By Lawrence White and Guillermo Parra-Bernal
LONDON/SAO PAULO, June 7 (Reuters) - Brazil's competitionwatchdog is due to reveal on Wednesday whether HSBC cansell its Brazilian business to Banco Bradesco, a decision withbig implications for the British bank's Chief Executive StuartGulliver and its shareholders.
Gulliver is relying on the $5.2 billion sale of HSBC BankBrasil to boost HSBC's main capital ratio and ensure the bankcan keep its status as the biggest dividend payer in Europeanbanking.
Some analysts fear the bank could find it harder to maintainthat payout, if the sale of its Brazilian division is delayed.
"This deal is important because it adds 60 basis points toHSBC's capital strength which gets them to their target andmeans they can maintain the dividend in a weak year forearnings," Ian Gordon, analyst at Investec, said.
Brazil's central bank has already approved the deal, whichis HSBC's biggest single asset sale since pledging to shrink itssprawling global business to cut costs and boost profits.
But the antitrust watchdog Cade has clashed with the centralbank in the past over their roles in supervising M&A in banking.Both said they have jurisdiction over the financial sector basedon their interpretation of the law.
Cade has been reviewing Bradesco's purchase since Februaryand has so far failed to reach a consensus that competition willnot be affected, a source familiar with the discussions toldReuters.
The watchdog's scrutiny of the deal is taking place whileBrazil is in the grip of a political crisis and its economy hassuffered its worst economic contraction since 1990.
The source, who requested anonymity because of thesensitivity of the issue, said some Cade directors wantedBradesco and HSBC to provide more detail on how customers willbenefit from the combination.
Cade has blocked at least four major deals outside thefinancial sector since Brazil's new competition law came intoeffect in 2012.
In finance, the regulator last month imposed restrictions onlender Itau Unibanco's joint venture withMastercard, after a 233 day review into whether the dealwould reduce competition in the credit card sector, according toinformation on Cade's website.
The source, who has knowledge of the discussions, said someCade directors believe the central bank favours deals thatimprove the financial strength of the banks being acquired atthe expense of customers.
Brazil's central bank and Cade did not respond to requestsfor comment.
Cade's board in April said it should grant approval for thedeal, but the recommendation is not binding and is subject toapproval by a separate Cade court.
The regulator also recommended the two banks agree onmeasures to minimise market concentration, in view of evidenceof low competitiveness in Brazil's banking industry.
A spokeswoman for HSBC in London declined to comment. ABradesco spokeswoman also declined to comment.
HSBC's shares have fallen by nearly a third in the last 5years, as restructuring costs and dwindling trading revenueshave eaten into profits. But the bank's steady dividend payouthas remained an attraction for investors. HSBC's shares are setto yield 8.6 percent in dividends this year.
Gulliver said in May the disposal would add just over half apercentage point to its key capital ratio, taking it from 11.9percent to 12.5 percent, inside the 12-13 percent range targetedby the bank.
Fitch Ratings at the same time said the deal was crucial toHSBC being able to meet that goal for its capital levels, afterretained earnings sank to their lowest levels since 2004. (Editing by Sinead Cruise and Jane Merriman)
HSBC Holdings (HSBA)