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AmericasJuly 1 2013

Brazil's investment banks vie for market share

Once dominated by global firms, Brazil’s investment banking space is being reclaimed by local players, putting the squeeze on returns. But, despite increased competition and lower returns, is Brazil’s economy just too big to be ignored?
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Brazil's investment banks vie for market share

Investment banks in Brazil are having to work harder than ever, faced with increasingly fierce competition and larger numbers of players on each deal. While local firms are sharpening their tools, hiring local talent and expanding product reach, international banks are often being held back by capital constraints. As fee pools are being shared between larger numbers of players, maintaining a costly outpost in Brazil may no longer be a viable proposition for some global banks.

Before the financial crisis, international banks gathered as much as 89% of total fees in Brazil in 2005, according to data by Thomson Reuters and Freeman Consulting. Since then, however, their dominance has been challenged and their share of the wallet has gone down to 49% for the period from January to June 10, 2013.

Local winners

Of all investment banking fees in Brazil in 2012, local firms BTG Pactual, Itaú BBA and Bradesco BBI got the highest share, with 16%, 12% and 10%, respectively. They took $151m, $109m and $95m. Fee wallets up to early June this year depict a similar picture, with the same three banks in top position, although led by Itaú BBA. Meanwhile, global names such as Goldman Sachs and Morgan Stanley carved only 4% and 1% of last year’s Brazilian fee pool. Citi, which also has a corporate lending presence and is now rebuilding its investment banking team in Brazil, did not go beyond 4% either.

Despite lower returns, Brazil is an economy that is just too big to be ignored. It is now the sixth largest in the world – and a market that can generate phenomenally large deals. Just looking at the past six months, the country gave birth to the 11.48bn reais ($5.34bn) initial public offering (IPO) of Banco do Brasil’s insurance arm, BB Seguridade Participações, the world’s largest this year, and to state-owned oil giant Petrobras’s $11bn bond issuance, the biggest corporate debt sale from an emerging market on record. With the exception of JPMorgan and Citi, all the bookrunners were Brazilian names: Banco do Brasil, Bradesco, BTG Pactual, Itaú BBA, Banco Votorantim and the new Brasil Plural.

Strong local relationships and a long-standing presence are key. “All the largest international institutions want to be part of [Brazil and] Latin America in a meaningful way. Clients want to be able to make a local call that opens to them a global platform,” says Daniel Darahem, head of equity capital markets for Latin America at JPMorgan. “If they can’t make that local call to a global bank, they’ll probably resort to a local bank that gives them a closer coverage on the ground.”

JPMorgan’s strong claim on Brazil goes back to 1999, when it strengthened its local presence with the acquisition of Banco Patrimonio de Investimentos, carried out by the then Chase Manhattan.

Brazilian investment banking fee ranking

Home-grown choice

Many clients have indeed chosen home-grown firms over international names. Banks such as BTG Pactual and Itaú BBA have built their dominance over the past 30 years. They have been joined by traditional large lenders, such as Bradesco and Banco do Brasil (fifth in the fee wallet list), which have been building skilful investment banking teams. Those names couple talent with phenomenal credit power and corporate relationships, which Itaú BAA also enjoys from its parent, Itaú Unibanco.

Since the financial crisis, while many international firms have been dealing with new banking rules and focusing on their home markets, large Brazilian banks have become healthier and more ambitious then ever.

David Panico, managing director at Citi’s investment bank in Brazil, says that after 2008 local banks increased their relevance from a credit standpoint and were able to set up platforms that were competitive from an investment banking perspective too. But after the deep lows of the financial crisis, some international banks are showing greater interest in Brazil.

BTG Pactual’s head of investment banking, Guilherme Paes, says: “International banks are here but have a lot of restrictions coming from abroad in terms of [using] equity and size of credit they can give. Of course they’re going to be strong, but I don’t think they’ll dominate. You see the difference when there is a tough deal to be done [in terms of] commitment and the relationship with the client in the long run.”

Mr Paes also stresses the importance of being nimble and having an entrepreneurial mindset. He recalls a deal for a key client where BTG Pactual’s willingness and ability to provide capital, and fast, was crucial. When the corporate needed 1.2bn reais for a follow-on equity placing and a guarantee on the pricing, BTG was able to take that calculated risk, he says. “International banks would have zero authorisation to do that [to give a firm guarantee on the pricing]. That may be bigger than most of the equity they have in the country.” The bank has $7.5bn in equity capital and a loan book of about $20bn as of the first quarter of this year.

