Nubank’s Easynvest deal, adding 1.5 million clients to the digital bank’s 30 million customers, is an important development in the market, but there have been many others in recent weeks.
Bradesco has launched a payments app called Bitz, BTG Pactual has announced plans to launch a retail bank in 2021 and BR Partners is nearing its IPO. The digital bank Banco Inter followed up its recent equity deal by announcing it now has seven million customers.
Meanwhile, the central bank has given the green light for the investment banking tie-up between Banco do Brasil and UBS.
There is also a fast-paced game of musical chairs of teams and senior bankers within private banking. Banco do Brasil appointed Andre Brandao, head of global banking and markets for the Americas at HSBC in the country, as its new CEO.
Interest rates
In 2010, when I arrived in Brazil, it was much simpler. With high interest rates, the big banks were untouchable. Corporates needed to keep them close for that crucial credit access and investors simply bought simple treasury products – sometimes corporate risk.
The big banks essentially sat in the middle of the financial system, capturing the corporates and the investors – private banks, asset managers. Then they naturally developed capital-markets capability – leaning on those corporate relationships to demand positions on international capital markets.
[There are] paradoxical conversations with clients about whether to seek bankruptcy protection or conduct IPOs
Some of the locals even became quite good – and began to take leading positions in international deals. Foreign firms always kept at least a foot in the door, because international investors were a critical buyer of these deals – and the large Brazilian companies needed to keep them onside for this.
Now, low interest rates have changed everything.
Bank credit is a much weaker lever over companies – the capital markets are freely and cheaply available. Investors are scrambling for new Brazilian equity and corporate credit through new platforms.
The early winner – XP Inc – has been flying. Its assets under custody (AuC) was up to R$412 billion in May, with 2.2 million clients. And it has been successful in exploiting its position to build out its investment banking services.
Retail sector
Distribution to the retail sector is the new game in town – and XP has it in spades.
In 2019, its role in the Banco BMG IPO marked the first time a new bank had pushed its way onto one of these deals for 16 years. Year-to-date, XP has claimed fifth place in IPOs – seven deals, with a volume of $332.5 million and a market share of 9.2% – and is sixth in follow-ons.
Perhaps that’s why BTG is reverse engineering the retail bank to give more bite to its traditional investment banking services.
It’s certainly why Credit Suisse has struck its deal with Modal.
Retail distribution – admittedly as well as corporate access – is what UBS saw in the Banco do Brasil deal.
The growing importance of retail is clear, though it’s not to say that Nubank’s addition of Easynvest means that we can expect the imminent launch of an investment banking business.
But combining the rapid growth of its banking customers with a brokerage operation could potentially make it another investment banking player. Who knows? The market is changing quickly.
International IBs
So, where does that leave the international investment banks operating in Brazil?
They are fighting for mandates as the importance of international distribution wanes and domestic buyers are gobbling up more and more of deals as international appetite for Brazil dwindles, falling by 85% year-on-year in August.
If these banks are serious about building a strong local operation, they could do worse than copy UBS. Or Credit Suisse.
It certainly makes the few remaining large independent brokerage houses, such as Plural’s Genial, an attractive partner. Plural is known to be planning an IPO, but would it be a surprise if it did a pre-IPO tie up?
It is worth sounding a practical note of caution as competition for ECM mandates intensifies. In 2007, underwriting discipline largely went out the window, the consequences of which hung over Brazilian equities for years.
All the market ingredients are in place for a repeat – or worse. Some bankruptcy lawyers report they are facing paradoxical conversations with clients about whether to seek bankruptcy protection or conduct IPOs.
Much of the wall of retail liquidity driving today’s deals is from retail investors that aren’t – in the main – sophisticated enough to differentiate stories. And so, underwriters will need to inject some discipline to avoid history repeating itself.
