In the hunt for competitiveness, Brazil’s Banco Pactual has tried just about everything.


Over the past two years, the investment bank has dabbled in commercial banking, insurance, annuities and leasing. In the meantime, all three of Pactual’s founding partners have quit, two in a vocal protest over the direction of the bank’s operations.

But in Brazil’s investment banking sector, Pactual’s case is not unusual. All of Brazil’s homegrown investment banks are searching for the right balance of products and services to compete with the international giants that are marching into the local market. Some local firms, like Banco Garantia and Banco Omega, have opted to sell rather than be swallowed by the competition. Banco Pactual and Banco Bozano, Simonsen, among others, have decided to stay and fight. Some are doing that by becoming full-service operations. Others, like Pactual, are pursuing a more focused course.

For Pactual, a series of false starts has complicated the bank’s efforts to reestablish its identity. At the end of 1997, under the leadership of then-president and founding partner Luiz Cezar Fernandes, Pactual bought São Paulo-based retail bank Banco Sistema. At the time the move was seen as an ill-advised attempt by Pactual- widely considered one of Brazil’s top five investment banks-to push into the highly competitive, increasingly internationalized world of retail banking.

Eduardo Plass, Pactual’s CEO at the time, contends that Pactual’s purchase of Sistema was misinterpreted by the financial community, and says the move was actually an effort by the bank to simply expand its distribution network. But then, after only six months, Pactual dropped its retail banking plans.

“Last year, we realized that we could not be competitive as a commercial bank,” said Plass. “We didn’t have enough capital base and we didn’t want to make an association with anybody. Our strategy is to stay in the markets where we are strong and competitive.”

New Leadership and Focus
Pactual’s reversal was not enough to convince co-founding partners Paulo Guedes and Andre Jakursky to stay. Last August, the pair announced that they were resigning from the bank rather than see it follow what was, in their opinion, a poor strategy for survival.

Then, this July, Fernandes-the charismatic, famous pipe-smoking leader of the bank-stepped down, selling his approximately R$100 million in shares to the bank’s remaining partners.

While some question the ability of the bank to carry on without its founders, Pactual’s new leadership believes it has finally discovered the key to continued success in Brazil’s increasingly crowded investment banking sector: asset management.

While the bank has no plans to shelve other corporate financial services, Pactual has decided to put much of its near-term resources toward managing the $3 billion clients have invested with the bank. They are building up their sales force and increasing distribution of their asset management products.

“This is a business that is decided by profitability and distribution,” said Plass, 40, who assumed the presidency of Pactual in July. “Managing funds and getting the best results is our expertise. But on distribution we are not that state of the art. We still have a lot of room to grow, which is why we are focusing on our distribution effort to get the best clients.”

Size Matters
But snaring the best clients has not been easy ever since foreigners started coming to town.

CS First Boston’s headline-grabbing purchase of Banco Garantia last fall was only the most visible of a series of acquisitions of local domestic banks by foreign players. At the beginning of the year, Warburg Dillon Read absorbed Banco Omega after more than a year of association between the two financial institutions. Shortly thereafter, Flemings took over Rio-based Banco Liberal. And when Banco Patrimonio ended its alliance with Salomon Smith Barney earlier this year, the bank was snapped up by Chase Manhattan.

“The Morgan Stanleys or the Credit Suisses have so many international contacts, so much business gravitates their way automatically, that it is extremely difficult for the locals to compete in international markets,” said Paul Bydalek, president of Brazilian bank watchdog Atlantic Rating.

Local banks hope to capitalize on their specialized expertise in Brazil and their precise understanding of how business and politics works in a country that changes the rules at the toss of a hat. With that in mind, the locals covet their strong research teams and emphasize the low rate of turnover among personnel. Regional firms often also have less bureaucracy than multinationals, making it easier for them to respond more quickly to market needs. Foreign banks, in the meantime, are still relative newcomers to the complicated Brazilian market, having just begun to appear in the last two or three years.

“I think there is a tremendous opportunity for agility inside of Brazil simply because Brasilia is always changing the rules,” added Bydalek. “By the time a Morgan Stanley tells New York what is going on and they revamp their thoughts, someone in Brazil has already closed the deal.”

Doing It All
In banks’ efforts to stand out in the highly competitive market, “client-oriented” service is the new catch phrase in Brazil’s investment banking community. Local banks are making sure that they can directly or indirectly service all of their clients’ needs.

“I think that it is useful not to be a one-product or a one-market firm,” said Eleazar de Carvalho Filho, head of Banco Warburg Dillon Read, which recently purchased Brazil’s Banco Omega. “Especially in this environment, I think that it is very hard to be consistently profitable if you are focused only on one segment.”

Pactual is trying to remain committed to its core business by gaining access to a pool of new clients. It has formed associations with insurance and reinsurance companies to expand its client base. The bank recently struck deals with Performance Bond insurance company and Swiss Re. The bank also sold a 70% stake in its new annuity business to Canada Life to shed a non-core business while maintaining an ally. Plass said that the bank also is considering agreements with other financial institutions in order to boost its distribution efforts.

Meanwhile, several of Pactual’s competitors are avoiding the potential pitfalls of a niche strategy. Banco Bozano, Simonsen, the country’s largest domestic investment bank, has taken a broader approach to meeting its customers’ needs.

“Our strategy is to be a wholesale bank, to offer our clients not just investment banking services,” said Alvaro Lopes, director of international at Banco Bozano, Simonsen. “Having a large range of products puts us in a better position when it comes to competing against not only domestic but international investment banks, since most banks are focused on only one or two products.”

Lopes acknowledges that offering a diverse product line creates substantial expenses, something the bank is trying to minimize by integrating the back office activities of Bozano and its recent retail acquisition, Banco Meridional. Bozano won Meridional in a privatization auction last year. Unlike Pactual’s purchase of Sistema, Bozano entered the commercial market by buying a bank of considerable size-220 branches in the wealthy southern part of the country. And Lopes says that the bank isn’t done with its shopping spree.

“Since the privatization program started in the early ’90s, you have seen Bozano looking at all the assets in all different areas,” said Lopes. “We continue to analyze all types of opportunities. There are going to be more auctions of other state banks in the south of the country. Let’s see what happens.”

Complementary Service
Banco Icatu, too, has worked toward integrating services to increase its scale. In a move that puzzled some industry experts, the bank recently announced that BBA Credistaldt would be buying 50% of Icatu’s equity brokerage activities. Although Icatu management would not comment about the strategy behind the move, local press reported that the bank hopes to merge its local research and international clients with BBA’s local corporate clients and capital markets expertise.

Most believe that there is room in Brazil for local and foreign banks to live in harmony, filling in each other’s gaps in service.

“Coming from the Swiss bank side, we have a 40-year history of working with the local financial institutions in Brazil,” said Carvalho Filho of Warburg Dillon Read. “We think that there is a lot that we can do with them. We don’t have the scale in asset management that the local banks have. There is a lot of room for distribution of local products.”

But survival is predicted largely on the timely reopening of the Brazilian capital markets. With corporate finance and merger and acquisition deals at a nearly 18-month virtual standstill, there is just not enough business to go around right now.

Locals say that the bad times just prove that they have the mettle to outlast the worst Brazil has to offer. But the market drought has also served as a protective shield, keeping competitors at bay, and giving the locals time to get their houses in order. It is only when the rain once again begins to fall that the market will find out who built their houses on the soundest foundation.