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Itaú's purported Citi buy leaves few options for Brazil's global retail bank clients

Whilethe impending sale ofCitigroup Inc.'s Brazilianretail operations to Itaú UnibancoHolding SA is unlikely to have a substantial impact on either company,the deal will mark the effective end of a yearslong exodus of large global playersfrom the country, analysts say.

Citi,which announced plans to sell off its Brazilian consumer banking operations earlierin the year, is purportedly just daysaway from sealing a deal with Brazil-based Itaú. It is also near tofinalizing the sales of its retail operations in Argentina and Colombia as well,according to news reports.

For Itaú,the Brazil acquisition would give it only a marginal bump and is unlikely to impactits current rankings as Brazil's No. 3 bank as measured by retail branches and No.2 bank as measured by total assets. According to SNL Financial data, Brazil-basedBanco Citibank SA has71 branches and holds about 64.64 billion Brazilian reais in assets. By comparison,Itaú Unibanco's retail presence includes nearly 4,000 bank Brazilian branches, andit holds some 1.276 trillion reais in assets.

ClaudioGallina, a senior director and country head for Brazil's financial institutionsgroup at Fitch Ratings, noted that a Citi Brazil acquisition would barely move theneedle on Itaú's Basel III core capital ratio, estimating a decline to 12.57% from12.60%.

"Thebank's worst risk would be having its Basel's ratio reducing; but per our estimates,this risk is irrelevant," Gallina told S&P Global Market Intelligence.

But whilerelatively small, the sale could have a broader impact on Brazil's banking market,according to São Paulo-based Austin Rating analyst Luis Miguel Santacreu, as itwill effectively leave the country without a truly global retail bank. The dealwould follow a string of international players' decisions to exit the space — mostrecently the U.K.'sHSBC Holdings.

"Notall clients are globalized, but a relevant proportion is," Santacreu told S&PGlobal Market Intelligence. "As Citi and HSBC are the most global banks worldwide,Brazil will be without a strong global retail bank."

To besure, with the exits of both Citi and HSBC, Spain-based Banco Santander SA will be the only foreign-controlled bankin Brazil with a significant retail presence, accordingto SNL data.

And whileBrazil's largest domestic banks, including Itaú, have expanded their footprintsthroughout Latin America and have bulked up their global customer service offerings,Santacreu said they still fall short compared to the worldwide presence of bankssuch as Citi and HSBC.

In additionto marking a notable change for Brazil's banking landscape, the reported deal alsoraises questions as to whether Itaú will be able to hold on to Citi's primarilyhigh-income clients in Brazil — many of whom make use of the U.S. banks' globalfootprint, according to the Austin Rating analyst.

A decadeago, when then-Banco Itaú SA acquiredthe Brazilian operations of BankBoston from Bankof America Corp., swarms of clients moved their accounts to Citi, Santacreupointed out.

Today,Itaú is a much larger bank with a broader international footprint than it was in2006, but the analyst still questions how the bank will successfully absorb Citi'sclients who depend upon an overseas network.

"We'llhave to see customers' reaction [to being part of] a bank that is not global anymore,"Santacreu said.

If customersdo choose to defect, Santander may be their last best option. While lacking thesame global presence as Citi and HSBC, the Spanish banking giant still has a farbroader global footprint than Itaú, particularly in North America and Europe.

It ispartially for that reason that Rafael Ohmachi, an equity analyst at Brazilian brokerGuide Investimentos, felt that Santander was the better suitor for Citi's operationsin Brazil. The Spanish bank, which operates BancoSantander (Brasil) SA, was reportedly in the running for the business,but was outbid by Itaú.

Still,analysts noted that Itaú's want for Citi's operations is unsurprising. In additionto having a high level of cash on hand, which has bolstered its for acquisitions, the bank is alsolooking to keep pace with its main Brazilian rival, Banco Bradesco SA, which acquired HSBC's Brazil operations earlier in the year.

"I don't see Itaú's move as a surprise, due to its ongoingconsolidation efforts since the time of the Unibanco acquisition," Ohmachi said. "It's a continuationof that move."

As of Oct. 6, US$1 was equivalentto 3.23 Brazilian reais.