Bloomberg News

Itau, BMG Strike Deal on Brazilian Payroll-Loan Venture

July 10, 2012

Itau Unibanco Holding SA (ITUB4), Latin America’s largest lender by market value, formed a 1 billion- real ($491.5 million) joint venture with Banco BMG SA to increase its payroll-loan business in Brazil.

Itau, based in Sao Paulo, will hold a 70 percent stake in Banco Itau BMG Consignado SA, as the new company will be called, with Belo Horizonte-based BMG owning the remaining 30 percent, according to a regulatory filing today.

“Considering BMG’s experience in the payroll loan market, Itau Unibanco expects to become the number one privately owned bank in the segment,” the lender said in the regulatory filing. “This transaction is another step by Itau to operate with assets of lower risk and spread.”

Under Brazilian law, banks are entitled to deduct payroll loans directly from the borrower’s paycheck and before other creditors. Osasco-based Banco Bradesco SA (BBDC4) surpassed BMG as Brazil’s largest originator of payroll-deductible loans, Clive Botelho, BMG’s executive financial director, said last month.

Itau fell 4.5 percent to 27.94 reais in Sao Paulo, compared with a 3 percent drop in the benchmark Bovespa index. BMG isn’t publicly traded. The yield of its dollar bonds due in 2020 declined 1.04 percentage point, or 104 basis points, to 10.154 percent.

‘Interesting’ Deal

Both banks said they expect the deal to be completed within 90 days. The joint venture’s portfolio of loans may reach 12 billion reais in the next two years and attract about 3 million new customers, according to the filing.

The deal structure is “interesting” for Itau as “it commits limited capital upfront, while it gives Itau the flexibility to continue to originate payroll loans through its own branch network,” Fabio Zagatti, an analyst at Barclays Plc in Sao Paulo, wrote in an e-mailed research note today.

“Payroll lending in Brazil may equal or surpass the auto loans in the next years,” Itau’s Chief Executive Officer Roberto Setubal told reporters at a press conference today in Sao Paulo.

Itau will provide as much as 300 million reais per month for the next five years to finance BMG’s payroll-loans, according to a statement from the lender. Itau will offer funding to BMG at market rates, Setubal said. The majority of the joint venture’s board will be named by Itau, which will have the right to approve all directors.

Itau has an option to buy out the joint venture, BMG’s Chief Executive Officer Ricardo Guimaraes told reporters at the press conference. The banks are also negotiating an option that would give Itau the right to buy BMG, Guimaraes said.

Valor Economico, a Sao Paulo-based newspaper, reported yesterday that Bradesco may buy a stake in BMG without saying where it obtained the information.

Bradesco declined to comment in an e-mailed statement from a press official. BMG’s Botelho, in a phone interview today, declined to say whether the bank has held talks with Bradesco.

To contact the reporter on this story: Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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