High Labor Cost: A Hurdle for HSBC's Brazilian Unit Sale? - Analyst Blog
As per a Bloomberg report, bidders for HSBC Holdings plc’s HSBC Brazilian unit are compelled to seek a lower price tag. The primary reason behind this is the high severance expense that any company has to bear in case of firing employees in Brazil.
Since HSBC’s Brazilian unit has a higher worker-to-asset ratio as compared with other domestic private banks, a potential buyer would have to slash work force. However, Brazil’s labor protection laws make it costly for bidders to dismiss employees. As of Dec 31, 2014, the Brazilian unit had nearly 20,480 workers.
In Brazil, labor laws are very stringent and complex. And if any company dismisses employees without proper reason, it can lead to more complications.
Compulsory severance includes a minimum of 30 days’ salary plus three day of extra per year of work, with a limit to 90 days. Additionally, employers have to pay a 50% fee over the amount deposited in the employee’s FGTS account (an employee-savings guarantee fund).
Making things more difficult for HSBC’s Brazilian unit are lawsuits filed by labor unions, which allege that the company hired private investigators for prying on workers’ personal lives. Despite resolution of a few cases, the bank still faces one class-action case filed by union and another one from prosecutors.
Notably, HSBC has made provision of 600 million reais ($198 million) to cover labor claims and above-mentioned lawsuits. We, however, believe that this amount is too small to cover all labor-related expenditure.
Earlier, it was reported that HSBC is expected to finalize the buyer of its Brazilian unit by mid-June of 2015. Some of the interested parties include Brazil’s Banco Bradesco S.A. BBD and Grupo BTG Pactual; Canada’s The Bank of Nova Scotia BNS and Banco Santander, S.A. SAN of Spain. Chinese banks – China Construction Bank Corp. and Industrial & Commercial Bank of China – are also in the fray (read more: HSBC to Decide Brazilian Business Acquirer in Mid-June).
However, with elevated labor costs, we believe the decision regarding the potential buyer might get delayed. One of the ways to avoid high labor severance expenses is to negotiate with labor unions.
Now it remains to be seen what stance HSBC and the potential buyer takes. For HSBC, the divestiture will be a step toward attaining its strategic initiatives.
Currently, HSBC carries a Zacks Rank #2(Buy).
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