Multinational companies command a dominant position in several industrial sectors in Brazil, yet the big banking groups, such as Banco Itaú, are largely locally owned. Founded by a São Paulo lawyer in 1945 and controlled by the Villela and Setubal families, Itaú has been a leading shaper of the banking landscape during decades of steady organic growth and well-chosen acquisitions. Today it boasts a strong domestic franchise, a sound capital base, and a sparkling 35.6 percent return on equity—a level of performance that made it Latin America's most profitable bank in 2005.

High interest rates have historically provided a volatile and risky environment for Brazilian banks, though the successful ones have achieved wide margins between their cost of funds (mostly from deposits) and the rate they charge borrowers. The growing prospect of a more stable and sustainable economic environment, cheaper money, and rising consumer income thus represents a challenge as much as an opportunity for the leading players.

Itaú looks well positioned to take advantage of these changes. Its mid-2006 acquisition of Bank of America's BankBoston Brazil unit and other Latin American...