Banks from JPMorgan Chase & Co. (JPM) to Banco Itau BBA SA are opening offices and hiring in Mexico, Colombia and Peru as Brazil’s share of the Latin American investment-banking fee pool falls to a record low.
Revenue from underwriting debt and equity and advising on mergers and acquisitions in the region totaled $1.89 billion this year through Dec. 16, according to London-based research company Dealogic. Brazil’s 41 percent share was the lowest since at least 2007, when Dealogic started compiling the data, and down from 51 percent last year and a high of 63 percent in 2007.
“We are investing a lot in the region, and year by year countries in Latin America outside Brazil are representing an increasing stake of our total revenue,” said Roberto Sallouti, partner and chief operating officer at Sao Paulo-based Grupo BTG Pactual, Brazil’s biggest merger adviser this year. “This trend will probably continue over the next years.”
Brazilian investment-banking fees declined as economic growth fell short of analysts’ estimates, the government intervened in the energy industry and looming elections sparked concern that the country faces new political risks. President Dilma Rousseff failed to offer a plan to stop using Petroleo Brasileiro SA, the state-run oil company, to sell gasoline below cost, adding to speculation that budget deficits may widen and Brazil’s credit rating will be lowered.
As Brazil faltered, Mexico, the second-biggest market for investment-banking fees in Latin America, expanded its share of the revenue pool to a record 34 percent this year from 21 percent in 2012. Mexican investment-banking revenue surged 64 percent to $642 million through Dec. 16 compared with all of 2012, while in Brazil it fell 17 percent to $782 million, according to Dealogic.
Citigroup Inc. (C) is poised to capitalize on the shift, said Alberto Pandolfi, the bank’s head of Latin American investment-banking coverage and M&A. The New York-based company generated the most investment-banking fees in Latin America excluding Brazil every year since 2010. It garnered an 11 percent share of the $1.1 billion 2013 total through Dec. 16, according to Dealogic, down from 14 percent of the total $917.6 million in 2012.
The company owns Banco Nacional de Mexico, or Banamex, Mexico’s biggest lender, and has a corporate-banking presence in 24 Latin American countries, including Peru and Colombia. It also holds a stake in Banco de Chile, that country’s second-largest lender by assets. In October, Citigroup hired Pedro Molina from Bank of America Corp. to run investment banking in Colombia.
Citigroup has recovered from the 2008 financial crisis and has an appetite to invest in Latin America and Brazil, said Marcelo Marangon, head of corporate banking and co-head of investment banking in Brazil. The bank plans to create an infrastructure business in Brazil, including project finance, corporate lending and investment banking.
Citigroup advised Petrobras on the sale of its wholly owned subsidiary, Petrobras Energia Peru, to China National Petroleum Corp., a $2.6 billion deal announced on Nov. 13, according to data compiled by Bloomberg.
Bank of America Corp., the second-largest U.S. bank, is No. 2 in fees from Latin America outside Brazil through Dec. 16, according to Dealogic. The Charlotte, North Carolina-based bank named Alexandre Bettamio head of its Latin American business in September.
“We are going to have an integrated team and a more strategically coordinated approach to Latin America, which is one of the key regions for the bank,” Bettamio said in an interview at the company’s Sao Paulo office. Bank of America will continue to increase its lending business and is “also going to expand our presence in the region by hiring investment bankers where needed as well as reinforce our sales and trading capabilities,” he said.
JPMorgan, with about 2,500 employees dedicated to Latin America and about two-thirds of that total based in countries in the region, has been competing with Citigroup for the top ranking in fees in Latin America outside Brazil, according to Dealogic. JPMorgan, based in New York, is No. 3 through Dec. 16 and won the top ranking in 2009 and 2008.
JPMorgan’s total revenue from Latin America including Brazil has grown 13 percent a year for the past seven years, and the region represents 5 percent of the bank’s wholesale business, with $2.5 billion in revenue in 2012, Martin Marron, CEO for JPMorgan in Latin America, said in an interview in October in New York. That’s up from $700 million in 2005.
Goldman Sachs Group Inc., which halted hiring in Brazil this year, said it will open a broker-dealer in Mexico and boost staff there. The New York-based firm boosted its total equity in Brazil this month by almost 25 percent to 925 million reais ($398 million).
Itau BBA, the top investment bank in Brazil by fee revenue in 2013, plans a similar expansion in Mexico and may hire as many as 50 people in two years, according to Jean Marc Etlin, the firm’s chief executive officer for investment banking.
BTG as well as New York-based JPMorgan and Morgan Stanley said they will also boost investments in Mexico next year.
Credit Suisse Group AG (CSGN), based in Zurich, is hiring four people at its Mexican broker-dealer, according to Marcelo Kayath, head of securities for Latin America, who said he expects initial public offerings in the country to climb in 2014 after doubling to $5.08 billion this year through Dec. 11 from $2.52 billion for all of 2012, data compiled by Bloomberg show.
Grupo Financiero Santander Mexico SAB’s $4.1 billion public offering in 2012 wasn’t considered an IPO under Bloomberg’s criteria.
“There are significant expectations about reforms in certain key sectors in Mexico and how that’s going to continue to improve market conditions,” said Javier Vargas, co-head of Latin American business outside Brazil at Credit Suisse. “The most important is the liberalization of the energy sector,” which Vargas said will allow private companies to compete with state-owned firms on exploration projects and install new electrical capacity.
