Brazilian bank IPO tests disruption potential of fintech firms

SAO PAULO (Reuters) - The first initial public offering (IPO) by a Brazilian retail bank in nearly a decade, set to price on Thursday, will test if investors expect new technologies to give smaller lenders a fighting chance against Brazil’s dominant big four banks.

Banco Inter SA, a tiny mortgage lender that has reinvented itself as a purely online bank, is the first in a wave of feisty digital challengers planning to go public - and looking to trade at higher multiples than many of Brazil’s largest lenders.

Skeptics look back to the last wave of Brazilian bank IPOs, when 10 small- and medium-sized banks listed on the Sao Paulo stock exchange in 2007.

High funding costs and weak results in a downturn forced several to delist, confirming perceptions that the little guy cannot compete in such a concentrated market.

Brazil's four largest banks - Itaú Unibanco Holding SA ITUB4.SA, Banco do Brasil SA BBAS3.SA, Banco Bradesco SA BBDC4.SA and Caixa Economica Federal - own 78.5 percent of outstanding loans in the country, according to the central bank. Their share has risen 20 percentage points in the past decade.

By comparison, Mexico’s biggest four banks hold 63 percent of loans.

Yet Inter and peers such as Banco Agibank SA, which also plans a 2018 IPO, are betting technology has changed things.

The disruptive innovations spawning dozens of Brazilian financial technology startups, known as fintechs, also let small digital banks reach customers across the country and raise funds through online checking accounts without costly bank branches.

“The current outlook for small banks is more favorable than in the past because technology allows them to diversify their services,” said Fábio Fonseca, a partner at JGP Gestão de Recursos Ltda, which has 13 billion reais ($3.73 billion) under management.

Fonseca said he had not decided whether to buy into Inter’s IPO.

Brazil’s central bank has been supportive of the new digital challengers, establishing rules to help new tech entrants compete on a more level playing field with established banks.

European regulators have also encouraged digital challengers such as N26 in Germany and Monzo, Starling and Atom Bank in Britain. In the United States, major fintechs such as Square Inc SQ.N and Social Finance Inc have sought banking licenses but small Main Street banks have fought regulation enabling tech competitors.


Major Brazilian banks have touted new digital services in recent years, but there are signs that fintechs and digital-first banks are still a step ahead.

JPMorgan analysts told clients in a note this month that after trying to open seven digital accounts at big banks and their new competitors, “our overall impression was poor with large-cap banks.” They said Inter’s registration process and product selection were among the best of the bunch.

In a vote of confidence, Brazilian asset managers Squadra Investimentos and Atmos Gestão de Recursos Ltda, have already committed to buying up to 200 million reais’ worth of shares at a maximum price of 21 reais per share. In total, the offering may reach around 730 million reais.

Still, Inter is seeking a rich valuation for a bank with just 500,000 clients, a loan book of 2.5 billion reais ($733 million) and 13 percent return on equity.

Based on its suggested price range, Inter’s IPO would value the bank at between 1.9 and 2.4 times its book value, including the proceeds of the offering.

Itaú Unibanco Holding SA ITUB4.SA, Brazil's biggest listed lender with 26 million clients, 600 billion reais in loans and 21.8 percent return on equity, is traded at 2.3 times its book value, according to Thomson Reuters data.

Other big Brazilian banks trade at even lower multiples, between 1.1 and 2 times book value.

Banco Inter’s track record on growth is also quite recent, as it has jumped to half a million clients from less than 12,000 at the start of 2016.

The lender, which is in a quiet period ahead of the IPO, declined to comment for this story.

Inter was founded in 1994 by the Menin family, which also controls homebuilder MRV Engenharia e Participações SA MRVE3.SA. It became a digital bank just four years ago.

It offers no-fee checking accounts and a full range of banking products, including investments and insurance. Yet more than half of its loan book is still made up of mortgages.

Ultimately, the small scale of Inter and its peers makes it more of a novelty than a genuine threat to Brazil’s banking oligopoly, according to some analysts.

“I do not believe new digital banks will have a substantial market share in the next five or 10 years. It may be easier for big traditional banks to move their large client base digital,” said Antonio Bernardo, head of consulting firm Roland Berger in Brazil. “Still, online banks can be quite profitable.”

Where big banks see real challenges from digital upstarts, such as online financial services firm XP Investimentos, they have found other ways to neutralize the threat. Itaú agreed last year to pay 6.3 billion reais for half of XP, with an option to buy full control.

Reporting by Carolina Mandl; Editing by Brad Haynes and Matthew Lewis