.

"The scenario is not really bright," Wilhelm concluded.

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