Brazil Banks Beat Wall Street as Itau Shows JPMorgan Who Rules

Gerdau SA (GGBR4), the largest steel producer in the Americas, chose three Brazilian banks to manage a $3.5 billion share sale last month. U.S. firms JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), which led previous deals for the company, weren’t in the mix.

When Magazine Luiza SA, an electronics and furniture retailer, held an initial public offering in April that raised $586.7 million, it asked Banco Itau BBA SA, the investment- banking unit of Brazil’s largest lender, to lead the deal. Foreign banks weren’t invited.

“It’s a sign of the times,” Jean-Marc Etlin, vice president for investment banking at Itau BBA, which also worked on the Gerdau share sale, said April 19 in an interview in Sao Paulo. “Brazilian companies and entrepreneurs are learning that they don’t need a foreign bank to help them with their financing needs. Local banks have got what it takes to do even the most sophisticated deal.”

Foreign firms pursuing investment-banking fees in Brazil, where an emerging middle class and rising commodity prices are propelling one of the world’s fastest-growing economies, face stiff competition. Local players have a greater capacity to finance deals, improved relationships with investors, experienced executives and the ability to provide services once offered only by large global banks.
‘Entrenched Competitors’

The strength of Brazilian lenders in investment banking is unusual for emerging markets, said Christopher Harland, head of Latin America for Morgan Stanley (MS), which has 300 people in Sao Paulo, Brazil’s financial hub.

“You don’t find many markets where you have those kinds of strong, well-capitalized, entrenched competitors,” said Harland, who is based in New York.

Brazil, which has experienced boom-and-bust cycles of inflation, currency devaluations and interest-rate swings since the end of military government in 1985, is surging again. Gross domestic product expanded 7.5 percent last year, the most in two decades, compared with 2.8 percent in the U.S. and 1.3 percent in the U.K., according to the International Monetary Fund. Unemployment is at record lows and credit at all-time highs, as inflation in April likely exceeded 6.5 percent, central bank President Alexandre Tombini has said.
Lower Fees

Brazilian issuers sold a record 290.7 billion reais ($180 billion) in stocks and fixed-income instruments in 2010, compared with 107.2 billion reais the previous year, according to investment-banking association Anbima. Last year’s offerings included the $70 billion sale of shares in state-owned oil company Petroleo Brasileiro SA (PETR4), the largest equity sale ever, for which Itau acted as joint global coordinator. Brazil had 143 mergers and acquisitions totaling $84.8 billion in 2010, the most since 2006, according to Anbima.

Investment-banking fees are lower than in the U.S. — typically 2.5 percent for equity offerings, said Andre Fernandes Berenguer, head of global banking and markets at Banco Santander Brasil SA, the Brazilian unit of Banco Santander SA (SAN), Spain’s biggest lender. Average fees for U.S. equity deals were 3.3 percent in 2010 and 3.4 percent so far this year, according to data compiled by Bloomberg. Banks in Brazil also split the money more ways because companies hire more firms to manage deals.

Still, investment-banking fees in Brazil were about $1 billion last year, according to two dealmakers who asked not to be identified because they’re not authorized to speak publicly.
BTG, Itau

Investment banks based in Brazil, including Itau, Banco BTG Pactual SA and Banco Bradesco BBI SA — the firms that managed the Gerdau share sale — maintain a grip on equity and debt offerings, even as foreign firms poach employees and ramp up operations in Latin America.

BTG, the Sao Paulo-based investment bank owned by Brazilian billionaire Andre Esteves, who bought it back from UBS AG (UBSN) for $2.5 billion in 2009, ranked No. 1 last year in advising on mergers and acquisitions, up from seventh place in 2009, according to Anbima. A spokeswoman for BTG said bank executives declined to comment.

Itau BBA, a unit of Sao Paulo-based Itau Unibanco Holding SA (ITUB4), was the top underwriter of equity and debt offers in the first two months of the year, according to Anbima. It was first in debt and second in equity offerings last year.

Credit Suisse Group AG (CSGN), ranked second in advisory work on M&A deals announced last year, was more frequently among the top five managers in equity sales and M&A over the past five years than any foreign bank, according to Anbima. The Zurich-based bank, which gained a foothold in Brazil in 1998 when it acquired Banco de Investimentos Garantia, the biggest investment bank at the time, led five of this year’s seven IPOs in Brazil, according to Bloomberg data.
‘Takes Experience’

“Selling a well-known, traded Brazilian company like Gerdau to global investors isn’t that difficult,” Jose Olympio Pereira, 48, head of investment banking at Credit Suisse’s Brazilian unit, said in an April 15 interview in Sao Paulo. “It takes experience and talent to sell new ideas to the market at a price that investors and the company will be happy with.”

