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Brazil’s Investment Banks Seek to Break into the Mexican Market

BTG Pactual and Itaú BBA open Mexico City offices as part of their pan–Latin American expansion but face entrenched rivals with deep pockets.

Mexico has long languished in the shadow of Brazil when it comes to economic and financial bragging rights. But for Brazil’s big banks, faced with sluggish growth and intensifying competition at home, Mexico suddenly has a new allure.

Grupo BTG Pactual opened its first Mexican office in January with a staff of 20 and began trading local stocks in March. The firm is just one step ahead of its biggest rival, Itaú BBA, the investment banking arm of Itaú Unibanco Holding, Brazil’s biggest lender. That firm expects to gain a Mexican broker-dealer license in July and begin trading by the end of the year, says Alberto Mulas, a former Mexican national housing commissioner who is CEO for Mexico at Itaú BBA.

For both of the São Paulo–based investment banks, the moves are just the first steps in creating a full-service operation that they hope will fulfill their budding pan–Latin American ambitions. Within 18 months Itaú BBA expects to expand its Mexico City office to some 40 employees, including stock traders, investment bankers and analysts, says Mulas.

“Mexico is obviously the crown jewel of any sort of regional expansion,” says Saul Martinez, a New York–based banking analyst at JPMorgan Chase & Co. “Mexico is the second-largest economy in the region, the banking system penetration is still very low, it’s a very consolidated sector, and the profitability of the banking system is reasonably good.”

The Brazilian banks have reason to look abroad. The attractions of their domestic market have grown dull of late. Brazil’s share in Latin America’s merger and acquisition transactions slid to 56 percent by deal value last year from 71 percent in 2008, according to data provider Dealogic, whereas its share of Latin American equity offerings fell to 41 percent from 85 percent over the same period. By contrast, Mexico is proving increasingly lucrative. The country’s share of the Latin American M&A market rose to 17 percent last year from 8 percent in 2008, whereas in equities it jumped to 34 percent from 9 percent.

Taking advantage of that opportunity won’t be easy, though. Brazil’s clout and local acquisitions enabled BTG Pactual and Itaú BBA to leap to prominence almost overnight in Chile and Colombia, but in Mexico they start far behind big rivals with deep pockets, such as Banco Bilbao Vizcaya Argentaria, Bank of America Merrill Lynch, Citigroup and Banco Santander. Neither Brazilian bank ranked in the top 30 in Mexican M&A or debt capital markets last year, according to Dealogic. In equities, BTG Pactual captured 12th place, whereas Itaú BBA came in at No. 17.

BTG Pactual, controlled and headed by Brazilian billionaire André Esteves, 45, has developed a wider Latin American franchise with the 2012 acquisitions of Celfin Capital, a Chilean securities and wealth management firm, and Bolsa Y Renta, a Colombian securities firm. BTG Pactual, which also has a presence in Peru, topped the Latin American league tables for M&A and equity offerings last year and ranked 14th in fixed income.

Mateus Carneiro, a partner at the bank responsible for the integration of the Latin America operations, pointed to BTG Pactual’s achievements in Chile as an example of its potential in Mexico. “Last year we really became leaders in the Chilean market,” he says in an interview. “We led or participated in all the main transactions in the capital markets and in mergers and acquisitions. We can replicate this story in Mexico and considerably grow our local operation in relevance into the future, together with our Latin American operations.”

Javier Artigas, the bank’s regional head for Mexico who previously headed strategic planning at Bolsa Mexicana de Valores, the country’s stock exchange, says his goal is to handle 2 to 3 percent of equity market volume by the fourth quarter of 2014. The firm, which manages 189.5 billion reais ($84.8 billion) in equities, bonds and hedge funds, may also expand into asset management in Mexico. The country’s pension funds have some $150 billion in assets, and many are looking to invest in foreign equities and structured products, he says.

BTG Pactual’s Mexico team includes five investment bankers. Artigas hopes they can win more mandates for underwriting initial public offerings. The bank participated in four equity offerings in Mexico last year, including CaixaBank’s 13.1 billion peso ($990 million) sale of shares in Grupo Financiero Inbursa, a Mexican lender controlled by the billionaire Carlos Slim, and the $2.5 billion share offering of Mexican bank Grupo Financiero Banorte. The bank also worked on two offerings from real estate investment trusts: It was a joint international book runner of the $1.2 billion IPO of a Mexican REIT managed by Macquarie Group and a co-underwriter of the $437 million initial share sale of shopping center developer Fibra Shop.

Artigas says the firm’s focus on Latin America will help attract clients in Mexico, where competition is intense with the presence of rivals including J.P. Morgan, Credit Suisse and Bank of America Merrill Lynch. “We have more than $8 billion dedicated to Latin America, which I don’t think any of the other investment banks have dedicated to the region,” he explains. “That is our competitive advantage.”

Itaú BBA, which boasts retail and corporate operations in Argentina, Chile, Colombia, Paraguay and Uruguay, moved to expand its Latin American presence in January by agreeing to acquire control of Chilean bank CorpBanca. Its investment banking unit ranked eighth in Latin American M&A, second in equities and sixth in fixed income last year.

To achieve its goals in Mexico, Itaú BBA will have to break into relationships that Mexican corporations have formed over many years with banks in the U.S. and Europe, Mulas acknowledges. Mexican companies “have had little interaction with banks from South America,” he says. “The first challenge is getting those three minutes of attention from the client to deliver the message that we feel we give them high-quality products and services.”

The firm aims to win 4 to 5 percent of the Mexican stockbrokerage market within five years, says Mulas. Itaú BBA participated in two Mexican equity offerings in the past two years. It was an underwriter, along with BTG Pactual and several other banks, of Banorte’s IPO last year, and it worked on the $4.1 billion IPO of the Mexican unit of Spain’s Banco Santander in 2012.

For both firms, as for their rivals, expectations are running high that a landmark energy reform bill passed by the Mexican Congress in December will spur a surge in investment banking activity. The reform ends the monopoly on crude production long enjoyed by state-owned Petróleos Mexicanos and aims to stimulate private investment in the oil, gas and electricity sectors.

Such a shift could attract as much as $25 billion a year in additional foreign direct investment into Mexico and encourage companies to seek funding through the capital markets, says Gordon Lee, country specialist and strategist for Mexico at BTG Pactual. Such investment in turn could help Mexico’s economy grow by 4 to 5 percent next year, faster than this year’s expected 3.5 percent rate, he adds.

Although BTG Pactual and Itaú BBA say their growth plans in Mexico don’t include acquisitions, analysts say they may have to do deals to overcome entrenched competition.

“They are trying to get a foothold into the market, but in my opinion, to be a relevant player in Mexico they will have to make acquisitions,” says JPMorgan’s Martinez. “On that front, it’s not clear what they can buy that would give them a relevant presence in the banking system.”

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