(Bloomberg) — Brazil’s central bank president, Gabriel Galipolo, cleared his schedule on Monday to make room for some urgent meetings. The guest list included Andre Esteves, chairman of financial giant Banco BTG Pactual SA, and Paulo Henrique Costa, the leader of a smaller, more obscure bank owned by the government of Brasilia.
The topic was a third bank that had brought all their fates together. Until recently, Banco Master SA had been a high flier, expanding its lending portfolio by 86% a year on average, leasing a splashy office in Miami and acquiring rivals. But to grow so quickly, Master had relied heavily on an incentive offered by a deposit insurance fund called FGC. A December 2023 rule change threw the bank’s future into uncertainty and raised concerns of others in the industry that the situation may pose a broader risk.
Daniel Vorcaro, Master’s chief executive officer and biggest shareholder, has been trying to sell the lender ever since the central bank introduced new FGC rules that disrupted its business model of borrowing from mom-and-pop savers to buy riskier assets, according to people familiar with the matter. Negotiations to be acquired by BTG were unsuccessful, the people said. But last week Master announced an agreement to merge with BRB SA, the bank owned by Brazil’s capital city.
That deal still requires antitrust approval and the signoff of the central bank, which has been led by Galipolo since January. He’s scheduled to meet Tuesday with Vorcaro in what could be a pivotal encounter for Master’s future and a test of Galipolo’s ability to contain a potential crisis for FGC. Critics of the Master-BRB deal say it’s tantamount to a government bailout of a firm that was allowed to take on too much risk for too long.
“The recent case of Banco Master and its rescue by BRB, a public bank linked to the federal capital district, blatantly exposes the functioning of a system that rewards irresponsible behavior — and transfers the risk to society,” said Fabio Alperowitch, co-founder and chief investment officer at Fama Re.capital, an asset-management firm, in a LinkedIn post.
BRB said in a statement that the deal brings “complementarity of businesses, solidity, liquidity and capital.” It will take place after a restructuring that will create a holding company. This separate entity, which wouldn’t be part of the deal, would keep some of the riskier slices of Master, such as its equity stakes in small and midsize companies, its portfolio of bonds linked to court-payment disputes (legal claims), and the investment-banking business, among other “non-strategic assets and liabilities.”
The central bank and Galipolo declined to comment. BTG and Master didn’t reply to messages seeking comments.
Banco Master was born after Vorcaro and partners bought a small bank, in 2017, and changed its name and strategy. Since its inception, Master relied heavily on funding from individual investors using a benefit from FGC, which is funded by reserve requirements from banks and owned by the biggest lenders.
FGC insures deposits in Brazil up to 250,000 reais ($43,816) per individual per bank. To attract those clients, Master paid more than other banks in interest — as much as 140% of Brazil’s interbank rate, called DI.
But the more Master grew using this type of funding, the more deposits it was forced to make in the FGC under the fund’s rules. Those deposits also increased Master’s cost of funding.
Then came the new rule in December 2023, forcing banks with a potential need of the FGC greater than six times their shareholder’s equity to retain more treasuries from the Brazilian government on their balance sheet, starting in June 2024 with an adjustment period through 2028.
But with its high cost of funding, Master needed riskier assets than treasuries to be profitable. Bonds linked to legal claims represented 34% of Master’s loans as of June 2024, Moody’s said, or about 175% of the bank’s equity.
In June, FGC had 132.7 billion reais in assets. Master’s time deposits that could need FGC insurance totaled more than 28 billion reais in the same month.
If the central bank blocks the acquisition, the Brazilian financial system could face challenges.
In a hypothetical liquidation or intervention of Banco Master, about 25% to 30% of FGC’s resources could be consumed, said Rafael Schiozer, a professor of finance at business school FGV-EAESP.
“Having a decapitalized FGC would reduce the security of the system as a whole,” he said.
Master was working to wean itself off of its FGC business model, but it has remained heavily dependent on the fund. In June 2024, roughly 65% of Master’s funding mix comprised individual customer deposits, obtained primarily through third-party brokerage platforms, Moody’s Ratings said in a report. It was 95% in 2022.
Additionally, a considerable portion of Master’s liquidity consisted of credit-linked and equity investment funds, which are harder to sell when needed than government securities. These funds accounted for 69% of the bank’s liquid assets as of June 2024, Moody’s said.
Master’s equity funds have stakes in companies such as Oncoclinicas do Brasil Serviços Medicos SA, a Brazilian cancer-care provider, and Biomm SA, a biotechnology firm.
Banco Master “continues to present important concentrations in its loan portfolio, as well significant exposure to credit-linked and equities held on its securities portfolio that adds asset risk and opacity to its balance sheet structure,” Moody’s said in a report in September.
The pressure forced Vorcaro to seek a deal, and he found a willing partner in BRB. Under the merger agreement, Master, with 51 billion reais in assets, will be incorporated by BRB, with 61 billion reais.
BRB would acquire 49% of Master’s voting shares, so Master’s shareholders would still have the voting majority. Master would remain a separate entity under the BRB brand. BRB will buy 100% of the preferred shares and 58% of the total capital of the bank. Vorcaro would join the board of BRB.
To Schiozer, the transaction is an “unforced sanitation” of the Brazilian financial system. In other words, the industry is seeking to clean up the problem itself without government intervention.
But ultimately, it’ll be up to Galipolo’s central bank to decide if the BRB deal leaves the financial system healthier.
–With assistance from Daniel Cancel, Martha Beck and Barbara Nascimento.
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