Interview with the President of Itau-Unibanco, Brazil's Largest Bank

Following on the Brazilian bank theme, Roberto Setubal, President of Itau-Unibanco, the largest Brazilian bank, with U.S. $ 632 billion in assets and iver 100,000 emp0loyees, gave an interview to the O Estado de Sao Paulo newspaper published on Sunday March 22. Here are some excerpts.

Mr. Setubal says the country will avoid a recession in 2009 and sees signs that the worst is over
Mr. Setubal denies negotiations to expand beyond national borders. "The priority right now is completing the integration of the banks". Cautious, he says that the worst of the crisis has likelypassed and says he does not believe in recession in Brazil this year. "I see growth close to zero, which is positive given the drop on the last quarter of last year."


What do you think about interest rates?

In Brazil, we have had a a distortion for more than 20 years: a savings account ("caderneta de poupanca") that is tax-exempt and has basic interest rates relatively high for the world's economy. If you want lower interest rates, somehow we have to review the remuneration of savings. There are several possibilities. We must be very careful with the legal issues. The way that seems most appropriate to address the problem at this moment would be to introduce income tax in investments above a certain value, say R$100,000.00 or R$ 200,000.00. If we use these values, probably 99% of savers will remain exempted.

If rates drop, will the banks have problems?

We have had high interest for many years. I always said that, as anywhere in the world, banks survive with any kind of interest rates. The difference is in the way results and revenues are achieved. Banks must be flexible to adapt to that. I see the Itaú-Unibanco prepared to lower interest rates.

What is the scenario of interest to the end of the year?

We can reach 9% or lower. In the future, we will feel like the economy reacts, but I think that is it ready for a rate below 10%.

Do you see recession in Brazil?

No. I see this year growth close to zero, which is a positive number given the drop in the last quarter of last year. We can have growth in the first quarter, which would be a positive surprise. Some indicators are responding well, for example energy consumption. The economy is showing signs that it has found a floor. Several indicators show that the economy is not going down a slope.

Is the worst over?

Possibly yes; it is not possible to make such statement, but there are signs that we may have reached the bottom of the well.

And outside Brazil?

That is quite different. The crisis is very serious. What happened in the financial system of developed countries had an unexpected dimension. It will take three, four years for the GDP of USA, Europe and Japan go back to previous levels. Regardless of this, the Brazilian economy can resume growth in 2010 and 3% is a rather reasonable.

Will Citigroup and Bank of America survive?

They will Survive. Clearly, the U.S. government is giving them full support to survive. They both have a very significant presence in the world, it is important that this government support continues.

How do you see the possibility of nationalization of banks?

The fact that the U.S. government has put capital in these banks does not mean that the intention is manage them, they are very complex institutions. The government's intention is to restore the financial system and get rid of this problem. It is more like putting out a fire.

Will this solve the problem? Some say we will see a new Japan forming (which took years to solve problems and faced long economic stagnation).

The government is moving towards a path and some analysts point to other paths. We have seen this week the Fed inject more resources in the economy. We are finally seeing proposals and solutions to the size of the problem. We may be starting to see the beginning of the end of the financial crisis, which means that the government can stabilize the financial system. Therefore, we have the expectation to see the resumption of economic growth in a few years.

How do you assesse a temporary nationalization of banks?

I am pragmatic. I do not attack or defend. If this is the best solution, then we should do what is best for the country.

If Itaú-Unibanco had operated in the U.S., would it have made the same transactions that caused these problems?

It would be very easy to say no and I would look good in the picture. Given the market conditions, we would have done something. Probably not with same the intensity that some banks did. Certainly we would not have been aggressive in the market. But when you are embedded in a market you do not see the risks. So it is very difficult to say that that we would get out unscathed. It is unreasonable to say that.

In what moment you realized that there was an irrational exuberance out there?

Looking today, the market in general, and the Fed, realized that there was something wrong. Alan Greenspan commented some years ago about "irrational exuberance". More recently, pointed to the "Conundrum", a mystery related to the very low long-term spreads. All of this indicated that there were problems. Nobody knew exactly where, but there were signs that something was out of place.

Some people have said that vehicle financing was the subprime of Brazil.

Do not have anything similar here. In Brazil there will be an increase in defaults, but nothing like the U.S. We are more accustomed to fluctuations. We see a new cycle of bad debt growth. But the banks are prepared to absorb this wave because, in Brazil, I do not see the economy going into deep recession.

There is a significant increase in defaults among small and medium enterprises, attributed in large measure to the lack of credit.

There is no lack money. The demand for credit rises when GDP is growing. When it falls, the opposite occurs. Moreover, with more uncertainty, banks are more selective in granting credit. Anyway, when we look at the volume of credit in the economy, there is an increase. Itaú itself in the last quarter (of 2008), increased the amount of credit offered by over 6%. In the first quarter, we grew our loans to small businesses. It is a weaker seasonal time.

Itaú-Unibanco is the largest bank in the country What is the next goal?

The integrattion of the two banks.

And how about the speculation about the Mexican Banamex?

Our priority at the moment is to integrate the banks. It is a mega effort integrating two companies of this size. We are very focused. This step comes before anything else. We did not make the merger to have the largest bank, but the strongest, with also more ability to make acquisitions outside Brazil.

Are there a lot of cheap banks on the market today?

Cheap banks is usually a bad bank. We want good banks. I do not see the opportunity to take risk to buy something uncertain. The crisis is long and the opportunities will not disappear quickly.

Itaú, Unibanco has about 100 thousand employees. Many are afflicted with the possibility of layoffs. What do you say to them?

We will not close branches, we continue to expand the business in some areas. We will be able to make the unavoidable cuts through natural turnover, intime and without pressure.