Latin America: Debt-defying Deutsche eyes equities
In the past two years, Deutsche Bank has enjoyed strong growth in its debt capital markets business in Latin America – its eighth autonomous region. Now Bernardo Parnes, its regional chief executive, reveals his plans to take on the competition in equities and M&A.
"I prefer to market on my merits than on the demerits of my competitor, but this situation goes to show issuers that the level of differentiation between the banks is as big as one tends to imagine"
Sporting figures at the top of their profession can attest that winning is the easy part; it’s staying there that is tricky. In the middle of this year, Deutsche Bank was top of the rolling 12-month league tables for international DCM issuance out of Latin America, and demonstrating its ability to lead on a broad array of structures – sovereigns, high-grade corporates and high-yield corporates, FIG deals, project finance-type structures, perpetuals and deals denominated in Chilean pesos, Brazilian real, euro and sterling – it picked up the Euromoney award for best bond house in the region.
Bernardo Parnes, Deutsche Bank’s chief executive of Latin America, has overseen this breakthrough of the German bank’s fixed-income business in Latin America. He joined the bank in mid-2008 from Bradesco BBI, where he had headed the Brazilian bank’s first serious attempts at developing its investment banking subsidiary, just before the financial crisis.
Brazil bounced back quickly from the crisis and during 2009 Parnes developed a three-year plan for its Latin American business, which, as he happily admits, initially played to the bank’s traditional strengths of international debt capital markets, and related fixed-income and risk-related trades.
In May, the growth in Deutsche Bank’s Latin American revenues – it generates more than $1 billion for Deutsche Bank, although Parnes declines to discuss figures – led to Latin America becoming the bank’s eighth autonomous region. The Latin America business had reported through the Americas business unit in New York, but now Parnes reports directly to Frankfurt and the bank’s global executive committee.
Euromoney senses that the internal recognition of the bank’s regional business – and the higher visibility and profile that autonomy entails – is a far more prized by-product of the group’s recent success than the league-table rankings or any external recognition.
"Everyone got very excited because [the decision to make Latin America an autonomous business unit within Deutsche Bank] is a strong signal, not only to employees and clients but also to shareholders, that Deutsche Bank is paying attention to the growing importance of emerging markets," says Parnes. "They said to me: ‘Go and put Brazil on the map’, and Brazil is a very big part of Latin America, and emerging markets are becoming integral to the bank."
Parnes says this change in internal reporting was always part of the bank’s plan for the region and so the move was not a surprise – it just made official the growing strength and status of the region. "This direct access to Latin America is because Latin America is growing in importance," says Parnes. "Does it have much impact on the day-to-day operations? No, but I expect that even further attention will be given to the region." By way of example, Parnes tells of his schedule for an upcoming trip to Europe, and it is packed with lunches and back-to-back meetings with the global heads of business areas and industry sectors, and country heads.
That his colleagues are keen to meet with the CEO of one of the world’s growth markets is, perhaps, unsurprising, but if Parnes is to continue the growth in Latin America that he has enjoyed, he will need the bank’s global network. Success brings expectation, not only of maintaining its position as a leading debt house but also of making progress in other areas, such as M&A and equities capital markets. Here, frankly, Parnes has his work cut out, and he knows it.
"We fight against two very big difficulties [in developing Brazilian ECM]: one is the local track record of our competitors and the other is the capital deployed by the commercial banks. You know that in some transactions mandates go to the banks with strong commercial relationships with the issuers, so, unfortunately – given that we are still building our local track record – we face a challenge."
Parnes’s response to this is to leverage the growing strength of Deutsche Bank’s global ECM business, and particularly its record in global IPOs. "Internationally, we have a great track record, so I am trying to replicate this to our region." Deutsche is also building what Parnes calls the four pillars of ECM businesses: research – the bank covers 132 Latin American companies, 71 of which are Brazilian; equities trading; ECM; and banking. "You need to get the four areas operating correctly, and create and show a track record," he says.
"In Latin America, when you do something, you have to do something big because the banks are entrenched. It makes no sense for us to even consider retail"
It won’t be easy. More than 95% of Brazilian IPOs during the past seven years have featured one of either BTG Pactual, Credit Suisse or Itaú BBA. Most of these transactions involve two of them, with usually just one space remaining for the international banks. Assuming Deutsche was pitching for business on an even basis – in terms of track record – with the other international banks, it would only have a 20% chance of success.
