Best bank
Santander Central Hispano
Best debt house
JPMorgan
Best M&A house
JPMorgan
Best equities house
UBS
Best in risk management and treasury
JPMorgan
Best in transaction services
Citigroup
Best in cash management
Citigroup
The bond-market bubble of the past few months notwithstanding, the past year has been brutal for Latin America. Latin economies were generally in bad shape a year ago, which at the least meant many banks thought things could only get better. Unfortunately, they didn’t. The corporate and financial sectors across most of the region found themselves in self-preservation mode, waiting for the recovery that always seems just around the corner.
Sluggish economic growth in the region has forced Latin American banks to readjust strategies and priorities, now that the hopes of the 1990s have been comprehensively dashed. Latin America is not going to follow the route of the Iberian peninsula, travelling from dictatorship through democracy to become a region of truly developed nations. There’s no European convergence play here, and countries seem just as likely to take large steps backwards (Argentina, Uruguay, Venezuela) as they are to move towards prosperity and stability (Chile, Mexico).
Treating Latin America as a region to be conquered, then, is a strategy of the past. Citibank has learnt the hard way, in Argentina, that a large commitment in the wrong place can cause disastrous losses. Santander seems to have learnt much the same lesson, exiting countries such as Peru in which it can’t see a clear route to becoming one of the dominant banks.
These two banks, as always, are the contenders for Euromoney’s best bank in Latin America award. Citigroup has a perennial claim. It has a strong presence in 24 Latin American and Caribbean countries, and enormous political clout in most of them. With the likes of Bill Rhodes, Robert Rubin and Stanley Fischer in the executive suites in New York, it has powerful connections at the highest level across the region. And with the acquisition of Mexico’s Banamex, Citi also owns one of the best banks in Latin America.
But its strategy in the region can be hard to fathom. Heads rolled in the wake of the Argentine collapse, and Jorge Bermudez, formerly in charge of Citi’s e-business division worldwide, was appointed the new CEO for the region. Citibank Latin America was then subsumed into Citibank International, run by Deryck Maughan, while the flagship Mexican operations were spun off and incorporated into the North American franchise.
Without Mexico or any significant activity in Argentina, Citi’s Latin operations seem rather threadbare. They managed to turn a respectable profit of $200 million in the first quarter of 2003 but the total of $351 million in the year to March contributed just 2.5% of Citigroup’s $14 billion aggregate profits. The figures for calendar 2002 are even worse. Citibank Latin America lost a total of $62 million last year. No other Citibank region came close to losing money, which means that Latin America stands out as an underperformer.
That said, when Mexico is added back in, Citi looks to be making healthy money in the region. It reported profits of $1.2 billion from Mexico in 2002, and another $349 million in the first quarter of 2003. The problem is these numbers seem to bear no relation to the results reported in Mexico.
Banamex’s official figures actually show an $11 million loss for 2002, which gives the impression that Citibank has decided to spend the year house-cleaning, sprucing up the Banamex balance sheet. Next year, expect stellar figures from the franchise. Just look at Banespa in Brazil, which was similarly cleaned up by Santander in 2001 and reported a 47.9% return on equity in 2002, with $996 million in profits – more than any other bank in the region.
And it’s not as though Santander has to rely on Banespa to provide the kind of profits that Banamex can generate in a good year. The reason why Santander Central Hispano wins the best bank in Latin America award this year is that it has first-rate banks in all three of the major economies in the region. Each was a serious contender for winning the best bank award in its respective country.
Santander has merged its banks in both Mexico and Chile, creating a powerhouse in each country. Santander Chile is the largest and strongest bank in the country, while Santander Serfín in Mexico posted that country’s highest return on equity (25.5%), while adding more than 300,000 new customers in 2002.
Santander also owns the best bank in Venezuela, as well as Banco Río in Argentina, which – if and when the banking system starts running again- looks well positioned to be the best bank in that country too.
Despite selling off its Peruvian operations, then, and seeing severe currency depreciation in Brazil and Venezuela, Santander’s net income from Latin America was $1.38 billion in 2002, down just 3.4% from 2001. Citibank, by comparison, made $1.14 billion between Latin America and Mexico, even giving it the benefit of the doubt with respect to the Mexican results. What’s more, in the core countries of Brazil, Mexico and Chile, Santander’s income rose 11% in euro terms, and more in dollar terms.
That said, Citibank, with its vast wealth, is still a major contender in the region. It has been talking about buying a large bank in Brazil for years, and 2003 could be the year when that finally happens. There’s also talk of a major acquisition in Chile. And Santander’s European shareholders might not be as patient as Citibank in waiting for results. The Spaniards have already sold off 25% of their Mexican operations to Bank of America to shore up their balance sheet back home.
Citi also remains one of only two banks dedicated to covering all of Latin America as regards its investment-banking products. Citi’s fortunes rise and fall, and over the past year it has been the latter. But ask any investment banker in the region to identify the biggest competition, and the same two names are always top of the list – Citigroup and JPMorgan.
Over the past year, there’s been no doubt which has been dominant. JPMorgan picks up an astonishing 13 (of 22) investment banking awards in Latin America this year – an almost unprecedented dominance of a market that many other houses have long left. JPMorgan made an especially strong push in the region at the same time as Citigroup seems to have taken its eye off the ball and the result is overwhelming.
In debt capital markets, JPMorgan has three times the volume of deals of its closest competitor, CSFB. In a year when Citigroup had a lot of difficulty getting the big sovereign mandates – with the exception of large bond exchanges in Uruguay and Venezuela – JPMorgan was everywhere, lead managing bonds from countries and corporates across the region.
