Merger to create largest bank in SouthAm

A pair of Brazil’s biggest banks will merge and create South America’s largest private financial group.

Executives for Banco Itau announced on Monday that they will purchase Unibanco Holdings with the merger creating an entity with about $265 million in assets. The newly-former Itau Unibanco Holding SA will strengthen Brazil’s financial system and encourage lending, according to the country’s financial minister.

Shares in both banks increased during trading on Monday though Itau shares are down 26% year-to-date, and Unibanco shares have lost 39%. In order to compete with the new mega-bank, financial firms like state-owned Banco Brasil SA and the private Banco Bradesco SA may have to look into expanding:

The market hadn't been expecting Itau to purchase its smaller rival, but it had anticipated "Unibanco to be absorbed by someone else. There are too many banks here in Brazil and some kind of consolidation was to be expected," said Claudio Freitas, senior Latin American markets analyst at Zacks Investment Research.

Banking stocks have been under pressure as the credit crisis has spilled over into Latin America, prompting Brazil's central bank to move to ease tighter credit conditions. Freitas said the Itau deal appears to have been accelerated by turmoil the global financial market.

Investors will now monitor any word from Banco Bradesco (BBD), currently Brazil's largest private bank. "They will now have to find ways to grow in Brazil too," added Freitas. "They will never accept being second" in the market.

Image- BBC News
Sources- Canadian Press, BBC News, Bloomberg, CNNMoney.com