What’s behind UBS’s joint venture with Banco do Brasil?

Banco do Brasil CEO Rubem Novaes talks with Sylvia Coutinho, country head of UBS Brazil, before a news conference in São Paulo on Thursday

The logic behind the announcement of an investment banking joint venture (JV) between Banco do Brasil and UBS has been questioned by competitors in São Paulo.

The new organization will join together Banco do Brasil’s investment banking group with UBS’s investment banking platform in Brazil and Argentina, and UBS’s institutional brokerage business in Brazil.

Speaking on condition of anonymity, many heads of investment banks in Brazil – both of Brazilian and international banks operating in the country – question the strategy adopted by the Swiss bank.

One of the bankers who had been approached by Rothschild – the merchant bank mandated by Banco do Brasil to find it an international banking partner – said there had been a few “deal-breakers” in the initial proposal.

“We didn’t like the fact that Banco do Brasil, being state-owned, could be subject to political interference, especially in Brazil, when the government can change from left to right every four years,” he says.

“We thought that the change in guidance coming from different governments would present a governance headache.”

Sylvia Coutinho, UBS country head in Brazil, says the fact that UBS will have a majority stake in the JV, with 50.01% of the ordinary shares, means this won’t be an issue.

Operational constraints

However, others claim that the JV has been structured with the majority ownership held by UBS to ensure that the new organization is categorized as privately held, thereby freeing operational constraints that apply to publicly held companies – such as those governing recruitment and salaries.

Another banker who spoke to Rothschild before dropping out of the selection process said that Banco do Brasil had proposed to hold a call option on the resources being placed into the JV by the third party.

He said that the proposed structure meant that, in the case of a disagreement between the two parties, Banco do Brasil “could effectively have acquired our business in Brazil”.

When asked whether UBS had agreed to such a call option, Coutinho declined to “comment on contractual details”. Rothschild also declined to talk to Euromoney about its role in the deal.

However, Coutinho believes the deal makes strong strategic sense for UBS’s growth plans in Brazil.

“This brings together two complementary businesses to create something unique in investment banking in Brazil, Argentina, Uruguay, Chile, Peru and Paraguay,” she says.

“We are getting great feedback from the market, both from investment bankers and clients about just how compelling this new entity will be. And it is also happening at an amazing time: Brazil is at an inflection point and we expect a huge growth in investment banking transactions. The timing of this deal couldn’t be better.”

How are they going to regulate those opportunities? They are clearly competitors in these areas 

 – Local banker

Most bankers agree that the outlook for investment banking transactions in Brazil is positive. With historically low real interest rates in the country, the debt capital markets (DCM) have been booming and the demand for risk products is also driving a demand for equity.

Cheaper financing is also spurring M&A and if growth returns next year – as is expected – investment among the country’s corporates will be another engine of capital markets activity.

“Banco do Brasil is contributing the access it has to its corporate relationships,” says Coutinho. “It has tremendous reach in their debt capital markets. It has what we didn’t have – and we have what they didn’t have.”

However, one senior investment banker questioned the value of the DCM business.

“The DCM product isn’t a very profitable one and I don’t think that Banco do Brasil has the strategic-level access at these corporates that will help the new joint venture gain the M&A mandates that will move the needle for the bank in Brazil – and also to a lesser extent the ECM mandates as well.”

Banco do Brasil has broad retail distribution that is a benefit for DCM transactions and UBS will be putting its institutional broker – the bank bought Link Investimentos in 2013 – into the new organization.

Meanwhile, Dealogic says that since 2015 Banco do Brasil has generated $142.15 million in investment banking fees. The equivalent figure at UBS is $35.8 million in Brazil – which just covers Brazilian investment banking and does not include non-Brazil investment banking or Brazilian brokerage business.

Both banks will be keeping their private banking and asset management outside the JV – meaning they will be competitors when trying to capture liquidity events from transactions led by the new organization.

One local banker said he thinks this is fraught with issues, adding: “How are they going to regulate those opportunities? They are clearly competitors in these areas.”

Wealth management

Coutinho declined to give specific details about how the new JV would interact with its onshore private banking business – in 2017, the bank bought Consenso, Brazil’s largest multi-family office, adding R$20 billion to UBS’s R$8 billion of onshore AUM.

However, she did mention that “our wealth management business is outside the scope of this agreement and will be managed separately. Many of our wealth management clients are business owners and they will benefit from having access to a more complete set of investment banking services.”

In contrast to the questions raised about UBS’s strategy, the senior bankers that spoke to Euromoney seemed to think this was a good deal for Banco do Brasil – adding the local institutional brokerage, as well as the structuring and research capabilities of a global investment bank.

“In theory, this is a win for Banco do Brasil, although there is still a lot of execution risk in putting this JV together and managing it cohesively,” one banker says.

“I don’t think it really alters the market dynamics for us. If anything, it helps us as where there were potentially two banks going for mandates there is now just one – so in some deals it could even work to our benefit.”

Banco do Brasil didn’t respond to a request for an interview.