Banco Santander Brasil Has Our Attention

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Let's step away from the busy IPO market to focus on one heading our way in a few weeks. Banco Santander Brasil will attempt to raise between 11.55 billion and 13.12 billion reals, or roughly $7 billion, offering 525 million shares. The offer price will be finalized on Oct. 6, with the ADRs trading the following day. Morningstar equity analyst Maclovio Pina is intrigued by the offering, and gives us some background on this high-interest IPO.

"Spain's  Grupo Santander (STD) will spin-off around 15% of its interest in Banco Santander Brasil, the country's 4th-largest bank. With a deposit market share of roughly 10%, we think Santander Brasil has room to grow in Brazil's lucrative banking market, with expansion plans that should reap the benefits of this booming space. Brazil has emerged from the global downturn in fairly decent shape, and while growth is still slightly tepid, the country's economy is showing renewed signs of expansion, which we think will help support the bank's strategy.

"Santander Brasil will have to overcome some potential hurdles in the near future. For one thing, it operates in a competitive market with several rivals, including  Itau Unibanco (ITUB) and  Banco Bradesco (BBD). Loan losses are still on the rise, which we don't expect will reverse anytime soon, and there remains some pressure on interest margins, partly due to government-controlled behemoth Banco do Brasil. We anticipate these factors will result in lower profitability in the near term. However, we think Santander Brasil, with about 20% equity-to-assets, twice that of Itau or Bradesco, has more than enough capital to withstand these expected losses. Furthermore, the bank has plenty of funds to deploy through its aggressive expansion plans, through either acquisitions or organic growth, which should lead to market share gains in the future."

We plan to have a report and fair value estimate ready ahead of the firm's initial trading date, so stay tuned.