Latin Americas leading banks are likely to tap the equity markets more frequently to support their fast-growing lending businesses, according to senior dealmakers in the region.
"Banks will need capital because of the fast loan growth taking place in the region. Theres only so much tier 1 and subordinated debt they can raise so equity capital makes sense," says Mark Rosen, the new head of the Latin America financial institutions group at Bank of America Merrill Lynch, which he joined last month from Credit Suisse.
Huw Jenkins, managing partner at BTG Pactual, says: "If you look at the stock of financial assets to GDP in Brazil, for example, compared with Korea or the UK, its small. As economies grow and their financial services sector deepens, banks will need more capital, so that will be a theme over the next few years."
"As economies grow and their financial services sector deepens, banks will need more capital, so that will be a theme over the next few years"
Huw Jenkins, BTG Pactual
In Brazil, bank credit is growing 2% month on month. The central bank forecasts loan growth to reach 20% this year. Even then, though, the loan-to-GDP ratio in the country will be only 48%, well below the levels in western Europe and the US, and highlighting the huge potential. In Peru, another country where the economy is performing strongly, mortgage loans are expected to grow by 25% this year. "Massive embedded growth remains in Brazil and in all Latin American economies," says Rosen.
Several banks have issued subordinated debt to boost their capital levels, including two deals last month: a $400 million tier 2 bond for Banco Votorantim and a $620 million tier 2 offering for Bancolombia. They follow a number of hybrid bonds issued last year including from Banco do Brasil, through a $1.5 billion tier 1 perpetual and Banco de Crédito del Peru with a $250 million 60-year non-call 10.
But for Banco do Brasil that capital raising was insufficient to match its credit growth. So last month it tapped the equity markets for $5.4 billion. Before the share offering, the banks capital adequacy ratio was 13.8%, well above the Basle requirements but below the levels of some of its big private-sector rivals, such as Itaú Unibanco, whose ratio is above 16%.
Jenkins says its an opportune time for Brazilian banks to raise equity. "Raising equity can be expensive and dilutive but having said that banks in Brazil are trading at multiples of their book value; therefore its a good time for them to be raising capital."
Another group of financial institutions that could turn to the equity markets are the local subsidiaries of international banks, especially as regulators increasingly demand that they be independently capitalized. In October, for example, Santander Brazil raised 5.1 billion in the years biggest IPO by a financial institution.
While other similar deals are unlikely in the short term, Rosen reckons that eventually other banks will follow suit. "Other institutions will look at what Santander has done in Brazil. Subsidiaries will have to stand on their own two feet."