Brazilians listen carefully when Roberto Setúbal speaks. From the ivory tower of Banco Itaú’s modernist headquarters on the outskirts of São Paulo, he presides with lofty perspective over one of South America’s most formidable banking machines. Furthermore, Setúbal’s words have rarity value. The chief executive and billionaire scion of the family that founded what is now the 13th biggest bank in the world by market capitalisation is notoriously media shy.
Inside Itaú’s boardroom, nervous aides flap around a wooden table the length of an aircraft carrier. One adviser mentions that Setúbal likes rock music, an attempt to humanise the 57-year-old who has a reputation for being stiff, imperious, sober. This is the antithesis of the clichéd image of a Brazilian but it is the stereotype of a Paulista, as the industrious inhabitants of São Paulo state are known, and Itaú is Paulista to a fault. In the sparsely furnished room, the only decoration is a signed white strip of Santos, Setúbal’s and one of the city’s favourite football teams.
Setúbal arrives and the humanising touch proves unnecessary. His hands are expressive and his eyes wrinkle into an easy smile. His hair is also tousled and he wears a rumpled suit with a simple tiepin. This rumpled look may be only because of a busy day – it is early December, and Setúbal’s 2013 diary is already two-thirds full. But the first impression, perhaps misleading, is that this is no media-trained executive. My hopes rise at the prospect of a candid conversation about where Brazil is going.
This has become a hot topic. Two years ago, Brazil was synonymous with go-go growth rates. Rocketing Asian demand for commodities buoyed the country’s external finances and helped to lift 36 million people into the middle class. A credit boom then turned them into profligate consumers. Motorbikes, fridges, clothes, beauty products and mobile phones flew off the shelves. Multinationals tripped over themselves to get a slice of the action. Local banks, such as Itaú, did exceptionally well.
“The past decade has been great for banks. Some years, loans grew by as much as 30 per cent,” says Setúbal. Itaú’s share price did much the same. Since becoming chief executive in 1994, he has presided over a 30-fold increase in Itaú’s market capitalisation. But now the economy has stalled, as has Itaú’s share price. In 2012, Brazil is estimated to have notched up a mere 1 per cent expansion, less than Japan, not much better than the eurozone, and a fraction of the other Bric countries, Russia, India and China. Setúbal winces at the suggestion that this shows that Brazil’s recent economic and market successes have only been due to good luck and ample credit, both of which may now be ending.
“That’s too simplistic,” he protests. “Brazil has done many other things right. We remain a democracy, the press is free and the government has cracked down on high-level corruption. What other Bric is doing that?” he asks. “These are signs of institutional strength,” that Brazil is becoming a “normal” country.
Yet despite Brazil’s growing “normalcy” – a recurring theme for Setúbal – he adds immediately that “commodities have reached a tipping point, credit growth too … it is clear that the current strategy is not working.”
These are unusually candid words from one of Brazil’s most powerful businessmen, who is also an international adviser to the New York Federal Reserve and weighs his words carefully. Some might even construe it as a “sell Brazil” recommendation. I put an exclamation mark next to his quotes in my notebook.
Still, whether Brazil is or isn’t doing well remains an open question. Objectively, its economy is sputtering along. But conversations about economics and finance in Brazil often digress into a history lesson and, relative to its recent past, including a spell of hyperinflation in the 1980s and early 1990s, a series of emerging market crises in the late 1990s and a stiff devaluation in 2002, Brazil is doing very well indeed – and Itaú with it. What began in the 1940s as a small family business has since grown into a giant, with about 100,000 employees and a $500bn balance sheet. Even in a ho-hum year such as 2012, profits hit $6.8bn.
Setúbal can take much of the credit for the bank’s performance, although its foundations were lain by his father, Olavo. A financial and administrative genius – also one of the shapers of modern Brazil – Olavo was known for his inscrutable mien, moral probity and wry asides. Taking a break from banking in the 1970s to become mayor of São Paulo, he described his new job as akin to “governing Switzerland and Biafra at the same time”.
In fact, Itaú became a bank by accident. Born in 1923, Olavo trained as an engineer, making his first fortune in the mid-1940s with a small metalworking factory. Indeed, if his wife’s uncle hadn’t asked him to take over management of the Federal Credit Bank, Itaú might not have happened at all. Then the 150th smallest of the country’s 200 banks, Olavo turned Federal Credit via a series of acquisitions into Brazil’s second biggest. Shortly before his death in 2008, he then gave his blessing to the merger with Unibanco. Itaú brought Olavo’s methodical engineering mindset to the merger; to Unibanco, client relationships and fund management. The result was the country’s biggest non-state bank and one of this century’s new crop of “multi-latinas”, Latin America-based multinationals.
“You always have to change,” remarks Setúbal of how Itaú has survived and prospered despite Brazil’s economic rollercoaster ride, an observation that is as true as ever today as Dilma Rousseff, the president, seeks to reforge Brazil’s exhausted economic model. “The government understands this is a new moment,” says Setúbal. “It is trying to do a lot.”
