Regional Awards for Excellence 2011: Latin America
It is not over dramatic to say that Latin America has been the most hotly contested banking battleground in the last 12 months. The rates of growth achieved by countries and companies in the region (combined with the growth rate forecasts for the next few years) have easily outpaced the stalling, developed economies.
The region is not, of course, homogeneous. An Inter-American Development Bank report in early 2011 argued there are two distinct groups of countries in Latin America: the commodity-exporting, developing-world-orientated economies should outpace the more sedentary, service-driven, developed-world-focused markets. The former, led by Brazil, has certainly enjoyed impressive rates of growth recently, as unprecedented levels of global liquidity have flowed into a country that has the world’s highest real interest rates.
The possibility of a credit bubble has been much discussed, as issuers throughout Latin America raised record volumes of debt on the international capital market at record-low yields. And despite bumper debt issuance, equity markets have also been active. Initial public offerings in Brazil have had a bumpy ride so far this year for pricing and structural reasons, but there is momentum in equity issuance.
One of the region’s investment banking themes of 2011 is a geographical diversification of interest and activity, which was pretty much synonymous with Brazil in 2010. In the past year, Mexico has become more active across equity, debt and mergers and acquisitions. Chilean entities issued important deals. Colombia, upgraded to investment grade, issued some landmark transactions and promises more. However, the election of supposedly left-wing candidate Ollanta Humala to the Peruvian presidency and the uncertainty caused by this October’s general election in Argentina underline that political risk has not left the region (although in the first half of the year deals emanating from Argentina attracted huge international interest, most notably Arcos Dorados’ blow-out IPO).
As these countries become more active, banks are having to judge the balance of commitment and investment against the opportunities the markets present. Brazil and Mexico aside, many of these markets can surely not sustain all-comers.
It is within this context that Euromoney has been evaluating banks within the region for the 2011 Awards for excellence. At first glance, the winners might suggest stability within the region; many of the regional awards go to the same recipients as last year (with some significant exceptions). However, this would be a misleading interpretation. Regional power and comparative strength are shifting. Competition is fierce and increasing. In many cases the competition for these awards was exceptionally close. During the research process, a constant refrain from the outstanding banks was that they are not taking any leadership position for granted. Nor should they be.
That said, the award for best regional bank and best bank in the region go to last year’s winners and each can be said to be clear of their respective fields. Banco Santander cements its position as best regional bank by beating its rival BBVA’s results, illustrated by a higher net attributable profit growth (25.3% versus 16.5%), which takes the bank’s net profit for the region to €4.8 billion ($6.9 billion). Santander’s growth in operating income also outpaced BBVA’s (15.7% versus 6.4%), as did gross income (17.6% versus 9.7%). Latin America now contributes 43% of Santander group profits. The region continues to be one of the group’s main drivers, with impressive growth in all of the key markets: the core market of Brazil grew profits by 31% to €2.8 billion, or 25% of the group’s total. Meanwhile, Santander’s growth in other important regional markets was strong: Mexico posted earnings growth of 38%, Argentina 31% and Chile 21%.
Despite these strong results, critics can point to the fact that the share price of the bank’s Brazilian subsidiary has underperformed the market, signalling issues with the integration of Santander and Banco Real. Santander Brazil’s more conservative stance towards lending compared with its main rivals has underwhelmed investors. However, on a pan-Latin American basis, Santander is the clear leader and the upcoming IPO of its Argentinean subsidiary, Santander Rio, is eagerly anticipated.
The focus of the bank’s commercial strategy in 2010 was to increase transaction business with corporate clients and institutions and to raise the linkage of medium- and high-income segments through the capturing of payroll. Santander also increased its investment-banking activities in the past year, leveraging local balance-sheet relationships into investment-banking mandates. The bank is now a top-five Latin American equity underwriter and is a powerhouse in debt, especially when including local-market debentures.
