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LONDON/SAO PAULO, June 7 (Reuters) - Brazil's competition watchdog is due to reveal on Wednesday whether HSBC can sell its Brazilian business to Banco Bradesco, a decision with big implications for the British bank's Chief Executive Stuart Gulliver and its shareholders.
Gulliver is relying on the $5.2 billion sale of HSBC Bank Brasil to boost HSBC's main capital ratio and ensure the bank can keep its status as the biggest dividend payer in European banking.
Some analysts fear the bank could find it harder to maintain that payout, if the sale of its Brazilian division is delayed.
"This deal is important because it adds 60 basis points to HSBC's capital strength which gets them to their target and means they can maintain the dividend in a weak year for earnings," Ian Gordon, analyst at Investec, said.
Brazil's central bank has already approved the deal, which is HSBC's biggest single asset sale since pledging to shrink its sprawling global business to cut costs and boost profits.
But the antitrust watchdog Cade has clashed with the central bank in the past over their roles in supervising M&A in banking. Both said they have jurisdiction over the financial sector based on their interpretation of the law.
Cade has been reviewing Bradesco's purchase since February and has so far failed to reach a consensus that competition will not be affected, a source familiar with the discussions told Reuters.
The watchdog's scrutiny of the deal is taking place while Brazil is in the grip of a political crisis and its economy has suffered its worst economic contraction since 1990.
The source, who requested anonymity because of the sensitivity of the issue, said some Cade directors wanted Bradesco and HSBC to provide more detail on how customers will benefit from the combination.
Cade has blocked at least four major deals outside the financial sector since Brazil's new competition law came into effect in 2012.
In finance, the regulator last month imposed restrictions on lender Itau Unibanco's joint venture with Mastercard, after a 233 day review into whether the deal would reduce competition in the credit card sector, according to information on Cade's website.
The source, who has knowledge of the discussions, said some Cade directors believe the central bank favours deals that improve the financial strength of the banks being acquired at the expense of customers.
Brazil's central bank and Cade did not respond to requests for comment.
Cade's board in April said it should grant approval for the deal, but the recommendation is not binding and is subject to approval by a separate Cade court.
The regulator also recommended the two banks agree on measures to minimise market concentration, in view of evidence of low competitiveness in Brazil's banking industry.
A spokeswoman for HSBC in London declined to comment. A Bradesco spokeswoman also declined to comment.
HSBC's shares have fallen by nearly a third in the last 5 years, as restructuring costs and dwindling trading revenues have eaten into profits. But the bank's steady dividend payout has remained an attraction for investors. HSBC's shares are set to yield 8.6 percent in dividends this year.
Gulliver said in May the disposal would add just over half a percentage point to its key capital ratio, taking it from 11.9 percent to 12.5 percent, inside the 12-13 percent range targeted by the bank.
Fitch Ratings at the same time said the deal was crucial to HSBC being able to meet that goal for its capital levels, after retained earnings sank to their lowest levels since 2004. (Editing by Sinead Cruise and Jane Merriman)