Latin America: Investment bankers optimistic for upturn
Revenues still depressed by poor ECM; DCM and M&A resilient but at low levels.
Investment banking revenue generated in Latin America this year may end up even lower than in 2015, Dealogic data suggests. However, bankers believe they may be over the worst of the slump and that Brazil is set to lead a recovery in their business.
Year-to-date figures to October 24 show investment banking activities in the region have generated $919 million, which is still some way off the $1.2 billion for 2015 in annual terms, and is around just half the total fees earned three years ago ($2.1 billion in 2013).
The drop in capital markets activity has led to retrenchment in many IB teams around the region. However, bankers in Brazil, whose poor deal-flow has depressed regional totals in recent years, are increasingly confident that the period of lean fee activity could be coming to an end. Fees generated in Brazil have fallen steadily since a post-crisis peak of $950 million in 2012 to just $363 million so far this year.
Roderick Greenlees, global head of investment banking at Itaú BBA, believes the outlook for next year is one of renewed investment banking activity. Dealogic calculates Itaú BBA has registered joint-top fees, along with Bank of America Merrill Lynch, in Brazil this year, with $54 million of revenue. A high proportion (47%) of that revenue has come from the bank’s ability to top the M&A league tables, and Greenlees says the sector held up well compared to others. “M&A has been strong for the past two or three years,” he says. “We didn’t see a down-cycle and the pipeline continues to be very strong. It’s a very important part of our business and continues to be so in 2017 and 2018.”
Itaú leads the region in M&A advisory in terms of volume: it has advised on $28.8 billion worth of deals, winning a 31.7% market share – above BAML’s 28.6% share in second place.
Greenlees says his bank has benefited from two main trends in M&A in 2016: Chinese companies are active in the region and the large Petrobras divestiture programme is leading to deals being closed. These also tend to be large, cross-border transactions – boosting the average deal size in the region and skewing the league tables to those banks who can claim the fewer, larger-weighted trades.
Examples of these main market characteristics are China Three Gorge’s acquisition of Duke Energy’s Brazilian business for $1.2 billion, State Grid Corp of China’s acquisition of 23.6% in CPFL and Petrobras’ sale of its 68% interest in the Carcara offshore licence for $2.5 billion.
The M&A pipeline remains reportedly very strong into next year. An economist at one international bank in São Paulo says its M&A team is busier with potential deals than it has ever been, so much so that it needs more resources. The source declined to be named as he is not authorised to comment publicly on investment banking issues.
At Itaú, Greenlees says the M&A pipeline also suggests deal-making will remain brisk and he contrasts the steady generation of M&A fees in the past couple of years with the equities business. “We saw a downturn in the equity capital markets business but that’s coming back very fast – specifically from Brazil,” he says.
The resurgence of ECM in Brazil, and the region, will be very welcome, given the paucity of recent activity. In Brazil, historically the engine of Latin American equities issuance, there has been just one IPO since the beginning of 2015, while the combined IPO and equity issuance there since the beginning of 2014 stands at just 85% of the annual volume in 2013.
Regionally, volumes are better. Morgan Stanley, leads the regional ECM league table with a volume of $1.5 billion from seven deals – a 16.6% market share that Dealogic estimates to have generated $21 million in fees.
Regional DCM activity has improved in 2016, with higher deal volumes already this year than in all of 2015 ($138.7 billion compared to $121.7 billion) and Santander is the top-ranked bank with two months to go, having claimed a market share of 11.9% of deals year to date.