A bigger fight

The Brazilian market has dramatically changed in just a few years, when a handful of international banks would dominate the market and fees were split between a couple of players in each transaction. “In 2007, at the peak of the market, 90% of transactions had two bookrunners,” says Alex Bettamio, Brazil’s head of investment banking at Bank of America-Merrill Lynch. “Now you see four banks per transaction, sometimes five or six. You see a mix of two or three commercial banks, then one or two Brazilian investment banks, and one or two American banks.”

Back in 2007, the two bookrunners on most deals were UBS and Credit Suisse. UBS exited the country’s investment banking market in 2009 when it sold the Brazilian business it bought only few years earlier, Pactual, to BTG, a firm created by Pactual’s original management. Credit Suisse, on the other hand, held on to Garantia, the historical, prestigious investment bank that the Swiss bank purchased in 1998. Its team continues to be a leader in Brazil and was the fourth by fee wallet in 2012, with a 9% share. As for other players, the lack of credit power and credit relationship with corporate clients is starting to be felt, however, as well as the toll that larger efforts required to appeal to pickier international investors is having generally on deal flows.

Allan Libman, Credit Suisse’s head of investment banking for Brazil, says: “We used to make 40% to 50% [on each] transaction in terms of fees. Now we are making about 35% with many other banks in the syndicate.” On top of lower fees, each transaction requires longer to take off than in the past. “There are lots of transactions going on but they are taking more time to get ready. Investors want to get comfortable with the premium some cases deserve in Brazil,” says Mr Libman.

Lighter wallets, greater efforts and headquarters’ strategies to deal with global problems have meant headcount reductions in a number of Brazilian operations. “Off the top of my head, I can think of five [investment banks] that are firing more than they are hiring,” says one banker.

Barclays and Deutsche Bank have been cited by observers as examples of international banks restructuring their Brazilian operations. Deutsche Bank reduced employees in its local investment bank and research units in late 2012 to “seek improvement of its operational excellence”, as part of a global effort to save Ä4.5bn by 2015, according to Bloomberg. Barclays moved its Brazilian equity research from São Paulo to New York and London in February, as part of its global strategy, according to a spokesperson for the lender. However, when contacted by The Banker, both banks stated their commitment to the Brazilian market.

Common trend, unique market

Brazil is not alone in this trend. A shift in favour of local banks is apparent in several large emerging markets. “Three years ago, big local banks would provide the credit and international banks would provide the research and the distribution,” said Todd Berman, head of investment banking at Troika Dialog, now part of Russia’s Sberbank, in a recent article in The Economist. “Now in Brazil, China, Russia... large successful banks have hired world-class people. To play in these markets you have to be not only a provider of good ideas, you also have to provide the financial capital.”

Further, local banks have started to expand into Latin America too. Itaú BBA and BTG Pactual are growing their presence in the region and offer talent and in-depth knowledge, particularly useful in cross-border deals.

Jean-Marc Etlin, head of investment banking at Itaú BBA, says: “We are not the natural advisor for a global merger, that is not our game. However, when investors look at Brazil or Latin America, we want to be the go-to bank. In Brazil specifically, local investment banks have been able to claim a significant share of this fee pool and now want to replicate that across the region.”

Availability of capital, ambition and talent all help to explain the rise of Brazil’s local champions. Creating a tailored approach that works for Brazilian clients is also key, although this is not necessarily a concept that global players have grasped.

“Sometimes [international banks] want to replicate the way they do business [elsewhere] in Brazil, and we are different,” says Credit Suisse’s Mr Libman, who sees the bank as local because of its history in the country. “Over the past 10 years, we have built a different way of doing business. You have to devote more time in getting it done and how to approach investors, and make sure they are comfortable with the case. That’s the way to do a Brazilian transaction.”

Brazilian investment banking fee ranking by product

Further hurdles

The Brazilian market presents other peculiarities too, which have impacted businesses and investors. The country’s gross domestic product grew by a mere 1% in 2012 and a disappointing 2.7% the year before. Although the central bank’s projection for this year is 3%, this is still a far cry from the 7.5% of 2010, and from what investors may expect from an elite emerging BRIC country – the group formed by Brazil, Russia, India and China.

In addition to this, the government’s intervention in the energy and oil sectors has alarmed many who fear uncertainty and future changes in contracts and prices. Local entrepreneurs have been delaying business decisions and are looking more cautiously at plans for mergers and acquisitions, says Mr Paes.

