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UBS Picks Brazil’s Fastest-Growing Broker as Fees Drop

Link Investimentos, the Brazilian brokerage bought by UBS (UBSN) AG, is gaining the most market share in cash equity trading as fees fall amid growing competition.

Link traded 316.9 billion reais ($161 billion) in equity and equity options on the BM&FBovespa SA (BVMF3) last year, boosting its market share to 8.9 percent from 7.4 percent in 2011, according to data compiled by the exchange. Sao Paulo-based Link overtook Morgan Stanley as No. 2 in equity trading, narrowing the gap with Credit Suisse Group AG, which had 12.9 percent in 2012 and has been ranked No. 1 since at least 2007.

UBS completed its takeover of Link today, seeking to benefit as Brazilian equity trading surges to a record, luring competitors including New York-based Goldman Sachs Group Inc. (GS), Barclays Plc and private-equity funds Actis LLP and General Atlantic LLC. Average fees in equity trading have declined to 0.09 percent from about 0.2 percent in 2002, according to Credit Suisse.

“New foreign competitors invested in Brazil, fueling the war to gain market,” Link Chief Executive Officer Daniel Cardoso Mendonça de Barros said in an interview at his office in Sao Paulo. “Fees for brokerage firms are falling about 20 percent a year for the last couple of years and today only about 10 brokerage firms are making money out of the 96 in BM&FBovespa.”

Global banks including UBS are under pressure to boost equities-trading market share and pare costs after industrywide revenue from that business fell 5 percent last year, the third straight annual drop, according to analytics firm Coalition Ltd. UBS’s revenue from equities climbed 35 percent to 777 million Swiss francs ($836 million) in 2012.

Equity Trading

Daily equity trading in Brazil, the world’s biggest emerging market after China, surged 12 percent to a record 7.25 billion reais in 2012, according to BM&FBovespa. Trading by foreign investors increased to 40 percent of total volume last year from 35 percent, helping offset the impact of a 32 percent decline in equity issuance to a seven-year low of $8.21 billion.

Revenue for equity brokerages in Brazil will grow in 2013 as trading volume may increase about 10 percent and fees could stop falling, said Mauro Oliveira, managing director of equity sales trading at Credit Suisse (CSGN) in Brazil.

Equity issuance will rise from 2012, fueling trading because of portfolio reallocations and growing international investment flow, Oliveira said. Central bank reductions in interest rates to a record low will also encourage more equity trading as pension funds, asset-management firms and private banking move away from fixed income, he said.

Link Acquisition

UBS, Switzerland’s biggest lender, obtained central bank approval to buy Link on Jan. 31 after announcing the 195 million real acquisition in April 2010. The Zurich-based company plans to rebrand Link as UBS, and will keep Link’s 170 employees, Mendonca de Barros told reporters today. That will bring UBS’s headcount in Brazil to 310, according to the bank.

Link surged from No. 10 in 2007 ranking by volume, when it handled 2.5 percent of equity trading. The firm ranks No. 1 in derivatives trading at the BM&FBovespa.

Credit Suisse, whose market share in Brazilian equities has ranged from 11 percent to 13.7 percent since 2007, is merging its brokerage with Hedging-Griffo, a Sao Paulo-based asset manager that it also owns.

As business grows, valuations are increasing. Actis, based in London, bought a 20.5 percent stake in XP Investimentos CCTVM SA in November 2010 for 100 million reais, valuing the Rio de Janeiro-based brokerage at about 500 million reais.

General Atlantic

Actis sold half its stake in XP in December for 136 million reais, almost three times the purchase price, to Greenwich, Connecticut-based General Atlantic, which built a 31 percent stake for 420 million reais.

“We’re very optimistic about the prospects for XP, a very profitable investment we’ve made,” said Patrick Ledoux, partner and the Actis co-head for Latin America. “XP has a strong retail presence, it’s growing market share, and is becoming a Brazilian Charles Schwab.”

XP, which wasn’t among the top 10 brokerages in equities trading as recently as 2008, surged to the fourth position in 2011 and kept it in 2012, with 7 percent of the market, according to BM&FBovespa data.

Goldman Sachs, which began trading equities in Brazil in 2009, ranked seventh on the BM&FBovespa in 2012. Barclays, which started its Brazil brokerage business in April 2010, wasn’t among the 10 biggest by volume last year. This month, the London-based bank closed its Brazil research unit and reduced staff in equity trading.

ICAP Jobs

ICAP Plc, the world’s largest broker of trades between banks, opened a business in Brazil in 2008. In October 2011, the firm cut about 50 jobs.

“After the adjustments needed, we are having our first profit in Brazil this first quarter,” said Paulo Levy, executive director at ICAP in Brazil. “We, as a lot of players did, had prepared ourselves and invested in Brazil expecting a larger market than the one that has happened.”

ICAP, with about 220 staff in the South American country, ranked 10th in equity trading in 2012.

Mendonça de Barros of Link said the decline in fees, increased competition and investment in technology will lead to consolidation or drive smaller brokerages out of business. Smaller firms are surviving only because of profits from the 2007 initial public offering of Bovespa and BM&F, he said. All local brokerages had stakes in Bovespa and BM&F.

The practice of allowing independent brokers to work without full-employment benefits generates labor liabilities that become obstacles to acquisitions, he said. Link doesn’t employ brokers on that basis, he said.

“Consolidation in this market is necessary because it simply isn’t big enough for all these firms,” Mendonça de Barros said.

To contact the reporter on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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