Itaú: The origins of a global bank

Consolidation of the Brazilian banking sector in 2001 reached the final stage in the seven-year cycle, which began with the implementation of the Real plan. During this cycle, the competitive environment has been altered by the privatization of basically all the state-owned banks, the restructuring of the federally-owned banks, the absorption of many large private-sector Brazilian banks, and by a free market for international banks…Itaú is clearly one of the winners in this consolidation process. Olavo Setubal, chairman of Banco Itaú, 2001 letter to shareholders

Setubal had good reason to feel proud. Between 1995 – the first year after the Real plan stabilized Brazil’s inflation – and 2001, Banco Itaú (Itaú) posted an average return on equity of 21%, grew its asset base from $25.1 billion to $34.8 billion, and enjoyed the highest market capitalization of any private sector bank in Latin America.

Itaú’s performance was particularly impressive when compared to its rivals. Itaú posted significantly better returns on equity than other Brazilian banks. Itaú’s performance allowed it to avoid the fate of Mexican and Argentinean banks, which were for the most part displaced or acquired by multinational banks once their markets were opened to foreign competitors.

Banco Itaú, however, had not always been one of Brazil’s premier banks. The bank was born in 1945 as Banco Central de Crédito, and for its first twenty years remained a credible, but small regional player. Between 1964 and 1974, the bank grew rapidly through a series of mergers and acquisitions, including a merger with Banco Itaú, which gave the combined entity its new name.

In 1986, the Brazilian banking sector faced a sudden death threat, when the government’s Cruzado Plan stopped rampant inflation and endangered all Brazilian banks’ profitability. The sudden end of inflation produced a onetime loss and decreased Brazilian banks’ ability to generate income based on high inflation. The fiscal reform rendered Itaú unprofitable overnight. Banco Itaú successfully responded with triage, cutting its workforce from 80,000 to 55,000 and launching a major operational improvement effort.

Surviving the sudden-death threat posed by the Cruzado Plan was necessary for Itaú to stay in the game, but not sufficient for them to thrive and improve performance in relation to their competitors in the years that followed. How did Banco Itaú emerge as one of Brasil’s leading banks?

Much of Itau’s success resulted from management’s ability to wait actively for golden opportunities, and then mobilize resources to exploit attractive opportunities as they arose. The privatization of Brazil’s state-run banks in the 1990’s, in particular, posed a golden opportunity that Itaú seized more successfully than its peers. Itaú acquired formerly state-owned Banerj in Rio de Janeiro (1997), BEMGE in Minas Gerais (1998), Banestado in Parana (2001), and BEG in Goias (2001).

The successful acquisition and integration of these newly-privatized banks provided Itaú with the scale to withstand onslaughts by multinational banks. Indeed, in April 2006, Itaú bought BankBoston’s operations in Brazil, and within two years exercised its option to buy BankBoston’s subsidiaries in Uruguay and Chile.  The growth of Itaú through M&A culminated in it’s 2008 merger with the Brazilian bank Unibanco to create Itaú Unibanco, the largest bank in the Southern Hemisphere and among the ten most valuable banks in the world measured by market capitalization.

Drawing on my research with Martin Escobari, my next few posts will discuss Itaú Unibanco’s impressive rise, focusing in particular on the critical acquisitions of privatized banks that created the platform for the bank’s subsequent growth.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.