HSBC Holdings plc HSBC is close to finalizing the buyer of its Brazilian unit put on block as part of its efforts to improve efficiency. According to a Wall Street Journal report, Brazil-based Itaú Unibanco Holding S.A. ITUB, Banco Bradesco S.A. BBD and Banco Santander (Brasil) S.A. have shown interest in buying the unit.
Earlier, the deal was expected to be finalized by mid-June (according to Bloomberg). However, it was delayed due to concerns over high labor costs that HSBC is likely to bear in case of firing employees in Brazil. Nonetheless, the company now intends to finalize the deal by August, according to a WSJ report.
Notably, HSBC has appointed The Goldman Sachs Group, Inc. GS to conduct the multi-billion auction (10–14 billion reais or $3.2–$4.5 billion, based on analyst estimates).
The unit forms nearly 3% of Brazil’s financial sector, and is expected to drive a modest increase in the winning bidder’s market share, with no material rise in systemic credit risk, according to Fitch Ratings.
Banco Bradesco Looks Most Promising
According to a Bloomberg report issued last month, Banco Bradesco is most likely to emerge as the winning bidder, with a bid of 10 billion reais against 9–10 billion reais and 8 billion reais placed by Banco Santander and Itau Unibanco, respectively.
People familiar with the matter noted that Banco Bradesco is willing to pay the entire amount in cash, indicating the bank’s interest in the unit. However, given the unit’s modest share in Brazilian finance space, Banco Bradesco will remain second in line to Itau Unibanco, in terms of assets, having 1.18 trillion reais in assets post acquisition.
Nonetheless, Banco Bradesco’s ability to cheaply integrate the unit as well as attain requisite government approvals as a domestic bank positions it better compared with Spain’s Banco Santander. Further, Credit Suisse sees “Bradesco as the strongest candidate, given the combination of a strong capital base, lower overlap versus peers and a Brazil-centric strategy”.
What is in Store for HSBC?
The London-based global banking and financial services firm aims to boost profitability and overall efficiency with a fresh round of cost-cutting program announced at the company’s Investors Day conference in Jun 2015. The company intends to lower expenses by $4.5–$5 billion (annually) by the end of 2017 through 22,000–25,000 job cuts globally.
However, the company anticipates incurring up to $4.5 billion in expenses to achieve such savings; which means higher costs are likely to temper the company’s financials in the coming few quarters, unless otherwise supported by greater revenue growth.
This Zacks Rank #4 (Sell) stock has been delivering unimpressive core performance amid a low rate environment. Moreover, muted growth in mature markets, combined with relatively high inflation and wage pressure in key emerging markets, will likely dampen the company’s performance in the near term.
Notably, the Zacks Consensus Estimate for HSBC has declined 4% and 1.3% to $4.12 and $4.48 per share for 2015 and 2016, respectively, over the past 30 days.
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