Brazils equity market, which produced 10% of IPOs globally in 2007 and shot up 73.4% in dollar terms, has turned from boom to bust. The crisis has not only swept away fat bonuses and optimism, but also broken the envied lock-hold of the two Swiss giants UBS Pactual and Credit Suisse. The proposed merger of Banco Itaú and Unibanco, the first and fourth in equity capital markets activity so far this year, is shaking up the market, too (see also box). Swingeing job cuts look inevitable.
Amid the global carnage, the scale of the pull back in the Bovespa index has been swift as well as brutal. The market peaked at 73,779 as late as May, but closed nearly 50% down at 37,785 on November 4, after dropping below 30,000.
The reason for the depth of the fall are numerous. The dominance of cyclical commodity companies, epitomized by petrol giant Petrobras and miner Vale, makes Brazils equity market rawly exposed to the global downturn. Alone, the two giants account for close to one third of market capitalization. The index had a long way to fall because of its spectacular run up. And finally, local issues, including corporate exposure to unfavourable foreign exchange contracts, as the real plunged against the dollar, added uncertainty for investors on corporate profit outlooks. That issue is only now being resolved, but at a high price. Aracruz alone has had to pay $2.13 billion to unwind such contracts.
The number of IPOs reached 64 in 2007 against four this year. That said, deal sizes have been substantially larger and the total capital raised has fallen less dramatically, to some BRL28 billion from BRL55.5 billion last year. But there are lean times ahead.
Even ever-cheery bankers are not anticipating much new IPO business before the second half of 2009, at the earliest. There will be more flow after the second half of next year, with top quality blue chip names and follow-ons testing the market first, predicts Alexandre Bettamio, head of investment banking for Brazil at Merrill Lynch in São Paulo. Only in 2010 will markets be more robust, he thinks.
The outlook for equities for the second half is bleak with only large placements gingerly coming to market next year, adds Nicolas Aguzin, head of Latin America investment banking at J.P. Morgan. Theres very little debt capital markets activity, he notes.
Still, there are a number of blue chips waiting in the wings, points out Mr Aguzin. They will prise open the market for other firms. He predicts less than 10 equity deals will complete in the second half of next year, after a fallow first half, and estimates firms might raise $3-4 billion in total. In the meantime, J.P. Morgan will focus on structured placements with specific investors and on private placements in Brazil.
This IPO drought is going to have a predictably huge impact on fees in equity capital markets. The difference between the peak of 2007 and the trough of this half may be as great as 70-80%, say some bankers.
That loss of revenue, coupled with a big ramp up in 2006-07, is already having its predictable toll on staff numbers. The process of staff shrinkage has started, but is likely to become a lot more severe, says Plinio Chapchap, M&A partner at Queluz Gestão de Ativos. Many people will lose their jobs before year-end. Then there will be a second round of cuts and departures post the bonus season, he says. He thinks staff losses could be as much as 50% across the industry.
The downturn has hit the two Swiss banks, Credit Suisse and more especially UBS Pactual, hard. They have achieved less than 25% market share combined in equity capital markets this year to date.
UBS Pactual, which placed first in equity capital markets in 2007, has slid to a lousy 7th place this year. Not only did wider corporate problems hurt, but long-standing tensions between UBS and Pactual staff were exposed when the former head of Latin American investment banking and later global fixed-income, André Esteves, and a team of 12 walked out to found their own firm, BGT, later buying the business of the now defunct Lehman Brothers in Brazil. UBS was over-sized and through bonus policy will be hoping to encourage more staff to walk, says recruiter Ademar Couto, director of financial services at Ray & Berndston Brasil. Still, many rivals believe that if the most acute phase of the crisis is over, the bank will regain at least some of its lustre after a poor year to date.
Credit Suisse, the other market leader, has fared much better in the rankings, placing number two in equity capital markets and first in M&A and will likely remain a powerhouse. However, its name has been tarnished by the selling of foreign exchange derivative contracts to corporate clients that turned sour. The bank has started slashing staff numbers to reflect the new reality. Senior losses include Rafael Pagano, head of Brazilian equity capital markets; Enrico Carbone, a director in real estate and technology, and Marcio Guedes, who was responsible for consumer and agriculture. There is speculation by headhunters and rivals that there will be more to come. The firm declined to be interviewed by The Banker on future plans.
The other question mark hangs over Merrill Lynch, which underwent a splashy growth spurt earlier in the year with 10 new hires in what now looks like spectacularly bad timing. Rivals point out that the team was hired at the top of the market, and is significantly too large for current conditions. Packages paid at this time for leading positions by investment banks came in at $4-5 million, and sometimes substantially more, for key members. Some also question the commitment of Merrills new parent, Bank of America, to the region.
We were hired as part of Merrill Lynch's long term strategy and commitment to building one of the best sustainable banking businesses in Brazil and the region, and we have full support from top management," says Bettamio. And, the firm is believed to be discussing adding a wider loan platform to support its investment banking business in Latin America and Chief Executive Officer John Thain recently cited Brazil as a key market for development. Mr Bettamio, who himself came over from UBS, declined to comment on staff and Bank of America plans, citing company policy.
The merger of Itaú and Unibanco is particularly galling for competitors in this environment. Its a very good deal for [the banks] and will strengthen their capacity. They will definitely become a bigger competitor for us, sighs one rival banker.
Itaú-Unibanco merger to trigger wider consolidation
The proposed merger of Brazils second largest private bank by assets Banco Itaú with its third largest, Unibanco, is set to create a Brazilian international bank and provoke another wave of consolidation in the already-concentrated market.
If approved by regulators, the deal will create one of the twenty largest banks in the Americas and give the entity: the full capacity to compete with the worlds largest global banks. The new bank would have a sizeable Latin presence, with coverage of all the Mercosul markets, and be in a strong position to build a more global platform at a time of flux in the industry as well as a moment where Brazil is gaining importance globally.
With BRL575 billion in assets, 4,800 agencies and 18% of the banking system, the new bank would be the largest in Brazil, leapfrogging current top private bank Bradesco and the countrys largest bank, the publicly-owned Banco do Brasil. That would upset the status quo, leaving Bradesco in the unpalatable position of playing second fiddle, just as Santanders acquisition of ABN Amros business in Brazil gives the Spanish bank real clout.
The likely upshot of the deal is a fierce contest for banking assets and it comes at a propitious moment. For now, the biggest prize is Nossa Caixa, a lending bank owned by the state of São Paulo, with BRL51.4bn in assets. Banco do Brasil was negotiating a deal to buy the institution as The Banker went to press and was also reportedly looking to buy Banco Votorantim, the financing arm of the eponymous conglomerate, although the bank denied it is for sale.
If concluded, either deal would put further pressure on Bradesco to acquire to keep up. The credit squeeze has hit small and medium sized banks particularly hard and opens the possibility of bids. Indeed, shares in some smaller banks jumped in early November, reflecting some expectation of bids although the easing of the credit crisis is no doubt also playing a role.