Consulting » BANKING – British banks are once more finding it difficult to resist

It has to be said that where giving the benefit of the doubt is concerned, British banks rank second to none. Having set aside some £4bn in loan loss provisions for their Latin American exposure in the early 1980s, an operation that drove lenders such as Midland and Lloyds into loss, the major clearers are once more looking to this region as an outlet for their cash mountains. They are playing for big stakes, too. Last year HSBC spent nearly $2bn to acquire full ownership of Banmerindus in Brazil and Argentina’s Banco Roberts, as well as minority stakes in banks in Peru, Mexico and Chile. This is relatively small beer compared with the $5bn or so the two top Spanish banks, Banco Santander and Banco Bilbao Vizcaya (BBV) have so far spent in building up a dominant franchise in Latin America. The two banks each have around 20% of their capital invested in the region and have clearly stolen a march on other international rivals. BBV says it has another $2bn or $3bn to spend in the region. The question is whether the British banks will be dragged lemming-like by the Spanish into the Latin American acquisition jamboree in the same way they followed the US banks into the lending trap of the 1980s. HSBC, through Midland Bank, and Lloyds TSB are so far the only serious UK players south of the Rio Grande. Barclays has at one time or another flown the colonial flag in most far-flung corners of the globe and it has a money-spinning operation in the Caribbean, so conceivably it could make a reasonable go of it in a market like Brazil. Martin Taylor makes no secret of the fact that the bank is overcapitalised and that his favoured share buy-back option faces tax constraints. His deputy chairman for international retail operations, Carlos Martinez de Campos, is a Spaniard who built Barclays into a highly profitable business in Spain and would be the ideal man to take the group into Latin America. NatWest, given its experience and success record abroad, might as well go into Italy as Latin America. Lloyds (ex-TSB) has been licking around Latin America for the past 130 years or so – albeit not doing as much kicking as Schroders whose directors, having completed their annual visit to the bank’s Peruvian guano processing plant, would toss their white gloves to the workers, who would scramble for them. “It really relates to heritage,” says John Leonard, banking analyst at Salomon Smith Barney. “Lloyds has a long history in the region through Bolsa (Bank of London & South America). It’s really a business decision, and if they like the market they have the expertise to make intelligent decisions and a base to build on. For HSBC, Brazil was a major step forward. They had some expertise through Midland and a 30% stake in Banco Roberts in Argentina.” HSBC has cleaned up in Brazil because their bank has nothing but deposits, so when interest rates went through the ceiling they made a killing on T-bills. “The region has a two-fold attraction for us,” says George Cardona, general manager international at Midland Bank. “There are now a lot of very technocratic governments in power that are doing the right things for their economies and there are also some important structural factors. Mercosur is a very effective free trade zone and there is a good chance that within 10 years all of Latin America will have achieved a single free trade area for some 700 million people.” For Lloyds TSB, the experience went in the opposite direction with their Brazilian consumer finance company Losango. It now looks like Sir Brian Pitman, a self-confessed enthusiast of Latin America’s reformist economies, has decided to put Losango on the block as part of a clean-up operation of its parent bank Banco Multiplic. Interestingly, there is strong talk of Lloyds TSB using the proceeds from an eventual sale of Multiplic to invest in other Latin American operations. This is the bank that generates £2bn a year in excess capital and one would think that it hardly needed to raise more cash to expand through acquisition. Yet looking around the UK market the fact is that the likely suspects carry extremely high price tags: Legal & General is capitalised at £4.7bn, Woolwich at £5.1bn, Standard Chartered at £5.7bn, and so on. “I think Lloyds TSB would be a seller of its Brazilian bank,” says Hugh Pye, analyst at Robert Fleming securities. “They could use the capital for expansion in Latin America or at home.” Pye believes that on a long-term basis Latin America looks to have potential. “In domestic European markets like Britain, competition can only get tougher, but Latin America entails risk as well,” he says. “Brazilian interest rates at one point shot up to 40% and are now down to 20-something%, but it shows how much volatility there is in the continent’s most significant economy.” For now it looks like Brazilian rates are likely to continue falling as will the cost of equity, so local banks could double in value in the longer term. However, the Asian syndrome is proving contagious in emerging markets such as Russia and Latin America. The answer, of course, is to buy in as cheaply as possible and in this HSBC has shown the way forward. By acquiring their operations for less than book value they effectively limit the downside in the short term and enhance the potential for longer-term high returns. There is no shortage of temptation to pick up a Latin American bank on the cheap. Bank deposits as a percentage of GDP barely nudge 30% even in some of the more advanced Latin American markets like Mexico and Chile, compared with about 60% in the US and an astonishing 85% in Spain. Clearly for the mature financial services industries of the developed world there is an under-banked market out there for the picking. But before leaping across the Atlantic it would serve the UK banks well to heed the guidelines set down by the Bank of Scotland on foreign expansion. Their stated policy is that when going abroad they wanted either a new geography or a new product, but not both. Jules Stewart is a freelance journalist.