Credit Suisse accounted for the most equity trading in both Brazil and Mexico this year, helping to push the firm to the top of Dealogic’s fee rankings for all of Latin America through Dec. 16. The bank is the No. 1 equity underwriter and merger adviser in Mexico, according to data compiled by Bloomberg. JPMorgan ranked first in M&A in 2012, while Citigroup was on top for equity underwriting.
Total equity offerings in Mexico reached $12.4 billion this year through today, an increase of 39 percent from 2012, data compiled by Bloomberg show. In Brazil, they totaled $14.1 billion, a 72 percent increase over 2012.
Mexican markets also are benefiting from pension rules put in place in 2011 that allow funds to have as much as 40 percent of their assets in stocks. Before that, they were allowed to invest only in indexes. Assets under management at Mexican pension funds, known as Afores, increased to 2.02 trillion pesos ($160 billion) from 1.90 trillion pesos at the end of 2012, according to Consar, the nation’s pension-fund regulator.
Mexico tends to follow growth trends in the U.S. economy. Analysts surveyed by Bloomberg estimate U.S. growth will expand 2.6 percent in 2014 compared with 1.7 percent this year.
The U.S. Federal Reserve will probably start tapering its bond-buying stimulus program early next year, though that isn’t a reason for concern because it’s already mostly priced into Latin American exchange rates and asset prices, according to Ilan Goldfajn, Itau BBA’s chief economist.
Even as fees from Mexico increase, announced M&A transactions declined this year, falling to $17.3 billion through Dec. 11 from $38.5 billion for all of 2012, data compiled by Bloomberg show.
Last year’s total included Anheuser-Busch InBev NV’s acquisition of Grupo Modelo SAB de CV for about $17 billion. Morgan Stanley (MS) was Modelo’s sole adviser on the deal, and part of the fees the bank received were included in Dealogic’s data for 2013, helping the New York-based bank reach the No. 1 ranking for investment-banking revenue for Mexico in 2013. Citigroup topped the list in 2012.
JPMorgan, Citigroup and Morgan Stanley all have broker-dealers in Mexico, which allow them to sell securities to local pension funds.
“Our expertise in prime brokerage allows us to develop a strong understanding of local accounts,” said Christopher M. Harland, Morgan Stanley’s chairman for Latin America. “A number of Brazilian asset managers now want to have Latin American capabilities, emerging-market capabilities and commodities capabilities. There has been real growth in the prime-brokerage business in both Latin America and Asia and also in Brazil.”
“Chile is an oasis,” Harland said, citing its AA- credit rating and favorable regulatory environment. “Private-equity firms have visited Chile to raise capital and are now looking to do the same in Colombia and Peru.”
Economic growth in Colombia and Peru has attracted the attention of investment banks. Colombia’s gross domestic product rose 4.2 percent in the second quarter of 2013 from the same period in 2012, while Peru’s economy grew 4.37 percent in the third quarter. In Brazil, GDP for the third quarter fell 0.5 percent from the second quarter and increased 2.2 percent from the same period a year earlier.
Banco Bradesco SA, the second-biggest in Brazil by market value, also is looking at Colombia, Peru and Chile and won approval in December last year from Brazil’s central bank to open a full-service bank in Mexico, said Sergio Clemente, vice-president at the Osasco-based lender responsible for the wholesale area, mid-size companies and international business.
Itau may open a bank in Peru in 2014 and invest 395 million reais in Colombia, where total fees jumped 24 percent this year through Dec. 16 to $163 million, compared with $131.3 million for all of last year. The company said Dec. 11 it was in talks to acquire a majority stake in Santiago-based Corpbanca SA, Chile’s fifth-biggest lender.
BTG plans to open offices in Colombia and Chile and is considering Peru, Sallouti said.
“We want to have local banks to provide local-currency-denominated loans to clients and compete with local lenders,” Sallouti said, adding that BTG’s goal is to expand to other Latin American countries all the products and lines of business it has in Brazil, which includes asset management, private equity and wealth management.
BTG and Itau are just starting their efforts to expand in Latin America, and will face strong competition from U.S. banks. No Brazilian bank was among the top 10 in fees outside Brazil this year through Dec. 16, according to Dealogic.
BTG participated as a lead underwriter for Fibra Shop Portafolios Inmobiliarios SAPI, Mexico’s first real estate investment trust focused on shopping centers.
“We wanted to have a presence in South America, and they’re strong in South America,” Gabriel Ramirez Fernandez, chief financial officer of Fibra Shop, said in a telephone interview from Mexico City. “They were able to help us with distribution in South America.”
BTG, which plans to open a broker-dealer in Mexico in January, bought Bolsa y Renta SA, Colombia’s biggest brokerage by trading volume, in June 2012 after announcing the acquisition of Santiago-based Celfin Capital SA in February of last year.
JPMorgan has similar aspirations in Colombia.
“We like Colombia because the regulatory framework is strong, institutions are very sturdy, government tends to be market friendly, and they’re a very young society that needs investments badly,” Marron said.
The bank also is applying for a license in Peru and plans to hire as many as 30 people to start a corporate, investment-banking and wealth-management operation in 2014, Marron said.
“We like the fundamentals of Peru,” Marron said, pointing to GDP growth with low inflation and the nation’s large pools of institutional investors such as pension funds. “We think the growth potential is intact in Peru and also the government has been pro-business, so Peru is our next target.”
Political risks also have abated, Marron said.
“Latin America is no longer where it used to be 20 years ago, where the fundamentals for the countries shifted from one extreme to another because of a presidential election,” Marron said. “But elections are still something we need to pay attention to, because they can add a little bit of spice to the fundamentals of those countries.”
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