Not yet with great success, however. Among a plethora of recent initiatives, Rousseff has cut energy costs by controversially renegotiating utility concessions, and slashed interest rates to a record low. Cheap energy and money should be a boon for Brazilian industry and entrepreneurs, and so help rebalance the economy away from consumption towards investment. Instead, Rousseff’s interventionist and “bossy boots” approach has backfired, so far, frightening off rather than rekindling activity.
“The government changes taxes. They change this. They change that. The result is a lot of uncertainty,” says Setúbal, hinting at a certain anti-market animus in Rousseff’s leftist Workers’ party, a common complaint in Paulista business circles. “They have to communicate better the role of the government versus the private sector. They are not giving the right incentives, the right returns for the risks that are being offered,” he says.
That may be true. Yet Setúbal is also indulging in some special pleading. Rousseff has singled out Brazil’s high financial costs as a barrier to growth, and called for more “civilised” profit margins at Brazilian banks such as Itaú, while using state-owned banks to push down their loan pricing further. That has proved popular with Brazilian consumers, who have to pay credit card interest rates as high as 300 per cent a year, while undermining Itaú’s traditional cash-cow business.
Setúbal suggests that lower rates may anyway be insufficient to reignite Brazilian loan demand. “There has been a [general] drop in the demand for credit, and while I can still lend to the same demographic I once did, I also have to take into account their current [higher] level of debt … which means I have to ask for more collateral,” he says.
Does that imply the consumer credit binge of Brazil’s emerging middle-classes may be flagging, and might even draw to a close, just as it eventually did in over-indebted western economies? Setúbal dodges the question, but it could seem so.
Of course, Itaú could use its scale to expand abroad instead. Indeed, the glossy full-page adverts it takes out in the FT and The Economist describe it as a “global Latin American” bank. (Curious aside: during Brazil’s military dictatorship, Olavo never lent to media companies in case he had to refuse a loan and suffered poor media coverage as a result. That did not stop him from being a major advertiser, however; a shrewd move.) Yet Itaú’s international expansion remains modest so far. Although it has offices around the world, non-Brazilian revenues make up only about 15 per cent of the total. The bank certainly has the firepower to buy into, say, Europe. But Setúbal says that is not on the cards. “Banking is a marathon. We are not ready yet to be a global, global bank [sic]. ”
That admission in turn forces a refinement of what he means by Itaú being a global bank. “We are a Latin American bank, with a global attitude, based in Brazil,” he says. That is fair enough, given the continental scale of the country, although it is a very Brazilian definition of what global means. Indeed, it turns out that Brazil may not be such a bad place for business after all. Financial conditions in the developed world are even worse. Expanding into the region is also expensive. Backtracking on earlier comments, he suggests that the Brazilian economy “is in the right place … I think Brazil can grow at 4 per cent”.
Such growth rates may not be spectacular. But if they reflect Brazil’s economic coming of age, from past periods of boom and bust, it is also true that this is a process that Itaú itself must undergo. “I have to become more efficient,” he says.
For all its apparent modernity, the bank is still controlled by the Setúbal, Villela and Moreira Salles founding families, which together own some 90 per cent of Itaú’s voting stock and whose leading members account for nine of Brazil’s top 40 billionaires, according to Forbes. Yet Itaú has outgrown these families’ ability to manage it, an increasingly common problem for family businesses throughout Latin America. At Itaú, in particular, investors are concerned by the performance of the bank’s share price. The flashpoint they are watching for is if a family member succeeds Setúbal as CEO when he retires in three years’ time.
“At a certain point, the family is crucial to grow the business,” observes Setúbal. “But then comes a moment when they have to change from being good directors to good shareholders. You have to make people understand they don’t have to be a vice-president.”
It is a tricky business. On the one hand there are investors. On the other, there is the family, where “you have emotions, which can be disruptive. You can also have vanity and competition. But at the same time, the family’s money is in the bank, which makes the business something you want to preserve. It makes you all the more careful, wanting to do the right thing.”
Expanding on the theme, Setúbal points out that the best-performing businesses are often family-owned with good corporate governance, while the worst performing are family-owned with poor corporate governance. Itaú, he says, is in the first camp because the family has agreed on a common vision of meritocracy. “Then decisions become easier. Another kind of decision, for example, is to only have a family member as CEO.”
On that subject, Setúbal refuses to be drawn on who might replace him. “The next CEO might not be from the family, the last two were not,” he says. “I wouldn’t expect the next generation to be managers.”
When asked if such views are also held by the family members who pepper Itaú’s board, Setúbal replies elliptically. “I was the fourth of seven children, born exactly in the middle, so I’ve always had to negotiate.”
Setúbal will need to draw on all these negotiating skills over the next three years, as the Brazilian economy changes and Itaú, perforce, with it. In many ways, though, these are the problems of success. As this disarmingly candid captain of finance puts it, “It is all part of Brazil becoming more normal.”
John Paul Rathbone is the FT’s Latin America editor