Blocked merger leaves Master with few lifelines

In the event of an intervention, the Central Bank would remove the bank’s executives and appoint an administrator, who would then trigger the Credit Guarantee Fund (FGC) to cover Master’s deposits. While drastic, this is the standard course when no market solution is available for a struggling bank, or when a deal poses a greater systemic risk than allowing a failure.

This was the approach taken in Master’s case, despite political pressure surrounding the decision. The Central Bank did not disclose details, but Valor learned that overvalued loan portfolios were among the problems identified. Should intervention confirm that the bank cannot survive, regulators could order an extrajudicial liquidation to wind down operations.

Because Master expanded by heavily raising funds through certificates of deposit (CDBs), the bill would fall mostly on the FGC, meaning the cost would be borne by large banks and other member institutions of the fund.

Master has not yet published its first-half results. Central Bank data show it held R$62.2 billion in deposits eligible for FGC coverage. Since the fund guarantees up to R$250,000 per depositor, the actual payout would be smaller. Still, when the BRB deal was announced on March 28, estimates suggested the FGC might have to cover around R$50 billion if the bank failed.

Costly payout

With R$107.8 billion in available liquidity, the FGC could see nearly half its resources depleted. In that case, it would likely increase contribution rates and require banks to pay in advance the equivalent of five years of deposits. Financial institutions currently contribute 0.01% per month of eligible deposits. Though small, if doubled and accelerated, the amounts would reach billions of reais for major banks. Itaú Unibanco alone might have to contribute about R$5 billion, sources said.

Other large banks would also face billion-real charges. While this solution avoids public money, it could push up lending spreads.

Master grew rapidly by attracting retail investors with CDBs offering above-market yields, all covered by the FGC. However, the bank invested the funds in risky and illiquid assets.

Founded 30 years ago, the FGC has since guaranteed deposits in 40 failed institutions. Its largest historical payout was R$3.7 billion in 1997 to cover Bamerindus, equivalent to R$19.6 billion today. A bailout of Master would be the biggest in its history.

The bank holds only R$690 million in demand deposits, shielding it from mass withdrawals. Most funding is in term deposits, which cannot be redeemed before maturity. Investors can only try to sell them on secondary markets, often at a discount.

Master’s urgent challenge is meeting maturing deposits. Some CDBs pay up to 140% of the interbank rate (CDI), pushing costs higher. “The CDI alone is at 15% a year, so the carrying cost is extremely high,” a banking executive said.

New deal

Both BRB and Master signaled plans to appeal within the Central Bank, possibly by addressing flagged issues and resubmitting the deal. Analysts, however, see slim chances of approval. The banks have ten days to request a review.

Mr. Vorcaro could also look for another buyer, but this would require a large group capable of closing quickly, an unlikely scenario. He visited the Central Bank headquarters in Brasília on Thursday (4), but people familiar with the matter consider a last-minute solution improbable. In recent months, Mr. Vorcaro negotiated asset sales with BTG Pactual and J&F, the Batista family’s holding company. In May, BTG bought R$1.5 billion in shares, receivables, and other assets.

“The chance of a new buyer is very low. There’s no time for due diligence, especially with Master’s complex balance sheet,” said a lawyer experienced in such transactions. “The Central Bank’s rejection of the BRB deal is practically a ‘pre-intervention.’ It’s hard to see how the next step won’t involve the FGC,” added a senior banking executive, noting that regulators conducted an unusually deep review of Master’s situation.

A quicker way for the bank to raise cash would be to sell loan portfolios, a simpler process than asset sales, though it could worsen challenges later. It might also face Central Bank resistance. “The regulator is watching everything under a microscope, down to a R$100 instant payment,” one source said.

Master has also faced a turbulent week. Federal Police and prosecutors launched a major operation against 40 funds allegedly used to launder money for organized crime. Among the targets were Reag and Trustee, firms with extensive business ties to Mr. Vorcaro and Master.

Meanwhile, a political maneuver by Congress’s centrist bloc to allow lawmakers to dismiss Central Bank directors highlighted Mr. Vorcaro’s lobbying pressure, triggering strong pushback.