Best project finance house
The best bank in the region is Itaú Unibanco. In a region that is growing strongly, it again outperformed the competition. Its market value on December 31 was R$179.6 billion ($113.1 billion), with net profit reaching R$13.3 billion, a 32.2% increase on the year before. One of the bank’s many highlights was the substantial growth of its credit portfolio to R$335.5 billion, a 20.5% increase, and although questions are being asked about the sustainability of credit growth in the region, the analysts have not expressed concern about the quality of its new credit.
The best-in-region award was in effect a head-to-head between Itaú and its great domestic rival Bradesco, but Itaú has had a demonstrably better year. Not only did Itaú beat Bradesco’s (admittedly impressive) net profit growth of 27%, but Itaú also posted a better return on equity (24.1% versus Bradesco’s 20.7%) and struck a psychological and business blow against Bradesco by acquiring the banking division of retailer Carrefour, which Bradesco had been favourite to buy.
Itaú has also accelerated its internationalization strategy in the past year. Headquartered in São Paulo, Itaú Unibanco is now present in 18 countries, with branches and representative offices in New York, Cayman, Lisbon, London and Tokyo. Latin America, and especially South America, is still the focus of Itaú’s international operations and generates most overseas revenues; the bank has particular strength in Argentina, Chile, Uruguay and Paraguay.
Itaú is also using its domestic strength, business relationships and balance sheet to good use with the expansion of Itaú BBA, its investment-banking division. The lender continues to be the regional bank that is competing best with the international franchises in capital markets activity. Bankers at rival institutions often question the value added by some of the regional banks awarded mandates on international transactions but admit that Itaú BBA has added genuine structuring capability and therefore credibility.
According to Dealogic, the bank is ranked eighth-largest underwriter on the region’s debt transactions, fourth for equity and the eighth-largest adviser for M&A in terms of deal volume. Itaú has domestic distribution and is also trying to build credible international distribution organically to enable it to rise in the years to come, although with its financial might acquisitive growth remains a possibility.
Best investment bank
Credit Suisse raised more than $5.5 billion for its clients in the equity capital markets, which places it second in the Dealogic tables for the period under review. The Swiss bank has completed IPOs and follow-on transactions in Brazil, Argentina and Mexico. Its outstanding deals include being the global coordinator and joint bookrunner on YPF’s $1.2 billion follow-on offering, the largest Argentine equity transaction since the same company’s 1993 IPO. Credit Suisse was co-global coordinator on Adecoagro’s $314 million IPO, the first US-listed Latin American agribusiness company. The bank was also co-global coordinator and joint bookrunner on OHL Mexico’s $796 million IPO, the largest sole-Mexican IPO. Credit Suisse was also involved in many of that country’s IPOs, including Arezzo, Raia and HRT.
Credit Suisse is also a participant in the Latin American and Caribbean debt capital markets, placing $20 billion in bonds through 32 transactions. One of the highlights was a Colombian peso-denominated deal for the Republic of Colombia, the first global TES issuance since 2007, which effectively re-opened the Latin America global currency market and allowed Colombia to fulfil its 2010 financing needs. The bank also demonstrated its leading debt capabilities with four sole-lead transactions for CAF, Pemex, Cabai and Mexican retailer Grupo Famsa, and has a strong reputation for high-yield issuance, with notable transactions for Inkia Energy, Cosan and BR Properties.
Credit Suisse’s strongest performance this year came in M&A, for which it also wins Euromoney’s award for excellence in Latin America. It isn’t just the volume of deals that is impressive but that it has executed some of the largest, most complex and transformational deals during the designated period. The bank has been active in many countries and industries and has had a leading M&A advisory role in big transactions in Argentina, Brazil, Mexico, Colombia and Peru.
It is this regional breadth that marks Credit Suisse as the region’s leading M&A bank. In Brazil the bank was financial adviser to Telefónica in its successful unsolicited offer for a 50% stake in Brasilcel from Portugal Telecom. This was a landmark deal for Telefónica, delivering direct control of Vivo, the leading mobile operator in Brazil, a key strategic step in the consolidation of the Brazilian telecom market. It was a complex cross-border deal and one of the largest M&A transactions in 2010.