It was clearly the underwriter of choice in Mexico but also wins the best debt house award in Chile, Panama and the Dominican Republic. In addition, for the first time JPMorgan tops the combined-debt league table, despite Citigroup’s acknowledged dominance in Latin syndicated loans. There’s no doubt that JPMorgan is the best debt house in Latin America this year.
There are honourable mentions as well. UBS stormed up the league tables, finally leveraging its first-rate trading operations to get mandates across the region. It wins the coveted award of best debt house in Brazil, where it lead managed the sovereign’s triumphant return to the capital markets after more than a year’s absence.
Barclays, too, is showing a new interest in Latin debt capital markets, putting up billions of dollars in loans to get choice mandates from such countries as Mexico.
But the most serious threat to JPMorgan and Citibank comes from Germany. No longer content with a dominant position in euro-denominated Latin issuance, Deutsche Bank is competing hard for dollar mandates as well. It has a very large team, and needs a steady flow of deals, unlike the more opportunistic, profit-minded shops such as UBS, Goldman Sachs and Morgan Stanley. The rest of the street has been rather taken aback by Deutsche’s aggression, and there’s a lot of sniping in its direction on the subject of fees, which went as low as nine basis points for one Costa Rica bond. (Deutsche claims it won that bid by just one basis point.)
Deutsche doesn’t seem to worry too much about the profitability of its debt capital markets team. Its point of view is that bond issuance drives deal flow to its large and profitable trading desk. It makes a lot of money structuring and trading everything from foreign exchange forwards to credit derivatives, where it has an estimated 30% to 40% market share, and is expert at taking one instrument in one country and tweaking it into something unrecognizable that can be sold somewhere different.
Also very important in derivatives trading is Santander, which claims an 80% share of the structured derivatives market in Brazil, for instance, and a 62% share of the market in warrants in Mexico. With its unparalleled number of branches across the region, Santander boasts more than 10,000 corporate clients in Latin America, most of which could never get the likes of Deutsche to return their phone calls.
At the other end of the spectrum is Goldman Sachs, the master in commodities. While the number of clients large and sophisticated enough to make use of them is small, the value added can be huge.
But the best bank at risk management and treasury in Latin America this year is, again, JPMorgan. While it doesn’t get all the derivatives trades it might want, it is far more likely than any other bank to have consulted with the highest levels of its Latin corporate clients and helped to structure their whole risk-management strategy. Its team is sufficiently profitable for it to have remained committed to Brazil through the worst of that country’s turmoil last year – something its rivals failed to do.
Ultimately, these awards are about service to clients, and JPMorgan has demonstrated a commitment to and usefulness for its Latin clients that goes well beyond providing them with the best bid-offer on derivatives trades.
And if its advice is sought after in the CFO’s world of risk profiling, it’s equally sought after next door, in the CEO’s suite. JPMorgan wins best M&A house in Latin America this year in the wake of a long series of deals, the high point of which was the acquisition of Coca-Cola bottler Panamco by Mexico’s Femsa – the biggest deal of 2002. JPMorgan’s reach in Latin American M&A is rivalled only by Citigroup, which has not been particularly visible of late. JPMorgan was also on the winning side of one of the few M&A deals with a clear winner and loser, when Colombian brewer Bavaria was forced to buy 25% of Peru’s Backus y Johnston from Empresas Polar for $568 million. Polar had bought its stake between 2000 and 2001 for just $195 million; it was advised by JPMorgan.
Honourable mention in this category must go to Goldman Sachs, which came top of the Thomson Financial league tables thanks to its inexplicable decision not to include the Panamco deal, but which in any case advised on eight of the 19 deals worth more than $500 million, and five of the 11 deals over the $1 billion mark.
Goldman doesn’t have JPMorgan’s reach but it does have a very strong Latin American franchise, in contrast to its fellow elephant hunter Morgan Stanley, which is more often found advising US or European companies looking to expand in Latin America. That didn’t happen very much over the past year, and Morgan Stanley ended up well behind JPMorgan, Goldman Sachs, Citigroup, CSFB and Merrill Lynch.
One of JPMorgan’s big deals over the past year was a highly complex exchange and listing on behalf of Tenaris, a multinational steel-pipe maker based, unhelpfully given the present situation, in Argentina. The deal involved simultaneous share offerings in Argentina, Mexico, Italy and the US, which implies a certain amount of equity-market expertise on the part of JPMorgan.
But JPMorgan has never seemed particularly interested in equities when it comes to Latin America. There’s been precious little primary (or even secondary) issuance in years, now that the wave of privatizations is over, and maintaining anything approaching comprehensive research coverage is extremely difficult.
Historically, Merrill Lynch was the bank with the Latin equities franchise, but now its debt team is on the ascendant, while the equities team seems to be wasting away. The only player in the market that seems genuinely committed to Latin equities is UBS, which wins the award for best equities house in Latin America.
Over the past year, UBS has been the bookrunner on more Latin equity offerings than any other bank, as well as being the top secondary trader of both Latin ordinary shares and Latin ADRs in 2002. What’s more, given the weakness of the Latin equity markets in general, no-one seems particularly keen to compete with UBS.
And whatever the problems it might have had in volatile markets such as investment banking, Citigroup similarly has a lock on the unglamorous but important businesses of cash management and transaction services, and wins those two awards again this year for Latin America.
Both services are operated out of Citi’s Global Transaction Services group, which not only covers an astonishing 24 countries in Latin America and the Caribbean (including such places as Bolivia and Haiti), but also has a presence in 66 other countries worldwide as well.
Citibank uses its dominant position in these markets to lobby for increased efficiency in securities markets across the region, for instance winning foreign investors an exemption from Brazil’s CPMF financial transactions tax in June 2002, and ensuring that international investors in Mexican stocks don’t need to pay capital gains tax in Mexico.
