Banking: Locals look daunting in Latin America
With local banks becoming dominant in the region, foreign banks will need to take on a more local persona to remain competitive.
RBS pulling out of Brazil is not in itself big news: the UK bank was late to the party and found the market more expensive and crowded than it had expected. But it is symptomatic of the complex competitive challenge that US and European investment banks face in Brazil and elsewhere in Latin America.
The truth is that local banks have been successful in recent years in playing to their strengths and strengthening their weaknesses. The locals always held the stronger cards in relationships and reach with the continent’s corporate client base. Many have also been using their balance sheet for years – deploying capital as a platform for the investment banks isn’t a problem. The leading locals have been successful – to greater and lesser extents – in developing investment banking credibility, teams and track records (interestingly it is always hard to know which of these factors is the stronger driver of the other two).
The future of investment banking looks increasingly local, within individual countries and regionally. Now, with BTG Pactual and Celfin’s tie-up there will soon be one local investment bank operating throughout the region (the enlarged entity will still be absent from some important markets but those gaps should be addressed quickly). The domestic and intra-regional capital markets, too, will become increasingly important. Already, in such countries as Mexico and Chile, the local debt and equity markets are more important sources of capital than the international markets. In Brazil the local debt market could be very big (given certain structural economic and regulatory shifts) and its growth would be likely to have an impact on the large volumes being raised in the international bond markets.
Latin Americans would always rather deal with other local companies if there isn’t a reason not to. Local business culture is powerful and yet can be subtle, and therefore hard to demonstrate. But one clear illustration of its sometimes insular impulse can be shown by pointing out that English-speaking bankers can work in Hong Kong and Singapore, as well as London and New York but that doesn’t wash in São Paulo. Brazilians work in Portuguese and Latin America ex-Brazil requires Spanish.
Meanwhile, local investment banks have for some time now been saying they are more flexible, agile and quicker to commit to Latin American clients than the foreign banks, which usually have to refer to New York or London for important strategic decisions. It was a nice marketing angle. But now bankers at the foreign banks are, in private, admitting the same thing: in comparison their decision-making is slow and cumbersome and it is costing them deals. Compliance and coordination take time. The locals can say yes while the bankers who are in the field for the foreigners are still waiting, requesting internal approval, and by the time the decision comes from above it can be too late.
So what are the competitive advantages for the Wall Street and European firms? The argument that they have better products and people will become harder to justify. They can still point to better, deeper and more trusted relationships with international investors. But, the locals are on the attack too. They are using co-bookrunning mandates on international deals to familiarize themselves and build standalone relationships. Building these networks and understanding what different investors want isn’t rocket science and the locals have the determination, people and resources to succeed. And, as the locals are keen to point out, the local capital markets are probably the future anyway.
The best chance for the foreign banks that want to compete in Latin America is to present themselves as being as local as possible. That’s why JPMorgan is investing large amounts in domestic debt and equity market capabilities throughout the region. That’s why Citi markets itself as an emerging market brand and emphasizes its Latin American heritage. Credit Suisse has ditched the Guarantea brand in Brazil but the team retains its local identity within the market (and in the bank’s internal reward structure).
All foreign banks with aspirations for growing investment banking revenues in the region will have to play up their local credentials as best they can.