Bank mergers possibly rising in Brazil

Financial analysts predict that mid-size Brazilian banks are ripe for merging when you consider high inflation, high interest rates, GDP contraction and rising unemployment.

Even though Brazil's midsize banks do not face the magnitude of regulatory burdens of large banks, challenging regulatory constraints overseas and the scrutiny of international banks in regards to their correspondent banking has reduced the relative value of Brazil's midsize banks.

Lower valuations on Brazil's mid-size banks make them more attractive to those foreign banks that are less constrained by regulations in growing overseas, according to financial experts.

Furthermore, many of Brazil's small and mid-size banks generally demonstrate the willingness to preserve good asset quality, thus the credit impact of the challenging macroeconomic environment has been relatively modest.

And around 80 percent of the assets in Brazil's banking sector are concentrated in the country's 10 largest banks, with a large number of small and midsize banks playing smaller roles.

Given the concentration of the Brazilian banking system, the largest private banks, Itau, Bradesco and Santander, already count on a broad range of products and have access to cheap source of funding, thus the acquisition of a mid-size or small bank would not bring relevant synergies. Because of that, a more likely scenario is that midsize banks are targeted by new entrants, such as foreign banking groups with appetite for investing in the country.