Banking with the Brahmins

Latin Trade, June, 1999 by Thierry Ogier

BankBoston targets rich investors instead of borrowers in Brazil.

ON THE PRESTIGIOUS AVENIda Paulista in Sao Paulo, only a stone's throw from Brazil's Central Bank building, sits BankBoston's latest branch office. Housed in one of the few remaining mansions dating from the coffee boom at the turn of the century, the lush classic structure symbolizes its desired customers: rich people. "We are only going to attend the A-class customer," says Odilon Almeida, the bank's vice president in Sao Paulo.

In a market plagued with sky-high interest rates and slumping growth, BankBoston is betting that the bank is far better off managing rich investors' funds than trying to make money on loans to companies and consumers. Tough to argue with them. Assets under management have jumped 35% last year to $6.1 billion. Profits last year were up 29% at $102 million, making BankBoston the second-most-profitable bank in Brazil.

The bank's elitist strategy blossomed under the guidance of Brazilian native Henrique Meirelles, president and chief operating officer of BankBoston until its recent merger with New England's Fleet Financial Group formed the eighth-largest U.S. bank with $180 billion in assets. Meirelles, now head of the new bank's international division, has said publicly that there will be no change in strategy, explaining why it works: "Our customers come from a small slice of the Brazilian economy, the segment where incomes and assets continue to grow even in difficult times."

The 1% solution. The target market is the 1% of the population that had a minimum monthly income of 4,000 reais, about US$3,500 before the devaluation. Starting in August 1997, the bank earmarked $100 million to attack this segment. Last year, it doubled the number of branch offices to 65 and increased the number of employees by a third to 4,200. With the market identified and the service coming online. BankBoston got lucky.

When the economic fallout from troubles in Asia and Russia hit Brazil last year. BankBoston enjoyed a "flight to quality"--consumers taking their money out of institutions viewed as being unsafe and depositing them with "quality" banks. By the end of the year, the number of account holders at BankBoston in Brazil actually had doubled to 110,000. Those customers now represent 44% of the bank' s revenue, an increase from 31% in 1997. Corporate banking revenue now accounts for less than 40% of revenue; the remainder is derived from treasury operations.

While wealthy Brazilians were expressing their confidence in BankBoston, Wall Street was decidedly bearish about the bank's burgeoning exposure to Brazil. Financial analysts were concerned about the bank's $6 billion commitment in Brazil and another $9 billion invested in neighboring Argentina. The bank's share price tanked, at one point slicing $6 billion off the bank's marker capitalizations and ultimately pushing the bank into a merger with Fleet.

While applauding BankBoston on shrewd maneuvering in a very difficult market, Luis Miguel Mas Santacreu, analyst at financial consultancy Austin Asis, in Sao Paulo, is not convinced by its elitist strategy nor by its financial firepower. "Its strategy looks right for the moment, but in fact, it is limited," he says. "In the medium term, things will get more complicated. BankBoston does not have the required funds to acquire another bank in Brazil. It has to grow on its own. When Citibank launches an offensive in Brazil. Bank Boston is going to lose customers."

Citibank has been trying to increase its presence in Brazil through a major acquisition but so far has failed. Nonetheless, it is expected to compete fiercely in the upcoming sale of Banespa, the big government-owned bank in Sao Paulo state.

BankBoston's Almeida discounts the threat. He points out that the bank has stuck to its customer profile in Brazil, while HSBC, ABN Amro, Banco Santander, Citibank and other major competitors have gone after the middle class. "We are the only bank in Brazil that made plain it was not going to go for the mass market," says Almeida.

And despite the roller-coaster Brazilian economy, the bank is not changing course in the region, according to Almeida. "We have not altered our planned investment by a cent," he says. The bank still aims to boost to 200,000 account holders by the end of year. In fact, the bank is spending millions on its marketing efforts and developing tailor-made services for specific categories of professionals such as physicians.