UBS AG is expanding its capital markets and mergers advisory business in Brazil even as it cuts back in those areas globally, and despite worries over Brazil's economic policy and the Swiss bank's refusal to use lending to win business.
UBS on Monday completed its takeover of Link Investimentos, marking the start of full-fledged investment-banking, brokerage and wealth management operations in Latin America's largest economy. Link will be re-branded as UBS Corretora. The brokerage's 170 employees will bring UBS's headcount in Brazil to 310.
Veteran banker Lywal Salles, who has spearheaded UBS's return to Brazil, said the bank will not deploy capital for loans in order to win deals, and instead will use the strength of Link's brokerage business to attract investors as it focus on equities and advisory. UBS left Brazil in 2009 after selling its unit to BTG Pactual Group for $2.5 billion.
"We believe we can go do well in Brazil without having to resort to lending to bolster our activities - our roots are on equities, advisory, our traditional strengths," Salles told reporters in São Paulo. "We are not that kind of a traditional lender."
Some of UBS's foreign rivals have been downsizing their Brazilian units to cope with three years of sub-par growth and market performance, as well as rising costs and slow deal flow. Barclays Plc and Deutsche Bank AG cut research as well as sales and trading staff in the country as competition mounted and business faltered.
Limiting loans in Brazil will help UBS reduce risk-taking and leverage after the Swiss bank suffered trading losses of more than $50 billion in the aftermath of 2008 financial crisis. The company has been cutting fixed-income operations and returning to its private banking roots with moves such as its recent launch in China of a local unit to focus on areas such as wealth management.
In Brazil, UBS has at least three agreements in place to carry out initial public offerings. The bank also has one agreement for a follow-on offering, 21 for mergers and acquisitions deals and another seven smaller-scale M&A-related engagements for the wealth management division, said Salles and Daniel Mendonça de Barros, chief executive of UBS Corretora's brokerage unit.
The outlook for investment-banking business in Brazil remains cloudy, as investors are leery that the government's efforts to fight inflation may be too timid.
There were three initial public offerings in Brazil in 2012, down from 11 in each of the two previous years. Salles said the drop-off was due to lack of investor confidence that the government of President Dilma Rousseff is doing enough to reduce inflation, which is running at its fastest pace in a year.
Confidence has also weighed on the benchmark Bovespa stock index <.BVSP>, subsequently hampering IPOs and similar deals. Mounting competition is making it harder for brokerages to make money in Brazil, Mendonça de Barros said.
"It surely has been seen as an overhang in confidence, mainly in the equity market," Salles said. "But things should improve soon. There is a list of companies in line to go public, the catalysts will come, I am sure."
UBS' takeover of Link comes as fees are coming down in Brazil's crowded brokerage market. But UBS has said it expects synergies between the three units will help generate enough deal flow to keep supporting growth in an economy that has seen capital markets activity lose steam over the past three years.
For the past 11 years, Link has topped derivatives trading volume rankings in the BM&F derivatives trading segment of the São Paulo Stock Exchange, and is currently No. 2 in cash equities trading.
(Editing by Gerald E. McCormick, Gary Crosse)
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