And foreign investors have been more selective in choosing deals, adding to the time and effort required of bankers. “[Institutional investors] do a fair amount of due diligence before investing in a Brazilian company, more than they did in the past,” says Renato Eijisman, head of investment banking at Bradesco BBI. “Companies need to have a very solid story, very clear prospects, very clear governance. Lately, if you look at the stock market in Brazil, many investors have not made money. Because of that, they are more selective and more sensitive to pricing.”

But these concerns will likely prove unfounded in the long term, as Brazil tries to move from a consumer-led model to a growth strategy based on investment, says Mr Etlin. Furthermore, he points out that the country finds itself in a crucial point in history. As well as unemployment levels close to record lows, falling inequality and a rising middle class, for the first time since the dire hyperinflation period of the 1980s and mid-1990s – and with inflation currently at 6.46% – Brazil has single-digit interest rates.

Despite a recent 50 basis points hike by the central bank, the benchmark Selic rate is still a relatively low 8%. This not only alleviates pressures in consumer credit, but also encourages the development of capital markets. It will make higher yielding corporate bonds more appealing, as well as encourage investors to look at the equity market, which is now still tapped mainly by larger, more liquid issuers. “Single-digit interest rates are forcing people to seek new investment alternatives away from government bonds,” says Mr Etlin. “As a result, fixed-income activity has been and will continue to be strong, and we may also see increased activity in the smaller IPO market.”  

New consolidation wave?

Despite fiercer competition at the top and the economic slowdown, Brazil and its development prospects should attract banks rather than scare them off. Local bankers know this well. Over the past few years, a number of boutique firms have started to emerge and thrive. Names such as advisory firm Estáter, asset manager Vinci Partners and investment bank BR Partners are growing and gaining a solid reputation in the market.

And new investment bank Brasil Plural got itself on the huge BB Seguridade listing. This fact is all the more impressive as it was Brasil Plural’s first IPO mandate and was made soon after the bank obtained its banking licence. Founded in 2009 by former Pactual bankers as Plural Capital, after the sale of UBS’s Brazilian business to BTG, as an asset manager, the firm then bought a leading local broker, Flow, and rebranded. Without wasting much time, the bank has also recently been appointed on its first international bond offering (the name of the issuer was still confidential when The Banker went to press).

Sebastien Chatel, co-head of equity at Brasil Plural, sees great potential in the fixed-income space. He says: “Given our capital structure, we are never going to do a Petrobras bond deal, but where we can add value is for first-time issuers and high-yield issuers, where you really need to craft a story. There is a great search for yield globally; that’s a business where we have real hopes we can develop something interesting.”

A fresh look

It is not just new local firms that want a piece of Brazil’s expanding market. Some international banks are starting to reignite their existing platforms, such as Citi. And new foreign firms are trying to break into the country from scratch too. According to its central bank, and as published in Brazilian newspaper Valor Econômico, Standard Chartered and a number of ‘universal’ banks applied for a banking licence earlier this year, including China’s ICBC, South Korea’s Woori and Japan’s Mizuho. Interestingly, UBS also applied. But rather than aiming at its investment banking past glory, it may be that the Swiss bank will focus on wealth management.

Perhaps a new foreign bank’s best chance at success is to merge forces with a smaller, well-connected player. Local links coupled with an international sales force and access to deep-pocketed investors is the formula most firms are aiming for. That is why US banks will always have a role in large Brazilian deals, according to Bank of America-Merrill Lynch’s Mr Bettamio. “At the end of the day, the capital is still coming from the US. The most relevant accounts that make the deal happen are the long-only fundamental accounts, and those are classic US investors,” he says.

Yet, not all international banks managed to get the local part of the formula right. 

“It is fair to say that there are a number of [foreign] players who have not found a way to address the Brazilian market and have conceded that doing it organically is close to impossible,” says Mr Chatel. “There is really a handful that has had a successful experience, and several others who have given up. It may make sense to them to [look for local partners]. It may also make sense to us to do something strategically with someone who has exposure to other emerging markets but not to Latin America.”

There were talks last year about a possible deal involving Brasil Plural. Nothing materialised then. Perhaps the bank, and other boutique firms, may find more appealing propositions in the near future, as international banks’ appetite for Brazil improves, and their own ambition grows. 

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Read more about:  Americas , Americas , Brazil
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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