Itaú and BMG in loans joint venture

Itaú-Unibanco, Latin America’s biggest bank by market value, has signed a R$1bn ($493m) joint venture with Brazilian lender BMG to create a new payroll loans business, as it looks to protect itself from rising defaults.

São Paulo-based Itaú said it would retain a 70 per cent stake in the new company, to be called Banco Itaú BMG Consignado, whose loan portfolio is forecast to reach R$12bn within the next two years.

“This transaction is another step by Itaú-Unibanco to consolidate its strategy of operating with lower-risk assets with smaller spreads,” the bank said in a regulatory filing on Tuesday.

Payroll loans, which are deducted directly from the borrower’s monthly salary, were only introduced in Brazil in 2003 but have become popular as banks look to invest in products with a lower risk of default.

Loans overdue by more than 90 days in Brazil hit a record high in May of 6 per cent as the sharp economic slowdown put pressure on the country’s consumers, who traditionally buy everything from socks to plastic surgery on credit.

Tuesday’s deal with BMG, a small bank but almost exclusively focused on payroll loans, will help Itaú keep its lead over rival Bradesco, Brazil’s third¬-biggest lender by assets, in a market where consolidation is accelerating.

“It seems that Bradesco was also negotiating [with BMG] but once again, Itaú got there first,” said Francisco Petros from the Brazilian Association of Analysts and Investment Professionals of Capital Markets (Apimec).

While Bradesco has more branches than Itaú in Brazil due to a strategy of organic growth, including setting up cash points in Rio de Janeiro’s most dangerous slums, Itáu has been catching up through a series of acquisitions.

Last year, Itaú snapped up a 49 per cent stake in the local credit arm of French retailer Carrefour after Bradesco had long been tipped as the favourite in the bidding war.

Aside from giving Itaú access to more banking customers in Brazil, the BMG deal will also provide it with more experience of a sector of the banking industry that has largely been the domain of smaller banks, said Mr Petros.

The joint venture comes only a month after Brazilian authorities took control of Banco Cruzeiro do Sul, one of the other largest providers of payroll loans, after discovering accounting irregularities at the midsized lender.

(Samantha Pearson | ft.com)