A Bank of America Merrill Lynch sign is seen on a building that houses its offices in Singapore May 17, 2012. (Photo : REUTERS/Tim Chong)
Itau Unibanco's (ITUB4.SA) takeover of Redecard (RDCD3.SA) will help Brazil's most profitable bank vie for a bigger share of the fast-growing credit card business and could alter the relationship between banks and card users.
A relentless government push to lower borrowing costs is forcing banks to promote products such as credit cards to make up for falling interest income. Redecard for years enjoyed a large chunk of the booming $400 billion-per-year card processing industry - and Itau wants to leverage its ownership as card transactions soar in Latin America's largest economy.
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By taking full control of Redecard, Itau can offer a more complete array of services without having to disclose strategies or investments to minority shareholders - who for years objected the company's ambitious capital spending plans. Itau previously owned 50.1 percent of Redecard, which contributed to 7 percent of the bank's profit last year.
"With Redecard folded into Itau, the new competitive scenario will reinforce banks' role as a distribution channel," said Francisco Kops, an analyst with J Safra Corretora in São Paulo.
Hours before Itau clinched the Redecard deal, competitors were actively announcing new steps. Banco Bradesco (BBDC4.SA) cut interest rates on Monday on all its credit card products, while Elavon, Citigroup's (C.N) acquirer, launched a new clearing platform with Brazilian technology company Bematech.
Itau will spend as much as 11.77 billion reais ($5.82 billion) to take Redecard private. The bank owns another acquirer, Hipercard, which might be merged with Redecard to gain scale, Jorg Friedemann, an analyst with Bank of America Merrill Lynch, said on Monday.
The deal may also allow Itau to book one-off tax gains worth 4 billion reais, analysts said.
The takeover of Redecard could accelerate changes in the way banks finance card holders. Itau's efforts to reduce the widespread use of interest-free installments on credit card purchases could help banks remove part of the risk of defaults from their balance sheets.
Currently, Brazilian consumers are only charged interest if they fail to pay credit card bills in full or on time. Banks and retailers for years financed the existence of interest-free installments to encourage demand for both goods and credit.
But after a decade of robust economic and wage growth, lenders are increasingly reluctant to offer interest-free installments for consumers who are better off financially.
Itau could use Redecard to speed up plans for a new type of credit card that would cut interest rates in half but charge interest from the date of the purchase of a good or service if the client makes a partial payment or defaults, said Victor Schabbel, a financial industry analyst with Credit Suisse Group.
That would allow the bank to bring in more revenue from credit card transactions.
"This is an important change to the way credit cards have been historically structured in Brazil," Schabbel wrote in a recent report.
Record-low interest rates in Brazil have also increased banks' focus on credit cards and other fee-based services.
A robust job market is allowing Brazilians to more rapidly substitute cash with credit. Abecs, the group representing acquirers, expects the industry to expand 20 percent this year.
Merchant acquirers, as companies in the sector are known, have thrived in the past three years even as newcomers have driven down fees. Redecard and rival Cielo (CIEL3.SA) hold about 80 percent of the market, down from 90 percent in 2009.
With Redecard's delisting, the fight for market share should intensify. The change could spark a fight between the two major players, Friedemann noted, driving down fees and hampering the performance of Cielo's shares.