Brazil Erodes Last BRIC Refuge for Investment Banks
Brazil is the only so-called BRIC emerging economy where companies not owned by the government, such as Credit Suisse Group AG (CSGN) and Grupo BTG Pactual, still earn the most investment-banking fees. That may soon end.
Banco do Brasil SA and Caixa Economica Federal, both government-controlled, are using their dominance of the nation’s loan markets and special relationship with President Dilma Rousseff’s administration as a wedge to unseat non-state firms in the race for investment-banking fees.
Banco do Brasil, already the country’s biggest lender by assets, wants to be the No. 1 investment bank as well, said Paulo Rogerio Caffarelli, vice president for wholesale banking. Caixa asked regulators in October for a license to create a 300-person unit. They would compete with Banco Itau BBA SA, BTG and Credit Suisse, the top three companies by investment-banking fees this year, according to research firm Dealogic.
“Since the 2008 crisis, our relationship with Brazilian corporations has boomed because of the loans we made, and now we want to leverage it by expanding our investment-banking activity,” especially in underwriting bonds, Marcio Percival, vice president of finance for Brasilia-based Caixa, said in an interview in Sao Paulo.
Rousseff has leaned on state-owned banks to boost credit as a means of reigniting economic growth, which decelerated last year to 0.9 percent, capping the slowest two years in a decade. The deteriorating economy has contributed to street protests that swelled to more than 1 million people on June 20 demanding an end to corruption and better public services. The contraction also could lead to an increase in souring loans, undermining the financial health of the banks.
Banco do Brasil ranked first as an underwriter of Brazil dollar-denominated bonds through June 26, up from third place last year, according to data compiled by Bloomberg. It also was the No. 1 underwriter on local fixed-income deals as of May 31, rising from third for all of 2012, according to Anbima, Brazil’s capital-markets association. Non-state-owned Banco Bradesco BBI SA ranked first last year on local deals, and Itau BBA, a unit of Itau Unibanco Holding SA (ITUB), Latin America’s largest lender by market value, held the top spot in 2011.
Banco do Brasil, based in Brasilia, is fifth in investment-banking fees this year through today, after ranking sixth last year and failing to make the top 10 in 2011, data from London-based Dealogic show. Itau is No. 1.
Spokesmen for Zurich-based Credit Suisse, BTG, Itau BBA and Bradesco BBI, the investment-banking division of Banco Bradesco SA, declined to comment.
The ambition of Banco do Brasil and Caixa to move up the charts would put them in line with counterparts in other BRIC nations -- Russia, India and China -- where state-owned companies generate the most investment-banking revenue.
Russia’s VTB Group and OAO Sberbank are the two highest-ranked investment banks based on fees for the year through May, Dealogic data show, while State Bank of India is No. 1 in that country. In China, Citic Securities Co. (600030) and Bank of China Ltd., both controlled by the government, collected the most fees.
Government-backed lenders in Brazil account for 7.4 percent of investment-banking fees earned in that nation by the top 10 banks, the data show. That compares with 53 percent in China, 42 percent in Russia and 33 percent in India.
The competition from state-owned banks is heating up as the business may be about to contract. Emerging-market companies are postponing or canceling stock and bond offerings after the U.S. Federal Reserve said last month that it may reduce its monetary stimulus, growth in China slowed and investors pulled money out of developing countries. The MSCI Emerging Markets Index has fallen 14 percent from its high this year on Jan. 3.
Votorantim Cimentos SA, Brazil’s biggest cement producer, suspended an initial public offering of about $3.7 billion on June 19. The deal, which would have been the world’s second-biggest IPO this year, was a victim of “unfavorable market conditions,” the company said.
Azul Linhas Aereas Brasileiras SA, the airline created by JetBlue Airways Corp. founder David Neeleman, postponed a $450 million IPO last week. Banco do Brasil is an adviser.
Total revenue from investment banking is still rising in Brazil, climbing 15 percent to $953 million from a year earlier in the 12 months through May, according to Dealogic. That compared with a 12 percent increase, to $6.57 billion, for the BRIC nations as a whole. Russia posted the biggest jump, 40 percent, while India’s 2.6 percent was the smallest.
Brazil’s top five investment banks, which also include Sao Paulo-based Bradesco BBI and Charlotte, North Carolina-based Bank of America Corp., have smaller shares of the country’s loan market than Banco do Brasil’s. The government-owned bank is using those credit relationships to generate new business.