While Brazilian banks held the top five positions in debt offerings last year and the first three spots in equity sales, foreign firms made a stronger showing in M&A advisory, capturing four of the top five slots, according to Anbima. JPMorgan was No. 3, followed by Morgan Stanley and Bank of America Corp. (BAC)

Itau BBA fell to ninth place in M&A from fifth in 2009 and second in 2008. Bradesco BBI, which was third in 2009, didn’t make the top 10 last year.
‘All Their Power’

Goldman Sachs Group Inc. (GS), whose chief economist, Jim O’Neill, coined the term BRIC for emerging markets Brazil, Russia, India and China, hasn’t made the top 10 in any category since 2008, after a run as the top merger adviser in Brazil for the three years through 2005, according to Anbima. Andrea Rachman, a spokeswoman for Goldman Sachs in New York, declined to comment.

Claudio Berquo, 50, senior country officer for JPMorgan in Brazil, said the New York-based lender wasn’t trying to compete with Itau in all businesses. Instead it’s focusing on investment banking, especially cross-border deals, and private wealth management for high-net-worth Brazilians. The bank wants to be “more local than the global banks and more global than the local banks,” he said in an interview at JPMorgan’s headquarters in New York last month.

“We don’t want to go head-to-head with Itau where they have all their power,” Berquo said. “What JPMorgan is in the U.S., they are in Brazil.”
JPMorgan Advice

JPMorgan, which has had a presence in Brazil for more than 40 years, has seen the size of its workforce there fluctuate with the health of the economy. It doesn’t issue credit cards or have retail branches, compared with Itau, which has about 3,000 in Brazil. JPMorgan has 630 employees in Brazil and plans to expand to more than 1,000 by late 2013, said Berquo, who has worked at JPMorgan since 1994.

The bank was the lead adviser to Chile’s Lan Airlines SA (LAN) in its $3.7 billion takeover of Brazil’s Tam SA (TAMM4) to create Latin America’s largest, and the world’s 11th biggest, passenger carrier. The deal, announced in August, is pending an antitrust review in Chile. JPMorgan also advised Gerdau on its $1.6 billion deal in August to complete the purchase of Tampa, Florida-based Gerdau Ameristeel Corp., the second-largest mini- mill steel producer in North America.

Gerdau, based in Porto Alegre, Brazil, bypassed JPMorgan for its share sale in April because the Brazilian banks it selected “had their abilities tested in other deals,” Chief Financial Officer Osvaldo Burgos Schirmer said in an e-mail.

“The chosen banks have a strong presence in Brazil, knowledge of the steel sector, market intelligence, presence in the main financial centers of the world and a long relationship with the company,” he said.
‘Connect the Client’

Foreign banks such as JPMorgan, Bank of America and Credit Suisse see opportunity as more family-run businesses like Gerdau search for investors and deals outside Brazil, bankers said.

“One of the things we do well is cross-border deals,” said Hans Lin, senior investment banker for Bank of America in Brazil. “We have the power to connect the client in Brazil to a target in Asia or the client in Asia to a target in Brazil.”

JPMorgan acquired a majority stake in Rio de Janeiro hedge fund Gavea Investimentos Ltda for an undisclosed sum in October to expand its asset-management division. The fund, run by former Brazilian central banker Arminio Fraga, 53, manages about $6 billion for high-net-worth investors. Credit Suisse made a similar acquisition in 2006, buying a controlling stake in Brazilian asset manager Hedging-Griffo.

“Private banking is a great source of investment-banking business,” JPMorgan’s Berquo said. “If you have a private- banking relationship, there’s always an opportunity to offer services selling the company or taking the company public.”
Real Appreciation

The real’s 47 percent appreciation against the dollar since December 2008 and the rise in the volume of deals involving Brazilian firms has made the country one of the most expensive in the world to staff, bankers said.

“There’s a lack of talent in Brazil because everybody wants to be in Brazil,” Berquo said. “Now it’s becoming the new private-equity Mecca. Everybody is doing private equity in Brazil. Blackstone is there, KKR is there, Carlyle is there, plus the local players who’ve been there forever. So the competition for people is tough.”

