Latin America investment banking – the brittle relationship

Staying committed to a region where deal flow sometimes stops overnight is tough for an international investment bank. Local firms and the few foreign competitors that have stuck around hope to benefit from any upturn in business. The in-and-outers might find it hard to get back.

You might be forgiven for thinking that after the history of crises, setbacks, false dawns and balance-sheet-shredding losses over the last 50 years, international investment banks might have given up on Latin America.  

However, the relationship between the region and foreign firms is a complex one. Some have stayed committed through thick and thin. A few have been more like serial monogamists, in and out with an alarming regularity.  

Others have tried to maintain the illusion of commitment through a long-distance relationship: we’re still fully engaged, they say, from their offices in New York, Miami or Houston. Since the financial crisis, a few firms – especially those from Europe – have given up the pretence that the relationship has a long-term future.

It’s understandable. Latin America’s volatile environment has created a huge challenge for international banks keen to develop new revenue streams in the region but unable to count on any level of sustainability. Brazil, despite its scale and developed local capital markets, effectively disappeared from the international issuance radar between 2015 and 2018.

Other markets, such as Colombia and Peru, offer more consistency, but even their peaks of activity are not sufficient to build a broad-based business for a cluster of investment banks. Chile, the most stable of all, offers scant opportunities for the internationals as it is largely able to self finance.

Throughout, investment banks’ coverage models have appeared to be more of an art than a science. And then the 2008 crisis smashed into the capital structures of the international banks and was compounded by harsher regulations for global systemically important banks (G-Sibs) and other regulatory costs.

Many of the Europeans gave up and went home. The US investment banks consolidated. The universals ditched their retail businesses but continued to talk commitment to corporate and investment banking. (HSBC has been populating an office in São Paulo in anticipation of the expiration, at the end of 2018, of the non-compete clause it agreed on local capital markets activity with Bradesco).

And all the while the locals grew. And grew. They either added local investment banks – like Itaú did when it bought BBA Creditanstalt – or grew organically by hiring teams from the competition, like Bradesco BBI.  

Sometimes international banks fortified their brand and reach with local acquisitions. In 1998, Credit Suisse bought Garantia in Brazil and that business remains a reason for the bank’s strong position today. The success of that acquisition also led Credit Suisse to buy the asset manager Hedging Griffo to develop its private banking coverage in 2006.  

It was a trick that UBS tried to emulate with the acquisition of Pactual, only for it to lose that bank’s management. Ultimately it sold back Pactual to a group of ex-employees, led by André Esteves, who had established local investment bank BTG.

Although the Pactual transaction did not work out, UBS still retains regional ambitions and an appetite for local acquisitions. Tom Langford, who heads the region for the bank, tells Euromoney that it covers the region from its three offices in Mexico City, São Paulo (where it bought the largest family office in the country, Consenso, in 2017) and Buenos Aires.

Roberto Sallouti is now chief executive of BTG Pactual and presides over the only true pan-regional investment bank with a reputation akin to those of its Wall Street competitors. He says the bank is exactly where it needs to be, following its existential wobble in 2015 when the then chief executive and largest shareholder Esteves was caught up in the Lava Jato corruption scandal (the charges were eventually dropped and Esteves is re-establishing his authority at the bank).

“We haven’t had wind in our sails since 2012, and in that period Brazil’s per capita income contracted by 10%,” says Sallouti. “So we have almost forgotten what it is like to have an environment where you have positive economic surprises.”

When BTG had to rationalize it held on to its pan-Latin American business, which includes firms like Celfin Capital in Chile and Bolsa y Renta in Colombia. The bank’s global ambition may have been trimmed by realism, but its regional presence was preserved above other businesses.

Sallouti says that decision is now paying off.

“Becoming a regional player for us was so important because it raised our profile and enabled us to get international mandates,” he says. “That explains our mandates from Shell, from APP, from Enel. We’re the only pure Latin American investment bank, and it makes a difference for sure.”

Meanwhile, BTG Pactual’s home market of Brazil is the obvious example of local banks building international capital markets credibility – muscling in on mandates by reminding corporates of the value of their balance sheets. Over time, they have grown into credible partners for bookrunning teams. It is also true in Colombia and Peru.  

And now, as fresh hope of stability and capital markets activity builds in the region, the international banks are rebuilding too.

Goldman Sachs re-entered Argentina in 2017 and Deutsche Bank is opening a representative office. (Deutsche’s almost wholesale withdrawal from the region announced in 2015 – Brazil remained – was emblematic of the European retrenchment).

Santander Brasil is building its investment banking team, keen to make its impressive growth in corporate banking pay off in the fee-based business. BBVA is trying to build a Brazilian investment bank of a scale similar to what it has established in Mexico.

Sallouti expects new entrants to his home market of Brazil if the optimistic scenario for investment banking in the next couple of years materializes.

“That always happens,” he says. “I started working in this business in the early 1990s, and it’s a cycle. Very soon we’ll see international banks talking about acquisitions here again.”

The region has gone from being underbanked to overbanked and then to rationalization. Now is it in danger of becoming overbanked again?

“The world is overbanked!” laughs a chief executive of Latin America for an investment bank in New York. “There is still too much capacity everywhere.”

Original Source: Euromoney