“Banco do Brasil is the biggest lender in Brazil, has a huge balance sheet to provide credit, and that helps to obtain investment-banking deals,” wholesale banking vice president Caffarelli said.
State-owned banks have responded to Rousseff’s call to help stimulate the economy by boosting lending 72 percent since the beginning of 2011, to 1.23 trillion reais ($546.2 billion) as of May, according to the central bank. That compares with a 26 percent increase for non-state lenders during the same period.
Loans made by government-owned banks, including the Brazilian development bank known as BNDES, account for 49 percent of the total 2.49 trillion reais outstanding, central bank data show.
“Brazil is running a dual banking system -- a system where the public banks are still showing little risk-aversion as long as the government supports them,” Inigo Vega, an analyst at Nau Securities Ltd., wrote in a note to clients in May.
Government banks are an even bigger part of the loan market in India, where 21 state-controlled lenders accounted for 76 percent of the 50.8 trillion rupees ($851.4 billion) of bank loans as of March 2012, according to data from the central bank.
In China, the four biggest government-controlled banks -- Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. -- have 44 percent of the nation’s 70.5 trillion yuan ($11.5 trillion) of loans outstanding, according to the central bank. The government also has a controlling or minority stake in all of the nation’s smaller banks and affiliates.
“No one here is statist, our ideal economic model is not China,” Caixa’s Percival said. “We don’t like the government’s 50 percent stake in credit -- it isn’t the picture we want to see. There is something wrong.”
Percival said that once the economy rebounds, non-state banks would be willing to increase lending.
John Welch, a strategist at Canadian Imperial Bank of Commerce in Toronto, said Brazil is making a mistake allowing such a large expansion of government-controlled banks.
“Perhaps the growth of state-owned banks’ balance sheets was necessary during the 2008 crisis,” Welch said in an interview, referring to the credit crunch five years ago that led to the collapse of Lehman Brothers Holding Inc. “But when the credit crisis was over, it was time to shrink the balance sheet, and they didn’t.”
Interest rates offered by state-owned lenders are often subsidized and unfair competition for other banks, which responded by cutting back loans, Welch said.
“Just to have a subsidized rate creates an excess of demand for the loans at that rate,” Welch said. “It also makes monetary policy harder.”
Felipe Salto, an economist at consulting firm Tendencias Consultoria in Sao Paulo, said that government-owned banks should only get involved when there’s a market failure.
“I don’t see that in the investment-banking business or the credit market right now,” Salto said.
Caixa plans to create its investment-banking division with employees transferred from other units, according to Marcos Roberto Vasconcelos, vice president of asset management. The focus will be underwriting local bonds, he said.
The bank ranked sixth among originators of Brazil fixed-income deals in the 12 months through May, up from seventh for the previous calendar year and 10th in 2011, according to Anbima. Caixa had 603 billion reais in assets under management in the first quarter, including 337 billion reais in investments for the nation’s unemployment insurance fund known as FGTS.
Caixa, responsible for about 69 percent of Brazil’s real estate loans, funds most of its mortgages with savings deposits and mandatory monthly payroll contributions to FGTS.
About 24 billion reais of the total managed by Caixa is an FGTS private-equity fund. That helped the 152-year-old bank obtain its first mandate advising on an IPO in April, for Sao Paulo-based electricity transmission and generation company Alupar Investimento SA (ALUP11), in which the fund has a 14 percent stake, data compiled by Bloomberg show.
Banco do Brasil was an underwriter of Biosev SA’s IPO after extending more than 380 million reais in loans to the company as of December 2012. Biosev, Brazil’s second-largest sugar-cane processor, raised about 709.4 million reais in April.
The bank’s insurance unit, BB Seguridade Participacoes SA, was responsible for the world’s biggest IPO this year, raising 11.5 billion reais in April. The transaction helped Banco do Brasil grab fourth place among equity underwriters this year, compared with fifth for 2012, data compiled by Bloomberg show.
Banco do Brasil’s expansion in investment banking includes buying the preferred shares of Sao Paulo-based Banco Votorantim SA it doesn’t already own, boosting its share of capital to 75 percent from about 50 percent, two people with direct knowledge of the plan said in January. Votorantim would remain a private company, allowing Banco do Brasil to use its brokerage to build an investment bank with a more flexible wage policy than state-owned firms must follow, the people said.