Citigroup in March hired Andre Kok from Itau BBA, where he had worked for the past six years, to head corporate and investment banking in Brazil. About 75 percent of the New York- based lender’s senior investment bankers in Latin America are new to the company or the job, said Eduardo Cruz, Citigroup’s head of banking for Latin America.
Recruiting Students

“You have to hire senior talent in the region, and the best places to have found some of that has been competitors,” said Cruz, who was hired from Goldman Sachs in 2005.

Morgan Stanley’s Harland said the firm is recruiting students from local universities. Bank of America’s Lin said the Charlotte, North Carolina-based lender is adding corporate bankers, risk managers and administrative staff to accommodate a new corporate bank in Brazil that will double the firm’s lending capacity, the size of which it wouldn’t disclose.

Bradesco BBI, the investment-banking unit of Osasco, Brazil-based Banco Bradesco SA (BBDC3), the country’s second-biggest bank by market value, has been hiring from outside, an exception to its policy of cultivating executives internally, said Renato Ejnisman, director of the division. The unit was created in late 2006, shortly before Ejnisman, who has a doctorate in physics from the University of Rochester, joined Bradesco from Bank of America, where he had worked for eight years.
‘Shoulder-to-Shoulder’

“We want to expand our client base and improve relationships with the advantage of the strong presence Bradesco has among corporate clients in Brazil,” Ejnisman said. “We don’t have the history that our global competitors have in the investment-banking market, but we have equipped ourselves to fight shoulder-to-shoulder for business in Brazil and abroad.”

Bradesco has the biggest team of bankers in Brazil to distribute Brazilian assets globally and to identify demand from foreign clients for deals involving Brazilian companies, Ejnisman said. He cited the bank’s role advising Sompo Japan Insurance Inc., the country’s second-largest non-life insurer, when it bought a 50 percent stake in Brazilian insurance company Maritima Seguros SA in 2009 for 328 million reais. Maritima hired JPMorgan.

“When the deal was announced, everyone thought we were working for Maritima,” Ejnisman said. “But it was the other way around. The Japanese client hired us. This story that only global banks can distribute Brazilian products or do cross- border deals has definitely become a myth.”
Santander Rises

One bank that considers itself both global and local is Santander, which expanded in Latin America in the 1990s.

The Madrid-based bank bought regional lender Banco do Estado de Sao Paulo SA, known as Banespa, for $4.8 billion in 2001, paying three times the price offered by the next-highest bidder. Its 2007 purchase of ABN Amro Holding NV’s Brazil unit for 11 billion euros ($16 billion) vaulted Santander into the top three non-state-owned banks in Latin America’s biggest economy, with 376 billion reais in assets, 54,000 employees and 2,395 branches as of December, according to data from Brazil’s central bank.

“Santander is the most global Brazilian bank and the most Brazilian of international banks,” Roberto Barbuti, 42, head of the equities division at Banco Santander Brasil SA’s global banking unit, said in an April 14 interview in Sao Paulo. “We have a strong ability to lend to clients here in Brazil and abroad, and that is an advantage we have over banks that have a small presence outside of Brazil.”
‘Advantage Is Temporary’

Santander’s purchase of ABN Amro’s Brazilian unit led to consolidation among rivals. In November 2008, Itau announced it was buying Uniao de Bancos Brasileiros SA, or Unibanco, for $12.5 billion to create Brazil’s biggest bank and the 12th largest in the world by market value. The deal was in part spurred by Santander, which had become a “new kind of player,” Itau Chief Executive Officer Roberto Egydio Setubal said at a press conference.

Since then, Itau has won mandates to coordinate Brazil’s biggest deals, such as last year’s Petrobras share offer and the IPO of highway and ports operator EcoRodovias Infraestrutura Logistica SA in March 2010.

While Itau has built a formidable investment bank, Santander has an edge in some businesses, because of its larger market valuation, and in certain markets, including Europe, where it has more experience, Barbuti said.

“Any advantage is temporary,” he said. “You have to keep working. It used to be more of an advantage a few years ago. Now it’s shrinking.”

Etlin, 48, Itau BBA’s investment-banking vice president who joined from UBS in 2005 after starting his career at JPMorgan a decade earlier, doesn’t plan on easing the pressure.

“Working in investment banking in Brazil is like running a marathon,” he said. “But at sprinting speed.”