Friday, 21 September 2018

Revving up business

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Banco Bradesco, long described by its rivals as a sleeping giant, is asleep no more. The investment bank is providing quite an upset for the competition after breaking into IPO and M&A markets in 2007 for the first time, following years of success concentrated in the debt capital markets. Anthony Dovkants found out more.

This year is expected to be Banco Bradesco's (BBI) best yet, assuming markets improve, as it finalises its key integration process, started in mid-2005 when competitors were revelling in the nation's biggest private-sector bank's absence from core investment banking markets.

Key to these changes is Denise Moura, head of investment banking, who opens doors and has the ear of CEOs and CFOs across the land. For the most senior woman in Brazilian investment banking – and the previous head of the nation's second biggest private-sector asset manager BRAM – the integration process was key.

Something had to be done back in 2005 when it was clear the nation's IPO market was gaining momentum fast. M&A was opening new opportunities, both locally and cross-border, while debt was seeing new names come to market, amid expectations thousands of new potential candidates could represent future core investment banking clients.

Bradesco could no longer continue with its old business model. The giant did not have a separate wholly integrated investment bank able to compete with the likes of Credit Suisse, Goldman Sachs, UBS Pactual, ABN AMRO and Itau BBA on their respective strong fronts.

This does not mean that Bradesco was behind the curve in a landscape filled with Brazilian peculiarities. For example, the majority of foreign banks in Brazil do not compete in local debt capital markets, but have enjoyed a strong presence in IPOs and M&A. Local Brazilian banks have largely enjoyed a stranglehold on local debenture and ABS transactions but have been relatively absent in M&A and ECM.

Few banks have managed to cross the divide. Take UBS: it boosted its local ECM capabilities and gained a DCM platform by buying Banco Pactual for up to US$2.6bn in mid 2006. Banco Itau bought BBA Creditanstalt for some R$3.3bn in 2002 to build its M&A and ECM activities after playing a key role in DCM for so long.

Credit Suisse is a top player in IPOs, M&A and international debt, but is yet to establish a presence in local DCM. Goldman Sachs and Citi are in similar positions at a difficult time for local DCM, following a repricing in local markets.

For Bradesco, the time had come to become a top player in ECM and M&A as well as DCM. It wanted to leverage its massive balance sheet and tap client relationships stretching as far as the Amazon and the deep ranching south of Rio Grande do Sul. To do this it would offer some of the most aggressive fees seen in Brazilian investment banking history.

"When we proposed the setting up of a wholly integrated and separate investment bank, we imagined there would be a period of reorganisation and building up the business and we believe that we have almost achieved this goal," said Moura. "Our revenue today is above our internal targets and we already feature in the top 10 rankings in all core markets when we were previously among the first 20. Plus we have enough mandates in the kitty that we are able to keep building our business in a consistent manner thanks to having the right products and instruments that will allow us to compete aggressively in M&A and structured operations, we are confident we are on the right path," she added.

For Moura, the integration made an obvious difference. "Without a doubt, today we are bigger in investment banking, we are getting revenue from clients that previously were just corporate revenue for Bradesco," said Moura.

But the process - which involved the creation of a new treasury solely for investment banking, the building up of ECM and M&A teams and eventually the setting up of an international DCM operation - was not, for Moura, the most important ingredient.

"The most important thing that we did was hire a lot of people,” Moura said. “We already had a team but we put together the ECM and treasury groups. They were built up from zero, so the focus of getting the right people was more important than the integration itself, and that took up a good part of the first half of 2006.” For equities, Luiz Galvao, was one of five directors appointed to head up the core units of the investment bank, taking responsibility of equities. The team is made up of three research sales and two sales trading in New York, four research sales in Brazil and two in London.

The treasury is still being put together but the new team is offering, for the first time, structured derivatives and international fixed-income distribution. As part of the change, five senior bankers were appointed to become directors of BBI's units: ECM; treasury – including DCM and corporate; and project finance – including M&A.

But finding bankers in 2006 or 2007 was not easy as rival banks such as Itau BBA, Pactual, UBS, Goldman Sachs and Societe Generale were all looking for new talent.

"We go to universities and make presentations as a part of this and we also sponsor MBAs," said Moura. So far BBI has more than 35 staff as part of a goal of increasing the team to 40. The total excludes interns.

Going forward, Bradesco will be keen to finally fill a gap in its international capabilities - international fixed income. The bank has had a number of forays but has never consistently built on them. Today, Bradesco is building up the division.

"We do not have the full team yet so we are not yet competing head to head for international transactions. Only once the team is complete will we start to sell, we expect to finish putting this team together in 2008," said Moura.

While there are finishing touches yet to be done, the changes have already clearly paid off for BBI. By the end of last year, the investment bank could count 14 ECM, six DCM and 14 M&A mandates in its pipeline.

But turning mandates around is proving tricky for any bank in difficult markets, especially after Brazilian commodities and fertilizers giant Bunge postponed its US$500m issue early March - just weeks after oil heavyweight Petrobras did the same with its same-sized offer. Locally, issuers have had to engage in market flexes, leading to a repricing with yields widening more than 50bp and tenors dropping by three years to five since mid 2007.

External volatility is ultimately holding up the strong progress of international and local capital markets which have stalled at a time when the economy is projected to grow 4.5% this year – versus 5.4% in 2007.

But primary and secondary market disruption is giving Bradesco time to get its teams up to speed before the markets return. This is not expected until the US economy starts to provide more positive indicators, US banks get past their weak sub-prime performances and nasty surprises, and uncertainty is no longer the mainstay of news.

By the time that happens, Bradesco is expected to be one of the only major banks able to compete on all fronts. It has the wholesale banking business, Bradesco Corporate, which deals with larger companies and more than 1,200 conglomerates; Bradesco Empresas has found more than 333 potential clients for itself and wholesale; and there is BBI's investment banking businesses, which has overseen investments for 1,000 medium-sized clients. But this is just the first stage as Bradesco, like its rivals, is pulling its resources to scope a field of more than 20,000 companies. In Bradesco's case, its Empresas division is going after 26,000 companies.

But not all banks are able to do this. And it is only a matter of time before they feel the sharp end of Bradesco's competitive edge, after announcing the purchase of Brazil's largest broker Agora for R$830m at the start of March. The purchase will be key to boosting Bradesco's distribution to retail clients on IPO transactions and deepening its presence in derivatives and public-sector debt trading.

Indeed in a Home Broker market, where growth can exceed 100% annually, Bradesco and Agora will consolidate their position as the largest in its sector with more than R$58bn in volume negotiated in 2007.

Ultimately, it just a matter of time before Bradesco is ranked among the top three in investment banking in Brazil - a ranking that it enjoys across a broad spectrum of retail banking segments.

In 2007, Bradesco's equities distribution jumped to eighth place from 26th in 2006, in equities origination BBI hit eighth in volume in its first year of business and in M&A the bank has reached 10th in terms of volume versus fourth in number of deals. Bradesco, a top two player in DCM for 2007 and 2006, is just starting to rev up its investment banking business.

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