Credit Suisse also advised FedEx in its regulatory-driven 100% acquisition of Multipack in Mexico. The deal required complex tax structures. It advised financial sponsor Apax in its first investment in Brazil, the acquisition of 54.3% of IT company Tivit, through a successful multi-step transaction that included a public tender offer. Credit Suisse also acted as sole financial adviser to GE Capital in its sale of BAC-Credomatic to Grupo Aval, the largest M&A transaction in central America in 2010 and the largest M&A transaction by a Colombian company.
Best equity house
BAML was involved in the region’s highest-profile deals, including last September’s record-breaking follow-on transaction for Petrobras, and was lead left bookrunner on Argentine fast-food chain Arcos Dorados’ IPO, the largest Latin American debut offering of the year. The bank was also the sole global coordinator for the $5.4 billion follow-on equity offering for Banco do Brasil. And it wasn’t just in the large deals where BAML demonstrated leadership: it acted as lead left bookrunner on the IPO of Brazilian oil/gas exploration and production company QGEP, as well as Anhanguera Educacional’s follow-on transaction. So while Credit Suisse amassed more deals, in fact almost twice as many, BAML’s active presence in all the region’s heavyweight transactions and its undoubted status as the momentum house in the region’s equity markets make it this year’s winner.
Best debt house
However, in the past 12 months the notable feature has undeniably been the unprecedented volume of international bonds issued from the region and, on that basis, Deutsche, which heads the Dealogic tables for our qualification period, beats off competition from BAML and last year’s winner, JPMorgan, on the international side. And while Deutsche, HSBC, BAML, JPMorgan and Citi make up the top five bookrunners of international debt, Deutsche had a three-percentage-point gap between its share (13.6%) and that of the second-placed bank (HSBC on 10.6%) with $14 billion worth of deals.
Deutsche’s ability to win mandates throughout the region, across the spectrum of issuer type and its ability to lead on a wide variety of bond structures were both impressive. The fact that Deutsche can point to innovative transactions and deals with excellent execution outweighs the perennial complaint that the bank is buying business by undercutting fees. Also, the bank generates big trading and derivatives revenues that flow from its debt mandates. Deutsche ticked an impressive list of boxes: deals for sovereigns (first local-currency sovereign issue since 2007 for Colombia and the 100-year bond for Mexico), high-grade corporates (such as Pemex and CSN) and high-yield corporates (Braskem, Tarjeta Naranja and E-CL), as well as landmark deals for financial institutions, liability-management-driven transactions and innovative project-finance structures and perpetuals. Deutsche was also active in all the main Latin American markets and issued in an array of global local-currency bonds, as well as those denominated in euros and sterling (such as June 2010’s deal for America Movil). The bank has also continued to drive innovation, leading on the region’s first international inflation-linked bond for a corporate with May’s R$1 billion bond for Banco Votorantim.
Best risk management house
Deutsche also has the leading reputation for tailoring creative solutions to mitigate risks. One example is a structure the bank devised to enable a corporate client to achieve credit intermediation through derivatives. The company wished to hedge US dollar principal and coupon payments into local currency but it was undergoing aggressive capital expenditure and couldn’t afford to trap cash as collateral, or unwind or lose the hedge. The bank proposed to restructure the swap, thereby removing the transaction from the Credit Support Annex, enabling the client to free up a large amount of collateral while giving large potential savings over the life of the swap.
Best flow house
Citi also offers a wide range of derivatives products from forwards to highly customized exotic options in all asset classes: FX, local and G10 rates, commodities, equities and credit. It has demonstrated the capacity to execute large regional deals across this set of asset classes. For example, in Brazil Citi executed a $13.5 billion FX transaction in connection with the acquisition of an energy company and secured top place in the ranking published by the Brazilian central bank for the fourth year in a row.
Best cash management house
Overall, in 2010 Citi’s cash-management business in Latin America increased its deposit base by 28% and its local payments volume by 23%. International payment and US dollar clearing transactions grew by 12.4%, with double-digit growth in Mexico, Brazil, Colombia, the Dominican Republic, Ecuador, Guatemala, Paraguay and Peru.