A decade ago, Roberto Setubal set out to challenge Goldman Sachs Group Inc.
Setubal was chief executive officer of Banco Itau SA, one of Brazil’s biggest retail and commercial banks. At the time, investment banking in the country was dominated by U.S. and European firms, with Goldman Sachs the perennial leader in advising on mergers and acquisitions.
The single Brazilian bank competing with the outsiders was Banco Pactual SA -- and it was bought in 2006 by Zurich-based UBS AG, Bloomberg Markets will report in its July issue.
Setubal launched his quest by acquiring a small rival, Banco BBA Creditanstalt SA, in 2003. He renamed it Banco Itau BBA SA and told its CEO, Fernao Bracher, that his job was to dislodge foreign banks from their perches atop the investment-banking ranks.
Setubal opened the coffers of Banco Itau, now Itau Unibanco Holding SA, to help Bracher do it.
“By maintaining Itau BBA as a different company, we kept the sophistication, agility and flexibility in decision making of an investment-banking boutique and at the same time gave this boutique the power to use the huge capital base of Itau,” Setubal, 58, says.
Today, Itau BBA is the second-biggest investment bank by revenue in Brazil. It battles for primacy not with Goldman Sachs but with Banco Bradesco SA and Grupo BTG Pactual SA -- the successor to Banco Pactual, which is back in Brazilian hands under the leadership of billionaire Andre Esteves.
Itau vs. BTG
Itau BBA took in the most investment-banking-fee revenue in Brazil for the year ended on April 30, 2012 -- $117 million, according to London-based research firm Dealogic.
BTG topped the league table for the 12 months ended on April 30, 2013. Goldman wasn’t even in the top 10.
The Brazilian investment banks have used a two-track strategy to dislodge their foreign rivals: First, offer companies the best loan deals, and then use the credit portfolio as leverage to capture the company’s investment-banking business. As of December 2012, Itau BBA, led since 2005 by Fernao’s son, Candido Bracher, was the biggest lender to large corporations in Latin America, with 185 billion reais ($87 billion) in loans out to 3,100 companies with more than $100 million in annual revenue.
Goldman Sachs President and Chief Operating Officer Gary Cohn salutes Brazil’s investment banks.
‘A Good Thing’
“They are much bigger competition than they were historically -- and that’s a good thing,” he told a journalists’ roundtable in Sao Paulo in April. “They’re willing to take exponentially more credit risk than we are. And, by the way, they should. They understand the country.”
All banks in the country have been hurt by Brazil’s economic downturn, with gross domestic product growth an anemic 0.9 percent last year. The Ibovespa stock index was down 13.24 percent in reais for the year as of June 6, compared with a 13.77 percent rise in the Standard & Poor’s 500 Index. Total investment-banking fees fell 1.6 percent in 2012 to $916 million.
As investment banks compete for slices of a smaller pie, the Americans and Europeans are by no means out of the picture. Zurich-based Credit Suisse Group AG has been near the top of the investment-banking league tables since it bought Sao Paulo-based Banco de Investimentos Garantia SA in 1998. Credit Suisse was No. 3 in overall investment-banking revenue during the 12 months ended on April 30 and No. 2 in mergers-and-acquisitions fees for 2012, according to Dealogic.
Bank of America Merrill Lynch, a unit of Charlotte, North Carolina-based Bank of America Corp., was fifth in total revenue.
Local bankers fight the overseas banks for every deal.
“We Brazilians have longtime, lasting relationships with our clients, and we are here in Brazil no matter what,” Candido Bracher, 54, says. “Foreign banks usually end up adopting a stop-and-go investment policy in the country, divesting whenever there’s a local or international crisis.”
To compete with the global banks, the Brazilians have invested in international bond and equity distribution, says Sergio Clemente, a vice president of Bradesco who runs its wholesale-banking business. Bradesco, Itau BBA and BTG have all opened broker-dealers in Hong Kong, London and New York in recent years.
Bracher is less concerned about rivals from outside Brazil than from inside. Asked to name the biggest threat, he replies, “Competition from state-owned banks.”
Under orders from President Dilma Rousseff to help the stagnant economy, state-controlled Banco do Brasil SA expanded its loans to firms with revenue above 100 million reais by 24 percent in 2012, to 155.4 billion reais.
“The government-owned banks are under a lot of pressure to increase lending and at lower spreads, which is reducing returns for the whole financial system,” says Mario Pierry, a Sao Paulo-based analyst at Deutsche Bank AG.
Says Bracher, “I sometimes have the impression I’m competing against not-for-profit organizations.”
That competition with the state-owned banks involves investment banking as well as lending. Banco do Brasil was No. 6, behind Bank of America Merrill Lynch, in overall investment-banking revenue for the 12 months ended on April 30.
“We need to expand quickly in the investment-banking area,” says Paulo Rogerio Caffarelli, Banco do Brasil’s vice president for wholesale banking. “But as we already do on the retail and lending business, we grow without sacrificing our returns.”
Providing loans and other services to Brazilian corporations has been crucial for the growth of the local banks. Bradesco’s investment-banking fees increased 37 percent last year, to $81 million, at the same time it was expanding its loan portfolio for companies with revenue of more than 250 million reais by 15 percent, to 152.7 billion reais.
“Lending creates a good perception among companies that we are putting our own capital at risk to help them even in the most-complicated situations,” says Guilherme Paes, partner and head of investment banking at BTG. “International banks that come to Brazil with a small capital base and a few people, almost like investment-banking boutiques, are more and more being left behind.”
Global banks still offer better international distribution of Brazilian companies’ bonds and shares, Pierry says. “But the biggest Brazilian banks have learned that a credit line can help to generate a cash management or investment-banking deal in the future,” he says.
Another requirement: experienced bankers. To find them, the Brazilians have spent the past decade raiding U.S. and European rivals. Itau BBA was among the first when in 2005 it hired Jean-Marc Etlin, head of Latin America investment banking at UBS, as CEO of its own investment-banking unit, a post he still holds.
“When the market started to boom, Itau BBA made really huge investments in top executives who would make a big difference in the medium and long term,” says Vinicius Bolotnicki, a partner in Sao Paulo at New York-based executive recruitment firm Options Group. One of Itau BBA’s most recent hires is Charles Stewart, former deputy head of European investment banking at Morgan Stanley. Stewart was scheduled to move to Itau BBA’s London office in June.
Recent hires at Bradesco include managing directors Leandro Miranda from Credit Suisse and Ricardo Behar from Morgan Stanley.
One reason the bankers move is that the Brazilians offer better compensation.
“The Brazilian banks attract top executives by offering bonus payments 100 percent in cash, while at some foreign banks, it’s up to 80 percent in shares,” Bolotnicki says.
As the Brazilian banks fight for position, Goldman’s Cohn strikes a conciliatory note. The local banks “are good partners for us, and I wish them all the success in the world,” he says.
Yet the Brazilians need to keep watch.
During his April visit to Sao Paulo, Cohn also said the New York bank would increase its staff in the country to 350 from 300 and raise its investment-banking coverage to 300 companies from 200.
The global banks may have taken a step back. They’re not going away.