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Brazil's Cielo sees competition gaining steam next year

By Guillermo Parra-Bernal and Natalia Gómez

SAO PAULO, Nov 5 (Reuters) - Cielo SA, Brazil's largest card payment processor, faces more competition next year as the use of debit cards surges and rivals step up efforts to gain market share without weighing down pricing, Chief Executive Officer Rômulo Dias said on Tuesday.

While the third quarter showed mild signs of competition between Cielo and the merchant acquiring units of Itaú Unibanco Holding SA and Banco Santander Brasil SA that were reflected on lagged volumes, the fight for new clients will intensify next year, Dias said on a call to discuss quarterly earnings.

Itaú's Rede and Santander Brasil's GetNet merchant acquiring units are becoming more aggressive in line with policies by their parent companies to expand fee income and get their clients to spend more on financial services. Itaú is seeking to bridge Rede's gap with Cielo, especially in terms of new technologies, e-commerce and mobile payments.

"Santander Brasil continues with the same policy, and Rede is hiring more people to target consumer segments. More steps in that direction is making the outlook a lot more challenging for all of us," Dias said.

Rede wants to grow market share primarily focused on an improved service, the use of stronger relationships and innovative product offerings. In the opinion of Bank of America Merrill Lynch analyst Jorg Friedemann, while "Rede's speech is benign, we prefer to adopt a conservative stance on competition risk."

The analysts added that should Cielo's rivals step up efforts to gain market share, "the damage to Cielo could be much higher given the company's scale." A series of investment banks, including Bank of America, changed their targets and recommendations on Cielo, most of them because of the threat of competition to the company's profits.

Cielo has about 57 percent of the $400 billion-a-year industry, compared with Rede's 38 percent and the 5.5 percent owned by Santander Brasil's GetNet. Cielo's dominance has declined marginally over the past year, from about 57.5 percent, according to industry figures compiled by Thomson Reuters.

Shares of Cielo fell from an all-time high, shedding as much as 2.2 percent on Tuesday. The decline in the stock came even as third-quarter net income beat analysts' expectations after transaction volumes surge and strict expense controls helped offset a jump in debt-servicing costs.


The Barueri, Brazil-based company posted net income of 691.2 million reais ($309 million) in the quarter. That was above net income of 674 million reais expected in a Thomson Reuters poll of six analysts.

Cielo carried out 113.2 billion reais worth of transactions in the quarter, driving net revenue 8.4 percent higher to 1.74 billion reais. The poll expected revenue of 1.77 billion reais.

Earnings before interest, tax, depreciation and amortization, a gauge of operational performance known as EBITDA, totaled 929.7 million reais in the quarter. The poll expected 959 million reais in EBITDA. One of the signs that competition is weighing down Cielo's performance is the decrease seen in the EBITDA margin, or EBITDA as a proportion of net revenue, to 53.5 percent at the end of September from 64 percent in the prior three months.

Dias said that the company has no plans to step up acquisitions and that its plan in Brazil is to grow organically.