“We need to expand quickly in the investment-banking area,” Caffarelli said. “With lower interest rates in Brazil and all the investments needed in infrastructure, this business will grow a lot in coming years, and we can’t miss the boat.”
Banco do Brasil has tumbled 18 percent this year, compared with a 15 percent drop for Bradesco and a 10 percent decline for Itau, the nation’s two largest non-state banks by market value.
Banco do Brasil increased lending to companies 33 percent to 280.5 billion reais from a year earlier, while Caixa’s corporate loans soared 51 percent to 106.5 billion reais.
“This credit growth is unsustainable for the long term,” Andre Riva Gargiulo, a Sao Paulo-based analyst at GBM Grupo Bursatil Mexicano SA, said of Caixa’s lending.
Growth at non-state banks was less than half as strong. Bradesco had 272.5 billion reais of loans outstanding to companies at the end of March, up 13 percent from a year earlier, and corporate loans increased about 10 percent to 272.6 billion reais at Itau.
The gap may widen further after Brazil authorized a capital increase in June of 15 billion reais for BNDES and 8 billion reais for Caixa as the government seeks to create room on the banks’ balance sheets for continued loan growth.
“The government-controlled banks are being used not only as a booster for economic growth, but are also paying a lot of dividends to the Treasury, their controlling shareholder, helping the government achieve its fiscal targets,” said Maria Celina Vansetti-Hutchins, a managing director at Moody’s Investors Service in New York.
BNDES and Caixa accounted for 74 percent of dividends paid to Brazil’s Treasury by government-owned companies last year, according to Moody’s.
From 2008 through April, the Treasury injected 34.5 billion reais in subordinated debt into the state-owned banks and loaned 373.23 billion reais to BNDES, according to Salto at Tendencias Consultoria. BNDES said in an e-mail it plans to make more loans this year than the 156 billion reais it distributed in 2012.
By taking upfront dividends and making capital injections in the form of subordinated debt and shares of government-owned companies, the Treasury has weakened the quality and quantity of the banks’ capital, according to Moody’s.
“BNDES and Caixa, fully controlled by the government, are in the worst situation,” Vansetti-Hutchins said.
Delinquency rates at BNDES are lower than the market average and the bank invested its resources responsibly to get higher returns, a spokesman said in an e-mail.
“A lot of banks invest their capital in low-risk assets and good-quality company shares,” Caixa’s Vasconcelos said. “Only about 10 percent of our capital is in government-company shares.”
Banco do Brasil, created as a retail bank in 1808 by a decree of Dom Joao VI, the regent prince of Portugal, was bailed out by the government with an injection of 7.3 billion reais in 1997, after posting losses of 7.5 billion reais in 1996 and 4.3 billion reais in 1995. In 2001, the lender exchanged bad debt for government bonds.
Only state-owned banks are authorized to receive deposits from court decisions, and at Banco do Brasil, the amount reached 89.9 billion reais in the first quarter, up from 80.5 billion reais a year earlier. The banks can use those funds for any purpose and don’t have to set aside a portion for reserve requirements or pay fees to the nation’s deposit-insurance fund.
“These banks have access to subsidized funding lines with cheaper costs that privately owned banks can’t access,” GBM’s Gargiulo said. “Their global funding costs are lower, and Caixa is among the lowest of the market.”
Percival, the Caixa vice president, said the bank only uses subsidized funding for programs for the poor and that its loans to companies “use normal market funding.”
Banco do Brasil’s rate of debt payments overdue at least 90 days declined to 2 percent in the first quarter from 2.2 percent a year earlier, while Caixa’s rose to 2.3 percent from 2.1 percent. That compares with 4.5 percent at Itau and 4 percent at Bradesco.
Banco do Brasil and Caixa’s credit expansions are helping keep their delinquency rates low as new borrowers don’t usually default, Gargiulo said.
“There is a risk, which isn’t our basic scenario, that the economy falters, increasing delinquencies at the same time spreads are at record lows,” said Gargiulo, referring to the difference between banks’ cost of funds and how much they charge customers for loans.
Mario Pierry, an analyst at Deutsche Bank AG in Sao Paulo, said the banks’ strategy of leveraging their loan relationships into investment-banking business follows the path Itau and Bradesco took.
“They provide credit to companies -- why not help the client hold an IPO?” Pierry said. “Investment banking is a business that relies on relationships with clients.”