Oct. 7 (Bloomberg) -- Brazil’s Bovespa index closed little changed as speculation of improving profit growth prospects offset a drop in lenders following the record initial public offering of Banco Santander SA’s Brazil unit.

Vale SA, the world’s biggest iron ore miner, and Gerdau SA, Latin America’s largest steelmaker, rose for a fourth day after analysts upgraded the shares on prospects for increased demand for their raw materials. Tim Participacoes SA gained the most in the Bovespa after Correio Braziliense reported that the Brazilian unit of Italy’s biggest phone company was cutting costs to prepare for a sale. Itau Unibanco Holding SA and Banco Bradesco SA tumbled at least 3.2 percent after Santander said its IPO may raise $8 billion, a record in Brazil.

The Bovespa fell 32 points, or less than 0.1 percent, to 62,638.28. The BM&FBovespa Small Cap index jumped 1 percent, led by GVT (Holding) SA, which surged 14 percent after Telefonica SA offered to buy the company for 6.5 billion reais ($3.7 billion).

“Brazil continues to be the darling for foreign investors,” said Gilberto Nagai, who oversees the equivalent of $1.1 billion in Latin American equities as executive director of Fortis Gestao de Investimentos Brasil in Sao Paulo.

Among other Latin American markets, Mexico’s Bolsa index climbed 0.3 percent and Chile’s Ipsa increased 0.3 percent. The MSCI Emerging Markets Index added 0.5 percent.

Citigroup Boost

Latin American stocks were upgraded to “overweight” from “underweight” by Citigroup Inc. on speculation a worldwide economic rebound will fuel profit growth for the region’s commodity producers. Latin American earnings per share may climb 27.1 percent next year, leaving stocks in the region valued at 12.9 times 2010 earnings estimates, Citigroup strategists led by London-based Robert Buckland wrote in a report dated yesterday.

Vale jumped 2.1 percent to 37.99 reais. Goldman Sachs Group Inc. raised the stock to “buy” from “neutral” on the expectation demand for iron ore will rise.

Gerdau added 0.6 percent after Deutsche Bank AG upgraded the stock to “buy” from “hold” and said it is “bullish” on the Brazil steel industry. Usinas Siderurgicas de Minas Gerais SA, Brazil’s second-largest steelmaker, had its price projection raised to $39 from $27 at the bank. Usiminas rose 1.5 percent.

Lenders retreated after Banco Santander (Brasil) SA said it’s raising about 14.1 billion reais by selling 600 million units at a price of 23.50 reais apiece. The amount includes a possible supplemental offering, or “over-allotment,” of 75 million units. If the entire over-allotment is sold, the initial public offering will be the world’s biggest in 18 months.

Santander Decline

Santander lost 2.4 percent to 22.62 reais in its first day of trading.

“Eight billion dollars is a lot of money to digest,” said Greg Lesko, who helps manage $625 million as head of equity at Deltec Asset Management in New York and bought shares in the IPO. “I guess it wasn’t placed in firm hands. It’s certainly having an impact on the banking sector.”

Itau, Brazil’s largest non-government bank, fell 3.2 percent, while Banco Bradesco SA, the second-biggest, lost 4 percent. Investors sold shares to buy Santander, said Kelly Trentin, head of research at SLW Corretora in Sao Paulo.

Tim common shares jumped 5.5 percent to 6.50 reais on the report of the possible sale, said Joao Pedro Brugger, an analyst at Leme Investimentos. Telecom Italia SpA, parent of the company, denied the Correio Braziliense report, writing in a statement e-mailed today that “speculation concerning a possible sale of Tim Participacoes SA is completely groundless.”

GVT climbed 14 percent to 46.52 reais. The bid from Telefonica, Europe’s second-biggest phone company, tops an offer from Vivendi SA last month.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

Last Updated: October 7, 2009 17:17 EDT