One of the best banking stories coming out of Latin America has just got better. The merger of Brazil’s investment firm BTG Pactual and Chile’s asset manager Celfin was officially announced in February, following on from initial discussions the two companies held in mid-2011. Once completed, the deal has the potential to create a leading regional investment banking group, with an additional presence in Peru and Colombia. The deal has seen BTG Pactual pay Celfin $245m plus shares equivalent to 2.4% of BTG's total capital.
The Brazilian bank has been considered for some time as one of the most promising firms in Latin America. BTG was set up by former UBS banker André Esteves, who then bought Banco Pactual back from UBS for $2.5bn, having sold it to the Swiss giant in 2006 for $3.1bn, when Mr Esteves was a partner at Banco Pactual. The deal created a sizable partnership-structured Latin American investment bank and created great expectations from foreign observers, which BTG Pactual has duly fulfilled.
One of many
Headlines aside, the BTG Pactual-Celfin merger is just the latest in a series of big banking deals across Latin America. Over the past few years, Latam players have built up their capital, experience and talent and, once they have achieved a satisfactory market share in their home market, have started to look abroad.
A total of 84 deals involving Latin American banking operations were announced in 2011 for a total figure in excess of $17bn, the majority of which was cross-border. Over the past year, BTG Pactual alone was involved in 10 deals in its home market, including takeovers and strategic investments.
Since the financial crisis, the success of certain regional banks has been helped by the retreat of international groups, such as the sale of Spanish Grupo Santander’s operations in Colombia to Chile’s CorpBanca, or UK-based HSBC’s disposal of its Central American assets to Colombia’s Banco Davivienda.
This trend is not unique to Latin America, however. “This is happening across Latin America – in investment banking you see ourselves, you see Itaú; and even in smaller regions, in eastern Europe, you have VTB, Sbearbank, you see the Chinese banks, such as ICBC [expanding],” says Roberto Sallouti, founding partner and COO of BTG Pactual. “We think that, as regional players, we’ll have a strong competitive advantage [against international groups].” In a conference call with journalists in February, BTG Pactual CEO Mr Esteves said: “We think that we will continue to have [a] few big banks with global reach and they will compete with [a] few regional powerhouses, and we expect to be one of them.”
Up for sale
Following a review of its growth strategy in May last year, of its Latin American operations HSBC identified only Brazil, Mexico and Argentina as 'strategic'. Countries with high growth potential such as Colombia and Peru were left out, while the bank's Central American operations have already been sold. This involved an $800m deal that saw its assets in Costa Rica, El Salvador and Honduras bought by Banco Davivienda, one of Colombia’s largest banking groups.
HSBC has already sold its Chilean retail banking unit to Brazil's Itaú Unibanco, which has had operations in the country since the purchase of BankBoston’s assets in 2006. The Brazilian bank also formed a partnership last year with Chilean asset manager Munita Cruzat & Claro.
Itaú Unibanco is another of Latin America’s most exciting growth stories. Created by the merger of Banco Itaú and Uniao de Bancos Brasileiros in 2008, the group is now the largest privately held bank in Brazil, with a wide network across the region.
Whether through acquisitions or organic growth, Brazilian banks have indeed strengthened their presence at home and abroad. Besides Itaú and BTG Pactual, last year Banco do Brasil invested in an undisclosed target in Colombia and increased its operations in the US through the acquisition of Florida-based EuroBank.
Murilo Portugal, president of Brazil’s banking association, Febraban, says that despite these signs of internationalisation, for domestic financial players banking in Brazil is still more appealing than banking abroad. “The profitability of the Brazilian market is higher than the profitability [of foreign markets],” he says. “Because of this, while [international] expansion will increase, it will not be very significant.”
Euro woe
In Europe, Banco Santander’s board recently decided to put some of its Latin American assets up for sale. The bank had built a formidable presence across the region, with a considerable market share in most countries. In Colombia, however, this was not the case and Santander Colombia never managed to grow beyond a 2.7% market share – a long way from the minimum 10% the group would typically aim for. The operations have been sold to Chile’s Grupo Saieh, owners of CorpBanca, for more than $1.2bn. The Spanish bank has also sold stakes in publicly listed Santander Chile and Santander Brasil, reducing its ownership of these operations to 67% and 78%, respectively.
As well as having to adhere to European Banking Authority’s (EBA's) new capital requirements, Santander also has to comply with new rules on real estate assets in its home market. The bank’s total new provision requirements are €4.1bn. Of this, €1.8bn has been charged against 2011 results, €2bn can be met by the group’s current capital, and €900m will be provided by capital gains generated from the Colombian sale. Santander says that the remaining €1.4bn will be met by other capital gains and provisions in 2012.
Despite such capital constraints back home, some suggest that if Santander had managed to take over another lender, it would have not left Colombia. However, with rising valuations, this was not possible. Asset prices have in fact followed Colombia’s growing economic prospects and significantly improved social security, and buyers with deeper pockets and stronger motivations than Santander did secure a share of the local banking market. Canada’s Scotiabank bought Colpatria for $1bn , making it one of the largest acquisitions of 2011 and giving the Toronto-based lender a foothold in the country.
