Brazil Investment-Banking Fee Slump Leaves It Tied With Mexico

Jean-Marc Etlin
Banco Itau BBA SA’s investment-banking CEO Jean-Marc Etlin. Photographer: Simon Dawson/Bloomberg

Brazil investment-banking revenue tumbled 51 percent this year as a recession loomed, leaving Latin America’s largest economy virtually tied with Mexico as the region’s top fee generator for the first time.

Banks advising on mergers and underwriting debt and equity generated $183 million through June 15 in Brazil, according to research firm Dealogic, a record low since the London-based company started measuring it in 2005. Mexico fees fell 15 percent to $187 million. Last year Brazil’s total was 69 percent higher than Mexico’s for the same period.

Demand for investment-banking services slowed in Brazil on concern the nation’s credit rating would be cut, combined with the biggest corruption scandal in the country’s history, involving the state-owned oil company known as Petrobras. The slide will probably ease later this year, according to Jean-Marc Etlin, chief executive officer for Banco Itau BBA SA’s investment-banking business.

“The risk of an imminent rating downgrade is off the table for now as the Brazilian economic team has been focusing on delivering a much-needed fiscal adjustment,” Etlin said in an interview at Itau BBA’s Sao Paulo headquarters. “Publication of Petrobras’s financial statements and subsequent bond issuance have contributed to the better mood.”

Petrobras will help boost volume in coming months as it attempts to raise as much as $13.7 billion selling stakes in various units and projects.

Stake Sales

Brazil’s government is also considering the sale of some of its shares in IRB-Brasil Resseguros SA, the largest reinsurer in Latin America, in a 4 billion-real ($1.3 billion) initial public offering, while the government-owned Caixa Economica Federal SA is seeking to raise as much as 10 billion reais in an IPO in October, people with knowledge of the matter have said.

“Slow growth typically isn’t beneficial for equity markets, so we might see only high quality Brazilian companies issuing shares this year,” said Alexandre Bettamio, president of Bank of America Merrill Lynch for Latin America, in a phone interview from New York. The Brazilian government’s divestment plan will generate more deals, since it has a very good portfolio of assets, he said.

Investment-banking revenue in Brazil will probably end the year down about 15 percent to 20 percent compared with 2014 and above the total for Mexico, where “stronger economic growth and energy and telecommunications reforms” will boost demand, Etlin said.

Mexico, Latin America’s second-largest economy, is likely to expand 2.7 percent this year, more than 10 times the region’s pace, according to analysts’ estimates compiled by Bloomberg. Mexican President Enrique Pena Nieto has said constitutional changes he spearheaded to open the energy and telecommunications industries will help boost annual growth to 5 percent annually by 2018.

‘Completely Closed’

“Brazil’s international bond and equity markets were completely closed in the first quarter of the year, but now things have started to change,” Patricia Moraes, head of Brazil investment and corporate banking for New York-based JPMorgan Chase & Co., said in an interview in Sao Paulo.

She cited the sale of a $2.5 billion 100-year bond by Petrobras and the first initial public offering for the country in 2015, the 602.8 million reais ($194 million) IPO for insurance broker Par Corretora de Seguros SA.

Petrobras’s 100-year bond sale had an innovative maturity structure and opened the international bond market for other Brazilian issuers to follow, Moraes said.

Year-End Improvement

“The second half of the year will be better for Brazil and the signs of relief are already in the market,” said Fabio Mourao, head of Brazil investment banking at Zurich-based Credit Suisse Group AG.

International bond issuance fell 57 percent to $44.9 billion in Latin America through June 15, data compiled by Bloomberg show, while equity sales declined 35 percent to $8.13 billion.

“Besides M&A, bond issuance has been the main driver for investment-banking fees in Mexico so far this year,” said Humberto Cabral Gonzalez, head of capital-markets origination at Citigroup Inc.’s Banamex unit, in a telephone interview from Mexico City. “But valuations in the equity market have gotten better now and while growth forecasts have been cut the economy keeps growing.”

A bigger-than-expected increase in U.S. interest rates or a disruption in Europe could affect equity valuations, said Mark Rosen, head of investment banking for Bank of America Corp. He said that wouldn’t be enough to stop new bond and equity sales.

Mergers and acquisitions in Brazil fell 43 percent to $18.2 billion through June 15, while in Mexico the total increased 25 percent to $16.1 billion, data compiled by Bloomberg show.

“We will keep seeing distressed situations driving the merger-and-acquisition business in Brazil and companies being taken private in very specific situations,” Moraes said.

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