Brazil: Plural tipped for success as small banks struggle
New investment bank to rival BTG Pactual; Solvency of small banks under pressure
Plural Capital is to become Brazil’s newest investment bank after the Brazilian securities firm announced the acquisition of Banco Modal.
Plural, led by former BTG Partners Rodolfo Riechart and Andre Schwartz, announced the transaction – rumoured to be worth R$130 million ($70 million) – shortly after a non-compete clause with BTG Pactual expired.
Modal has R$1.2 billion in total assets and R$220 million under management compared with Plural’s reported R$650 million assets under management. Modal also gives Plural a banking licence as it gears up to compete for Brazilian investment banking services.
Plural also announced that it had recruited former BTG Partners’ Evandro Pereira and Pedro Guimaraes and is believed to be in advanced negotiations to buy local brokerage Flow Corretora de Mercadorias, as well as plans for attaining broker-dealer status in the US, as it seeks to create a full-service asset management and investment banking advisory firm.
"Its smaller size will enable Plural to be faster and more aggressive in winning mandates. I think they will be successful"
Plural Capital declined to comment on its expansion plans but Luis Santacreu, analyst at Brazilian ratings agency Austin, says: "Plural will be able to exploit opportunities that are not currently well explored by Wall Street firms – those firms don’t have the contacts like these guys."
One Brazil-based banker agrees: "Rodolfo [Riechart] alone is probably responsible for something like 30% of the Brazilian equity transactions over the past few years."
Santacreu says he expects Plural, which has offices in São Paulo and Rio de Janeiro, will develop in the same mould as BTG Pactual. "Plural won’t have the consumer finance business that BTG Pactual bought with its acquisition of Panamericano, but in its fundamentals and principles it is going to be very close to Pactual."
In the short term he doesn’t think Plural will be a threat to BTG, which he believes is the leader in investment banking advisory services, but he does expect them to do well. "I think Plural will become a good investment bank – there is a room in the market for them and I think its smaller size will enable Plural to be faster and more aggressive in winning mandates. I think they will be successful."
Meanwhile, there are rumours in São Paulo that the Brazilian central bank’s fiscal team is working with up to three of the country’s smaller banks to avoid a bank failure as the solvency of the country’s smaller banks is squeezed.
Already three small Brazilian banks have been sold, apparently the result of efforts of central bank-promoted consolidation to avoid bankruptcies in the sector.
Banco Schahin and Banco Morada have both recently been bought by BMG with central bank approval. The acquisition of Schahin, which was finalized in April 2011, was valued at R$230 million and also needed the approval of Brazil’s government-run bank deposits insurance fund, FGC. BMG was also close to acquiring Banco Morada but ultimately an agreement wasn’t reached, which has resulted in Banco Morada’s liquidation. Meanwhile, Banco Matone was bought by J&F Participações, with the latter needing to inject R$1.1 billion into the former to improve its capital base. J&F Participações is believed to be getting a loan from FGC as part of the acquisition process.
"We have some concerns with the small banks," says a São Paulo-based hedge fund manager. "We’ve heard that recent stress tests show that three or four of these banks would need capitalization in another financial crisis."
Brazil’s banking system is dominated by the leading privately owned and public-sector institutions but many small banks remain and the viability of some is increasingly in question. "It used to be a good business but not now," adds the hedge fund manager.
In the past year the profitability of Brazil’s small banks has been hit, with increased capital adequacy regulations and greater competition putting pressure on margins. The central bank is also withdrawing the support FGC gave to the sector in the 2008 crisis through deposit guarantees – effectively increasing the risk of banking with the smaller entities and increasing their financing costs.
Investors’ confidence had already been shaken after the revelation of losses in Pan America – enhancing the perception in risk inherent in these businesses.
And finally, from January 1 2012, all banks will have to accrue revenues from the sale of credit where previously they could record such sales immediately. This change will also have a negative impact on profitability and the banks’ level of capitalization as they rely on this mechanism of securitization/credit cessions to increase their net worth and therefore their capacity to expand their loan portfolios.
Santacreu says that, with all these pressures combined, small banks are facing a tougher operating environment and he expects the central bank will continue to work to foster necessary consolidation among small banks and thereby avoid any bank failures.