Parnes, though, is cautiously upbeat about his chances, and the uneven performance of the local equity transactions in the first half of the year, before global volatility all but stopped issuance, might offer an opportunity. "I always prefer to market on my merits rather than on the demerits of my competitor, but this situation goes to show issuers that the level of differentiation between the banks is as big as one tends to imagine," he says.
Perhaps some of Parnes’ confidence comes from the steady progress in Brazilian M&A, an area in 2009 in which the bank was rated 24th by the Brazilian banking association Anbima. "Up to 2009, we were nowhere to be seen in the league tables. We now rank eighth, one notch higher than last year. Our progress has been consistent."
Parnes will also be hoping the Deutsche Bank network will boost M&A volumes as well as ECM mandates by replicating deals such as the advisory role the bank had in selling two 15% stakes of Companhia Brasileira de Metalurgia e Mineração (CBMM) to Asian investors. Deutsche advised CBMM – which is part of the Moreira Salles Group, run by one of Brazil’s richest families – in the sale of each $1.95 billion stake: one to a group of Korean and Japanese investors and the other group comprising Chinese investors. Parnes says Deutsche Bank’s Latin American, London and Asian M&A teams linked up to win the mandate and to execute successfully. "This sort of connection with the global network will continue to feed more and more M&A deals in the region," he says.
Parnes has overseen the creation of ECM and M&A teams throughout the region from virtually nothing, with the bank now employing 24 bankers in corporate finance, M&A and ECM. In total, the Latin America group has grown from 670 in 2008 to 720 now, 200 of whom are based in New York – mainly the trading teams with associated business heads – and 520 throughout the region.
Parnes declines to speculate on whether the bank will open any other offices in the region, even though many banks are looking closely at Colombia. However, the bank has just received a vote of confidence in the form of new capital to continue to invest in growth planned up to 2015.
"We have capital in Brazil of R$1 billion and we just went to the GIC [Global Investment Committee] and requested an increase of R$300 million to rebuild our regulatory capital because, with the increase in our operations in Brazil, we needed to rebuild tier 1," he says.
"We have subordinated debt maturing next year and retained earnings here that could have been remitted, but we felt we could usefully leverage extra capital. So we suggested to retain them in addition to a fresh capital injection, and with the appropriate explanation it was well received by the GIC, so we have been recapitalized."
In Brazil, the legal minimum regulatory capital is 11% and Parnes says the estimation is that the new injection should take the Brazilian bank to more than 12.5%, after implementation of new Basle 2.5 regulations in Brazil.
DEUTSCHE, AS WELL AS BEING clear about its strategy for growth, also has clarity about what it is not pursing in the region. It is not developing onshore asset management, wealth management or private banking. Beyond a couple of professionals on the ground in these areas, there won’t be widespread investment. Neither will Deutsche Bank be looking at retail in the region. "There is no sense in us looking at retail," says Parnes. "Deutsche Bank is trading at below book value and banks in Latin America are trading at between two and three times book, so it would be dilutive. And in Latin America, when you do something, you have to do something big because the banks are entrenched. It makes no sense for us to even consider retail."
Also, Deutsche Bank will not be following JPMorgan in investing in local debt capital markets expertise. "We have done some local deals but are we going to be able to compete with banks such as Banco do Brasil, Itaú or Bradesco? No." Parnes adds that without the development of secondary trading, this activity demands balance sheet and, as such, is an inefficient and unsuitable area of business for the bank.
"A secondary debt market might well develop in Brazil but it won’t happen in my lifetime," he says. "I know very well the dynamics of the local market [in 1986 Parnes joined Citibank, which was then the largest bank in the local capital markets] and it is going to take a long time."
So, how exactly does Parnes view the strong domestic competition in the international capital markets? He has an excellent perspective, having worked for Bradesco BBI, as well as against BTG Pactual and Itaú BBA. Before Bradesco, he spent 14 years at Merrill Lynch in São Paulo, joining it from Citibank.
Parnes believes there will always be room for both.
"The locals have long relationships and deep pockets," he says. "You are not going to be able to compete on those fronts, and they are also creating product expertise, but they are never going to be as global as today’s international banks. By definition, this is these banks’ characteristics. We have more product expertise and global reach. Ultimately, the issuers and the investors benefit from there being these two categories of banks in the system."