It is such a wrench to have to sell something that you really value. Banco do Brasil, the country’s largest bank by assets, is going through just such an experience. It has announced the partial listing of its insurance business, BB Seguridade, this month in what would be the biggest flotation in Brazil since 2009. It is certainly an attractive asset. Banco do Brasil’s net income from insurance and pensions grew by a third last year, more than any other part of the group, accounting for a tenth of the total. The business is the Brazilian market leader in insurance.
The bank is planning to float up to a third of BB Seguridade, raising R$11bn at the mid point of the pricing range. Banco do Brasil has no shortage of uses for the funds. The government, which owns half of it, is keen to get the economy moving again and is pushing the banks to increase lending. Banco do Brasil is promising loan growth of up to 20 per cent this year but that kind of jump needs capital to cover the risk of a rise in bad debts. M&A activity is also in the air. The bank owns 50 per cent of local rival Banco Votorantim and is rumoured to want to buy more. It is also a potential bidder for City National Bank of Florida, a 26-branch operation being sold by Spain’s Bankia. Even if neither of those deals comes off, the listing proceeds could bolster core tier one capital which the bank expects to decline from 8.8 per cent to 7.6 per cent by 2016.
Still, Banco do Brasil has priced the public offering aggressively. The midpoint of the pricing range would value BB Seguridade at R$33bn. Assuming the business grows as much in 2013 as it did in 2012, that would be a valuation of 19 times forecast earnings. That is a hefty premium to the 8 times at which the rest of Banco do Brasil is valued. If you have to sell the family silver, it hurts less if you get top dollar.
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