The biggest issuer of credit cards in
Brazil is poised for strong growth at home and in the wider South
American cards market, founded on both organic growth and
partnership strategies. Justin Bandy reports on
Banco Itaú’s spectacular rise.

Banco Itaú is a privately
owned Brazilian bank headquartered in São Paulo. With more than
12.8 million credit cards in force, it is the largest issuer of
credit cards in Brazil, with a market share of 22 percent in terms
of cards outstanding.

The bank is one of the fastest-growing credit card issuers on
the South American continent. Between the end of 2002 and the end
of 2006, credit card revenue increased by 313 percent (see figure
1). During the same time period, the number of credit cards in
issue more than doubled to more than 12.8 million (see figure 2).
More growth seems to be in store: the bank recently projected a 20
percent increase in credit card billings for 2007.

“We expect credit cards and credit operations, collection
services in general, to keep growing in a very high level rate,”
said Roberto Setubal, CEO of Banco Itaú.

Credit cards play an important role in Itaú’s overall consumer
lending strategy, though vehicle lending is its primary form of
non-mortgage consumer lending. For the Itaúcred division, vehicle
loans comprise 70 percent of the consumer lending portfolio. Credit
cards are the second-largest component, with 16 percent of
outstanding consumer debt, followed by payday lending, with 7.7
percent. Payday loans were introduced in late 2004, and have been
the fastest-growing form of consumer lending in terms of relative
yearly growth. According to Setubal, personal loans will grow much
less than other lines in 2007. He expects personal loans will grow
slower than credit cards, and auto finance lending will grow faster
than credit cards.

Growth strategies

Itaú’s success is being
driven both by organic and inorganic growth strategies. The bank,
with $66 billion in total assets, has over 17 million personal
banking clients. The Brazilian market, which generates the bulk of
Itaú’s profits, has seen solid growth in consumer lending in recent
years. According to a recent study by Banco Itaú, the total volume
of credit card transactions in the Brazilian market reached $74.3
billion in 2006, an increase of 25 percent compared with 2005. For
2007, the bank expects the volume to reach $91.2 billion, up 20
percent from 2006.

Banco Itaú reported in December that it expects its credits to
individuals to grow by 30 percent in 2007, following a 41 percent
increase of the lender’s consumer non-mortgage portfolio in the 12
months preceding September 2006.

The bank is supporting its rapid growth in consumer lending by
expanding its distribution branches in Brazil. In 2006, Banco Itaú
opened 146 new branches, having opened 110 in 2005. The bank has
announced plans to open another 130 branches in 2007. In addition
to the expansion of its bricks-and-mortar network, Itaú has seen
rapid growth in the popularity of its internet banking channel. The
bank has 4.78 million internet banking clients, up from just 1.43
million in 2000. Banco Itaú has also helped foster growth by
focusing on creating customer awareness. One of its main strengths
has been in building a strong brand. In 2005, the US consulting
firm Interbrand rated Itaú as the most valuable Brazilian brand,
with a brand value of $1.3 billion.

Partnership strategies

In addition to expanding its existing operations,
acquisitions and new partnerships have been a critical component of
Itaú’s growth strategy. The bank recently strengthened its presence
in the South American cards market with the acquisition of
BankBoston’s operations in Brazil, Chile, and Uruguay.

“To participate in those remarkable economies, with great
development and a good growth potential, gives us the opportunity
to increase our presence in the Latin American market. In Chile and
Uruguay, we are going to continue the good work that is already
done, believing that Itaú will contribute with its operational and
technological expertise,” said Setubal.

Part of the rationale for the acquisition was the ability to
acquire BankBoston’s premium credit card client base. Through the
deal, Banco Itaú attained roughly a 50 percent share of the
Uruguayan cards market, having acquired OCA, a consumer finance
subsidiary of BankBoston, as part of the deal. Bank of America,
which previously owned BankBoston, was given shares of Banco Itaú
as part of the deal, and now has a 7.4 percent stake in the
Brazilian bank. Both banks have stated that they will “pursue
business opportunities which may be mutually beneficial”.

Banco Itaú has also used partnerships to expand its business. In
2005, it took an active role in the management of Redecard, a
relationship company for retailers that was previously managed by
Citigroup. Itaú, Citigroup and Unibanco each have a 32 percent
stake in the company, while MasterCard has a 4 percent stake.
Redecard has over 900,000 affiliated establishments in Brazil.

In late March 2007, the bank formed an alliance with American
Express. As part of the agreement, Banco Itaú will issue cards with
the Itaú brand and the American Express logo, and the cards will
function on the American Express network. Itaú will use its
distribution network to issue and market the cards. “This agreement
strengthens Itaú’s strategy to offer segmented products and
services for our high-spending, affluent customers, with a third
credit card brand option,” said Fernando Chacon, Itaú’s credit
cards marketing director. “This partnership enriches our position
in the Brazilian credit cards market, and strengthens our
competitive strategy. Cardholders will have access to a broad range
benefits, as well as special offers from American Express merchants
worldwide.”

