ASK ANY INVESTMENT bank how they view their strategy towards Latin America and the answer is usually the same: we are a pan-regional player, they say. Delve a bit deeper, though, and it’s clear that, with one or two exceptions, no bank has a critical mass across the entire region. Yet as the development of Latin America’s local markets kicks on apace, the leading houses are assessing how best to tackle that growth.
Over the past 12 months, there have been several examples of banks in the region trying to position themselves to take advantage of the budding financial opportunities.
Some have gone for the quick fix of an acquisition. Others are building organically in selected markets. And some are trying to serenade local niche players into some sort of tie-up or informal partnership. Whichever route banks are taking, the region is hitting their radar screens a lot more forcefully than before. "There’s a lot more conviction in boardrooms to invest in Latin America, especially given the growing importance of Brazil and Mexico," says Guillermo Jasson, Latin American regional head and head of investment banking at Morgan Stanley.
"Banks that are really committed to the region will have to set up locally, hire people locally and get local licences," says Pedro Chomnalez, head of Latin American investment banking at Credit Suisse.
The big buys
The most eye-catching plans have involved transformational acquisitions. Last May, for example, UBS paid up to $2.6 billion to buy Brazil’s Banco Pactual. Two months later HSBC spent $1.77 billion acquiring Banistmo, a Panamanian bank with a strong presence in central America and Colombia. In December, Credit Suisse spent just under $300 million on a 50% stake plus one share in Hedging Griffo, a Brazilian hedge fund. The Swiss bank is an old hand at buying local financial institutions in Brazil. In 1998 it purchased Garantia.
It is too early to tell whether these acquisitions will pay off, although Gerardo Mato, head of capital markets for the Americas at HSBC, reckons his bank’s acquisition of central America’s biggest financial institution consolidates what is still a fledgling investment banking operation in the region. "We only have three years of history but have been growing steadily in Latin America," he says. "The bank has all the ingredients to be successful."
Judgement
In reality, though, it will be some years before a true judgement on these deals can be made. Certainly, it took Credit Suisse a long time to benefit from the Garantia acquisition, although now it appears to be a wise move. Credit Suisse is dominating Brazil’s equity capital markets and also has very strong franchises in debt and M&A.
Critics argue that it is never easy to integrate local boutiques in countries such as Brazil, where institutions tend not to worry overmuch about compliance. Rumour has it that was one of the reasons why Goldman Sachs pulled out of a joint venture with Pactual before UBS stepped in.
If Pactual was deemed too risky for Goldman Sachs, has UBS taken a reckless gamble? Juerg Haller, deputy chief executive at UBS Pactual, deflects the criticism. "Our main consideration was to acquire a firm that had an experienced, deep and highly professional senior management team with a strong track record."
Pactual was Brazil’s leading investment bank, with a highly successful proprietary trading desk, a strong equity capital markets franchise and one of the biggest asset management operations in the country. Still, it will be one of the biggest successes of UBS chief executive Huw Jenkins if he can integrate the aggressive Pactual without upsetting the Swiss bank’s more conservative style of doing business. A rival banker says: "Undeniably it will be a strong force to be reckoned with but Pactual is a very volatile business."
The other criticism levelled at UBS Pactual concerns its non-Brazilian business. Now that much of the investment banking business is run out of Brazil (as opposed to New York) how will the bank’s charges elsewhere in the region, especially in Mexico, react? "To be successful in the long run we need to combine skills, culture and networks across Latin America," says Haller. "Importantly," he adds, "throughout the integration process, we’ve had stability in the team in the region."
Goldman brokerage
Other banks are forging their Latin American presence more gradually. Goldman Sachs, for example, is building its equity brokerage business in Brazil, which should be operational soon. "We need to have a strong local platform in Brazil," says Eduardo Centola, co-head of Latin American investment banking at the firm. He cites the strong pick-up in equity issuance out of the country.
"In the last 12 to 18 months about 90% of the country’s equity offerings have been registered in Brazil, not in the US, though they have also sold to US investors as 144a offerings," Centola says. "This is very different from the boom in 1993-94, when every company wanted to register in the US. Now Brazilian IPOs are attracting a mix of investors and there is a lot of local demand."
Merrill’s local tie-up
Elsewhere, some banks are attacking selective markets through local tie-ups. In Chile, for example, Merrill Lynch has a tie-up with broker Celfin. Jim Quigley, chairman of the bank’s Latin American franchise, says that the bank continually monitors which markets it should expand in and how.
An operating committee comprising the bank’s most senior Latin bankers meets every month, and one of its functions is to conduct a review of a particular country. "We have a dedicated Latin American strategy team that analyses every opportunity, prior to its being presented to the region's operating committee," says Quigley.
He says that with a growing pool of investors – including non-traditional investors, such as high-net-worth individuals from abroad and from the region and institutional investors from, for example, the Middle East, Asia and Russia – investment banks need to have a broad and flexible strategy.