“[Colombia] is a very logical place to be – a lot of our customers, whether [based] in Peru or Brazil or Chile, have operations in Colombia, so it’s a natural extension of their business and it’s a natural extension of our business as well,” says Brian Porter, Scotiabank’s group head of international banking. “Since 2007, the start of financial crisis, we’ve seen American or British or European banks retrench to their home market and do what they have to do; [we’ve seen] a repositioning of banking assets around the world – we’ve been opportunistic and fulfilled our [growth] strategy.”
Neither Santander nor HSBC were willing to comment on their strategy. Nor was the leading financial advisor on banking mergers and acquisitions in Latin America according to last year’s figures issued by data provider Dealogic, Goldman Sachs. BTG Pactual sits in second place in the ranking.
Colombian expansion
For their part, Colombian banks have been looking abroad too, and have been willing to comment on their success. In 2010, Colombia’s largest banking group, Grupo Aval – the owner of Banco de Bogota – purchased Central American credit card specialist BAC-Credomatic from the US’s General Electric, gaining a presence in a region that the bank had been targeting for some time, as well as operations in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Mexico.
Grupo Aval’s CEO, Luis Carlos Sarmiento Jr, says that the $1.9bn deal is already achieving good results, as its Central American operations closed 2011 with a $215m net profit, $900m in equity and about $9bn in assets. “We have been able to apply a lot of know-how in the areas of commercial banking in Central America, and we are ready to start a programme on credit card lending here in Colombia,” says Mr Sarmiento. “That’s based on lessons that we have learned from that acquisition. We import as well as export know-how.”
As for new lenders coming into his home market, Mr Sarmiento says that any competitor with long-term investment plans is good news for Colombia as they will contribute to the development of its local technological infrastructure and systems. Banks that are part of groups that are not in a position to invest in a regional market would not play such a constructive role. “[It’s good for] the whole financial system to have more competitors that want to be here, want to grow in this market, want to bring more technology and know-how as opposed to competitors that have troubles in their country of origin and have made decisions to divest – once those decisions have been made, then investments stop, new ideas stop,” says Mr Sarmiento.
International versus local
It is not just on a geographic scale that Latin America's regional banks have made themselves noticed. Their presence in international deals previously dominated by European and North American banking giants is now much more evident. The World Bank’s International Finance Corporation (IFC) has noted this change in trade financing transactions. Antonio Alves, head of short-term lending at the IFC, says: “The banks that used to dominate the global market are becoming more domestic, and the ones that used to be local – such as Itaú and BTG Pactual – are becoming global. [In late January] there was a [large trade finance] syndication club deal in London and 50% of bank participants out of the 25 or 30 banks were from emerging markets: Africa, Latin America, Asia. One or two years ago, you wouldn’t have seen any emerging market banks in a deal like that, or maybe just one or two.”
While once European, especially French and US banks would have played leading roles, now they share the same level the participation with emerging market lenders. “Sometimes they [enter deals at an] even lower level of participation,” says Mr Alves.
The debate over what is best for customers and clients – a locally owned bank or a bank which is part of an international group – is naturally won by the side in healthier shape – assuming that both sides have reached comparable skills and product coverage. Since the financial crisis, locally owned banks have tended to be in the healthier shape of the two. From an investment banking point of view, international groups often say that their presence in and commitment to Latin America is comparable to local competitors, and that they can offer much larger and wider-reaching sales and distribution teams. The differentiator is often the credit relationship that corporate clients have with local players.
BTG Pactual’s Mr Sallouti has a different view: “We have partners who grew up in the region, who have senior relationships in the region, and generate business in the region; and at the same time, given the level of capitalisation that regional players have reached, the capital we have committed to Latin America is probably larger than the capital that [a typical international investment bank] has committed. So both at relationship level and at the level of capital allocated, I think we have a competitive advantage to these global players. That’s what motivated us to expand.”
Golden opportunity
The question some are asking is how many more growth opportunities the European crisis will offer to local Latin American banks. In his conference call, BTG Pactual’s Mr Esteves said: “Every time that someone is reducing its scope, it [presents] an opportunity. We don’t see at this stage fire sales from European banks. Some of them sold participations or even entire franchises in Latin American countries [and] I think this trend will continue. We’re not working on anything yet but depending on how deep and how extensive the European challenge is, this could be an opportunity for the Latin American banks.”
Scotiabank’s Mr Porter believes that there will be some more consolidation taking place, and some new entrants, such as the Canadian bank, in certain markets. “This is a natural progression of what has been going on since the financial crisis, the new Basel capital and liquidity rules and just general business conditions,” he says. “In this division, we’ve completed something like 20 acquisitions in the past six years.”
Some may also feel that now is the time to expand franchises across the region and be prepared to pay for the chance to get a foothold in a growing market. Grupo Aval’s Mr Sarmiento is well aware of the opportunities present at this moment in time, because of both the strength of the potential buyers and the urgency of the sellers. He also is aware of just how easy it is to let ambition get in the way of of good business sense, as well as how the valuation of an asset can be magnified purely because of its geographical location. He says: “We’re contemplating any acquisition that comes by our desk, but we won’t do anything crazy, we won’t pay 45 or 50 times earnings as others have done.”
