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Itaú's Credicard buy may bring in unexpected tax benefits-ESIB

Itaú Unibanco Holding SA's purchase of Citigroup Inc's Brazilian consumer finance division Credicard could bring in unexpected tax benefits for Brazil's largest bank by market value and protect a dominant position in the nation's burgeoning credit card market, an analyst said on Wednesday.

Itaú's decision on Tuesday to pay 2.77 billion reais ($1.37 billion) for Banco Citicard SA and Citifinancial Promotora Ltda "makes all sense" from a strategic and financial standpoint, said Gustavo Schroden, senior banking analyst with Espírito Santo Investment Bank, in a phone interview.

 

Based on his own estimates, Schroden said Itaú paid the equivalent of 10.7 times estimated earnings this year for Credicard, or 2.3 times book value, both "very attractive multiples given the strategic synergies that could be extracted from the deal." If a tax benefit worth 690 million reais over six years was included, multiples would actually turn "even more attractive," he added.

The transaction gives Itaú an edge in the card market in Brazil, where more than 40 million people have in the past decade joined the ranks of the middle class and increasingly using financial products. With the Credicard purchase, Itaú's credit card base will rise to 37.7 million users, equivalent to a 40 percent market share - the largest in Brazil's card sector.

"The acquisition was pretty good in terms of the price paid as Itaú could extract substantial synergies from the integration of Credicard while protecting its leadership in the market," Schroden said.

Shares of Itaú jumped 2 percent in early afternoon trading, reaching 35.22 reais - the highest intraday price in a week. Itaú is up 4.8 percent so far this year.

Schroden said earnings estimates for Itaú could be revised higher should Creditcard's acquisition and integration begin to deliver income and expenses-related results sooner than expected. The tax benefits themselves may not necessarily lead to a revision of estimates, he added.

Espírito Santo has a "buy" recommendation on Itaú shares, with a price target of 42 reais a piece.

The bank is focusing on fee-related activities to try to stem a decline in revenue from loans in the face of an abrupt decline in interest rates, two years of sub-par economic growth and rising leverage among some consumers. Last year, Itaú took control of the 49 percent it did not own of Redecard SA, Brazil's No. 2 card payment processor, for about 10.5 billion reais, seeking to boost revenue from the segment.

With the purchase, Credicard returns to Itaú, which was Citigroup's partner in the company until 2006. The transaction is subject to regulatory approval.

Itaú trumped Banco Santander Brasil SA and Banco Bradesco SA, which sources recently told Reuters were in the race for Credicard. Bradesco currently has a 20 percent market share in Brazil's credit card market.

"An acquisition by either Santander Brasil or Bradesco would have hurt Itaús leadership in the segment - it was a move to protect its turf," Schroden added.

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