Analysis: Bolsonaro’s interventionism could be mixed blessing for state insurance IPO

By Carolina Mandl

RIO DE JANEIRO, BRAZIL – (REUTERS) The first IPO by a Brazilian state-controlled company under President Jair Bolsonaro’s government has emerged as a test of whether his penchant for intervening in the running of state-run firms will dampen investor interest in the Brazilian market.

The government has already slashed by a third the valuation of Caixa Seguridade, the insurance unit of state bank Caixa Economica Federal, ahead of its planned roughly US$1 billion IPO. It will be the government’s third such attempt to list the business, after pandemic-related delays.

The IPO comes roughly two months after Bolsonaro ousted the chief executives of state lender Banco do Brasil and oil company Petrobras in separate tussles over a cost-cutting plan and oil prices. Many foreign investors dumped their shares in the days after Bolsonaro seemed to prioritize politics over shareholder returns.

Since then, a number of companies have been forced to slash their valuations to conclude IPOs. As well as concerns about the impact of the coronavirus pandemic, the interventions are hurting sentiment. Bankers cite investor fears that the government could push populist measures, and bust Brazil’s budget with increased spending.

But part of whether Tuesday’s insurance unit IPO is successful may depend on whether investors are willing to wager that recent signs of rapid growth in parent company Caixa under Bolsonaro-friendly chief executive Pedro Guimaraes could mean that presidential links in this case may be a positive.

Guimaraes regularly joins Bolsonaro on Facebook livestreams to announce branch openings or lower overdraft rates. Caixa, Brazil’s biggest mortgage provider, has said it will keep interest rates flat for borrowers even as the Central Bank hikes its benchmark rate to fight inflation.

“The more Bolsonaro uses Caixa as a monetary policy tool, the better, because if the bank grants more loans, Caixa Seguridade will sell more insurance, mainly mortgages and life,” said equity analyst Stefan Darakdjian at asset manager Meraki.

The unlisted lender is opening 400 new branches, while the country’s other main state-controlled bank, Banco do Brasil, provoked Bolsonaro’s ire by planning branch closures.

Guimaraes has denied the moves on branches and mortgage rates were taken under presidential pressure. He has repeatedly called Caixa “the math bank,” meaning all measures are taken to preserve profitability.

While the effect of such moves on Caixa’s profitability are uncertain, analysts said its expansion binge will likely boost near term revenues at insurance unit Seguridade.

On Monday, Caixa Seguridade was finding demand to conclude the share offering, two sources familiar with the matter told Reuters.

SELLING POINTS

Caixa’s planned sale of a 15% stake in Seguridade gives the insurer a valuation of at least R$28 billion ($5.1 billion) at the bottom of the price range, valued at 13 times estimated 2021 earnings compared with a ratio of 11.8 for BB Seguridade, an already-listed insurer controlled by Banco do Brasil. For the next year, however, if Caixa Seguridade grows as expected, it would become cheaper than its rival.

“The bank has an enormous footprint across Brazil and this is positive for Seguridade,” said asset manager Luiz Missagia, at ACE Capital. “If it outgrows BB Seguridade, it becomes cheaper.”

Still, in a sign it is hedging its bets on the IPO, Caixa has also boosted to 50% the allotment of shares set aside for local retail investors, seen as less discriminating than institutions.

“Bolsonaro’s interference can be potentially good for Seguridade, but as a whole I see the government interference as a liability for the deal because its consequences are uncertain,” said Missagia. “If this is the only upside for the deal, I don’t see it as an upside.”