May 16 (Bloomberg) -- Banco Itau Holding Financeira SA'sRoberto Egydio Setubal, head of Brazil's second-biggest non- government bank, said his nation is in a ``transformation'' that's creating the best conditions for business he's ever seen.
Brazil, Latin America's largest economy, has broken a cycle of boom and bust because of rising commodity exports and will enjoy sustainable annual growth of 4 percent to 5 percent, Setubal said in an interview this week in Sao Paulo. An investment-grade rating granted by Standard & Poor's last month will make Brazil a magnet for foreign investors, he said.
Setubal is expanding abroad and at home, capitalizing on the 31 percent rise in Brazil's real against the dollar since May 2006, the collapse of inflation from almost 5,000 percent in 1994 to 5 percent now, and losses at global competitors. He's opening offices in the Middle East and Asia, hiring bankers from Deutsche Bank AG and Merrill Lynch & Co. and looking to buy Brazilian assets that may get dumped by foreign firms at discount prices.
``I don't see Brazil going back,'' the 53-year-old chief executive officer said at his office in Sao Paulo. ``The strong currency and investment grade are here to stay.''
Brazil, the biggest debtor among emerging markets for decades, became a net foreign creditor in January after international reserves surged to a record $195.8 billion. Luiz Inacio Lula da Silva, president since 2003, bolstered confidence in the nation by reducing the budget deficit and allowing the central bank to operate independently, Setubal said.
`Biggest Opportunities'
``Brazil in coming years will enjoy growth in financial instruments much higher than any other country that I'm able to be in,'' said Setubal, a member of the International Advisory Committee of the Federal Reserve Bank of New York. ``The biggest opportunities for Itau are in Brazil.''
Itau plans to expand its network of 2,782 branches by 140 in Brazil this year, and add 5,000 workers to the staff of 66,442, senior managing director Silvio Carvalho said in a Bloomberg Television interview on May 6.
Led by Setubal, who became CEO in 1994, Itau has returned better than 1,300 percent with dividends during the past decade in Sao Paulo trading, more than double the Bovespa index and outpacing the 1,092 percent total return of Banco Bradesco SA, Brazil's largest non-government bank by assets. Government- controlled Banco do Brasil SA, Latin America's largest bank by assets, advanced 771 percent.
Commodity-Led Bonanza
Lack of investment in roads, ports and energy could put the economic expansion at risk, said Sergio Goldenstein, the former head of open-market operations at the Brazilian central bank.
A drop in commodities prices could also reduce growth, said Goldenstein, now an economist at Rio de Janeiro-based BNY Mellon ARX, which manages about 9 billion reais.
``Part of the improvement in household income in some sectors of Brazilian society came because of'' rising commodities prices, he said. ``A reversal of this scenario could mitigate growth.''
Brazil's $1.07 trillion economy grew 5.4 percent in 2007, the fastest in three years. Controlled inflation led the central bank to cut the benchmark interest rate to as low as 11.25 percent in September, encouraging people and companies to borrow record amounts and boosting profit at Brazilian banks. Lending has increased every month since February 2004 to 992.7 billion reais ($600.8 billion) in March.
``The transformation that we have gone through in the past 10 years is very solid,'' Setubal said.
Under Pressure
Eleven analysts recommend buying Itau shares compared with one ``sell,'' according to Bloomberg data.
``Itau's efficient management pleases the market,'' said Aloisio Lemos, analyst with Rio de Janeiro-based Agora Corretora, who has a ``buy'' rating for the shares. ``They also have such a variety of products that naturally dilutes risk.''
The company's net income almost doubled in 2007 to 8.47 billion reais from the previous year, compared with a 58 percent rise in Bradesco's profit to 8.01 billion reais. Itau posted its smallest quarterly profit gain since 2006 in the first three months of 2008 as the net interest margin and return on equity narrowed.
Falling interest rates have made it difficult for Brazilian banks to maintain return on equity, said Andre Caminada, a partner at Victoire Finance Capital in Sao Paulo, which manages about $210 million.
Poaching Talent
``Banks can't compensate for this decline with higher fees because of government rules and competition,'' said Caminada, who doesn't hold Itau shares. He said that Itau is more conservative in lending than rivals. ``In the medium term, Itau needs to be more aggressive in insurance. Bradesco is much more efficient there.''
Itau is taking advantage of losses in mortgage and collateralized debt markets that weakened international peers, Setubal said. International banks and securities companies have raised about $260 billion of capital since July, after writedowns and credit losses of at least $342 billion.
``We were lucky about this crisis, because it gave us time to develop our business'' while competitors were reeling, Setubal said. ``Today I'm building up my business, hiring good people in the market, developing my franchise.''
Itau hired 196 people in the past year for its investment banking unit Itau BBA SA, Brazil's largest wholesale bank, including Alexandre Aoude, former head of Deutsche Bank's Brazilian unit. Itau BBA's staff increased to 1,026 at the end of April from 830 people a year earlier, according to the bank.
Foreign Investors
Brazil was the third-biggest market for initial public offerings globally in 2007, according to Bloomberg data. This year, only three companies went public, reflecting the reduced appetite for risk by international investors. Setubal said ``the worst moment is behind us'' and he expects IPOs in Brazil to rebound during the second half of the year.
``Markets closed up because international investors were reluctant and more careful about investments in general,'' said Setubal, who is the only Brazilian vice-president at the Institute of International Finance. ``This year probably will be more selective. For good companies, solid management, solid business you have a market.''
Foreign investors bought 75 percent of the shares sold in public offerings in Brazil last year and 49 percent of the ones sold this year, according to the local stock exchange, Bovespa.
Setubal expects Brazil to regain its post among countries with the highest number of future IPOs once a second investment grade is forthcoming.
Inflation Risk
Inflation is another risk to Brazil's bonanza, said Goldenstein. The central bank last month raised its benchmark rate for the first time in three years after inflation reached a two-year high of 5 percent.
Higher interest rates won't deter the economy from growing and the monetary policy makers' action was another sign of the government's commitment to sound economic policies, Setubal said.
``This is a big change in Brazil,'' he said. ``Politicians used to believe spending was very popular and nowadays they learned that stable prices is much more popular.''
