Banco Santender Central Hispano Americano, S.A. (BSCH), based in Santender, Spain, is furthering its existing presence in Latin America with the recent purchase of Banco del Estado de Sao Paulo (Banespa) for $3.6 billion.

Although the acquisition may seem like a sensible move for BSCH, some analysts are wary about the outcome. Moody's Investors Service has changed BSCH's Aa3 debt and deposit ratings outlook from positive to negative.

Additionally, Fitch has changed its support rating on BSCH to 3T since BSCH will only control 30% of Bansepa and BSCH may be exposed to a transfer and convertibility risk. At the same time, however, as a result of the acquisition, Fitch has placed Banespa's D rating on Rating Watch Positive and changed its support rating to 3T from 2T.

"They [Banespa] are a very liquid bank; if you look at their balance sheet, they have a lot of government bonds in their assets because they are not lending. So this could be positive and this could be negative," said Celina Vancetti, senior analyst of Brazilian Banks for Moody's.

"The positive is that they don't have a lot of loans to be renegotiating but at the same time, the interest rate in Brazil is declining so all the profit that Banespa would make with the government securities start getting lower and lower."

According to analysts, three or four years ago, BSCH came to believe that the European market would soon be a mature market and therefore developed a strategy to leverage on cultural affinities in Latin America, which seemed to have a great deal of growth opportunity. Today, BSCH is the largest private bank in Argentina, and the third largest bank in Mexico after the acquisition of Banca Serfin in May.

BSCH also has a presence in Peru, Colombia, and Venezuela. Prior to the acquisition of Banespa, BSCH did not have much of a market share in Brazil even though it had already purchased three Brazilian banks, according to Vancetti. "The largest bank in Argentina has assets of $12 or $13 billion. In Brazil, the largest private bank has assets of $55 billion. There is a tremendous difference because the [Brazilian] market is much bigger and the economy is much bigger," Vancetti said.

When Banespa first came to market, there were nine candidates for the acquisition including the three largest Brazilian banks and several foreign banks. In the end, BSCH offered four times the minimum price for the bank. "This aggressiveness reflects that they are really serious about having a substantial presence in Brazil," Vancetti noted.

Prior to the acquisition, Banespa was in the hands of the Brazilian government for nearly five years, and according to Vancetti, compared to other banks in the market, "Banespa was more or less losing market share."

BSCHS is aggressively planning for an $800 million profit from Banespa for the year 2003 by increasing the efficiency of the bank and reducing costs. BSCH has also said it will invest $150 million for a much- needed technological update.

Furthermore, there are internal issues that Vancetti feels will be the most challenging for BSCH. "Perhaps the most important issue is the union and the employees of Banespa. They are very unionized and very strong, very united in terms of eventually preparing actions in terms of BSCH taking over the bank. I think this is recognized in the market as perhaps the risky aspect of the transaction," said Vancetti. "It [Banespa] has a lot of market share and it adds a lot of value, but it has a lot of problems. This bank that they acquired is not an easy digestion."

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