The bank has developed segment-specific divisions to deal with
the different needs of its customer base. The Itaú Personnalité
division deals with the high-end segment, while the Itaú BBA
division deals with corporate clients. The bank has developed a
number of segment-specific cards products in recent years. The Itaú
BBA division offers the Itaú Company Debit Card, which allows
companies to manage corporate expenses in one centralised payments
system.

Strength of portfolio

Banco Itaú saw credit card
lending increase by 27 percent in 2006, and it accompanied this
growth with a significant improvement in the quality of its credit
card loan portfolio in the second half of the year. The bank’s
non-performing loan (NPL) ratio among current account holders
dropped from 7.5 percent to 5.2 percent from June through December
of 2006, while the NPL ratio among non-account holders fell from
9.9 percent to 5.5 percent.

The bank is also seeing increased sources of revenue from
non-interest income. Banking service fees from credit cards
increased by 10.5 percent in 2006. Banco Itaú has also supported
its growth in credit card lending with investments in
infrastructure. Between 2000 and 2006, the bank doubled its number
of ATMs (see figure 3). The bank has also been expanding the
functionality of its ATM network and recently announced it has
plans to allow certain cardholders to access personal loans through
its ATM network.

Two-thirds of Itaú’s credit cards are MasterCard-branded, while
Visa and Diners Club control the remaining one-third (see figure
4).

In 2005 Banco Itaú acquired Orbitall, Brazil’s leading credit
card processor. As of year-end 2005, Orbitall processed 21 million
credit, debit and private-label cards, a 28 percent increase on the
previous year’s totals.

The bank is extremely successful in cross-selling credit cards
to depositors, as more than 40 percent of customers with savings or
current accounts have an Itaúcard credit card acquired through its
branches, ATM network or telemarketing.

Banco Itaú’s credit card portfolio is divided between two
brands. Existing bank customers with current accounts are primarily
served through the Itaúcard brand, while the Credicard brand mostly
serves non-account holders. The Itaúcard brand increased its
portfolio from 3.3 million cards in 2000 to 8.4 million cards by
the middle of 2006. The Credicard brand was introduced in 2003, and
now has more than 4.4 million cards in force.

In 2006, Banco Itaú announced that Itaúcard’s operations were to
be combined with those of Credicard. According to Itaú’s annual
report, such a combination was orchestrated to “help achieve a
number of synergies, such as offering Credicard cards to
non-account holders, generating new partnerships, greater focus on
the corporate business segment and more diverse distribution
channels for Itaú”.

Itaúcard has 8.4 million cards in force, and generates over $716
million in monthly purchases and withdrawals. With the forthcoming
combination of the Itaúcard and Credicard brand, Itaúcard has
focused on expanding its portfolio of non-account customers.
Currently, there are over 1.4 million Itaúcard customers who do not
have a current account with Banco Itaú. Itaúcard is also focusing
on reaching small and middle market companies, and the bank has
approximately 60,000 MasterCard- and Visa-branded cards in
circulation in this segment.

Itaúcard has attributed much of its recent growth in receivables
to its Instalment Payment Plan, which allows cardholders to pay off
their balances in up to 12 payments at reduced interest rates.
Another driver for growth has been partnerships and co-branded
marketing. Through its partnership with supermarket chain Companhia
Brasileira de Distribuição (CBD), the bank issues the Extra
Itaúcard and has acquired 150,000 clients through this channel.
Itaúcard also recently partnered with retailer Lojas Americanas,
and announced last May that it aimed to issue 1 million cards
within the first 12 months of the programme’s launch.

Non-merchant partnerships

Itaú has also partnered with non-merchant organisations to
improve the performance of their portfolios. The bank has a joint
effort with Procon, Brazil’s consumer protection agency, to help
resolve customer complaints. Itaúcard reported that through its
co-operation with Procon, it has achieved a 97 percent
effectiveness rate in dealing with customer complaints.

The Credicard brand is primarily aimed at customers who do not
have an existing banking relationship with Itaú. The Credicard
brand is currently jointly owned by Citigroup and Banco Itaú. Both
banks issue cards with both the Credicard brand and their own
brand. However, in December of 2006, Citigroup announced that it
had obtained the exclusive right to us the Credicard brand
beginning in 2009.

Starting in 2005, Itaú and Citigroup began partitioning the
portfolio between one another, and finalised the split in the
middle of 2006. Itaú received the TAM, CBD and Fiat card
portfolios, as part of the division of the Credicard credit card
portfolio.