Costa Rica’s ambitious commitment to reducing carbon emissions places it at the forefront of the fight against climate change. But its politicians worry that, with financial aid being focused elsewhere, it could effectively be punished for its early adopter status.

Euromoney’s meeting is in Puriscal, the eponymous town of the fourth-largest canton in the province of San José, close to a large, crumbling cathedral that is being reclaimed by nature.

The building is still an imposing sight, but trees now take advantage by growing in (and widening) the cracks in the walls that were opened by a series of earthquakes in the 1990s. In 2009, a health notice ordered its demolition, but there has been no movement to either its destruction or rehabilitation in the following years.

From the nearby headquarters of Cooperpuriscal, a farming cooperative that was established by the ministry of environment and energy (Minae) and is financed by a mix of public funds and local private businesses, we head further up the mountain.  We are driving to a finca – a smallholding, which in this case has 26 cows. The finca’s residential building sits at the side of the road and does not hint at the modern construction to the back: brushed steel gates and fences contain healthy-looking cows that mill around on a perfectly-level concrete floor that drains down to a sluice.

The representative from Cooperpuriscal explains the overall structure that has recently been installed and (after another visit to a neighbouring finca) is clearly created to a template. All of the cows’ waste is captured in solid form in a structured production chain that produces organic, rich compost for use on the farm and for sale. The slurry gets washed into a polythene-covered tank that generates enough gas for the farmer to power the whole site.  The retained compost boosts the yield on the farm’s crops, which now supplement the cows’ grazing on pastures, which increases and stabilizes milk production. Meanwhile, the milking process uses modern equipment and feeds directly into a hygienic, on-site tank that is emptied every two days by the cooperative’s dairy lorry.
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Brazil’s banks face paradox of worsening asset quality in a deleveraging corporate sector

Brazil’s banks are facing an apparent paradox: the level of corporate leverage has improved markedly in the past year while delinquency levels have risen and non-performing loan (NPL) formation remains at high levels.

These are the main findings of a report into the Brazilian banking sector by Credit Suisse. Lead analyst Marcelo Telles says the main characteristics of Brazil’s credit crunch peaked a year ago. For example, net debt to last-12-month ebitda improved to 2.2 times for the system – excluding Petrobras debt – in 1Q17 from 3.0 times one year earlier. Interest coverage also improved to 2.7 times, from 1.4 times in 1Q16.

The report says that analysis of the Brazilian banks’ 1Q17 results show that “asset quality in the large corporate segment remains on a deteriorating trend”.

However, while the leverage in the corporate sector has been improving, there has been a deterioration in asset quality in the large corporate sector – with higher delinquency, still-high NPL formation and high provisions. Telles believes the reason behind this apparent contradiction between these main findings lies in the performance of renegotiated and restricted loans than have been agreed in the past couple of years, and that lengthened the NPL cycle and is now translating into higher NPLs.

“Despite improvement in corporate leverage, delinquency in the corporate sector has been deteriorating constantly since early 2015, while that of the retail sector has stabilized many months ago,” argues Telles.

“Since 2015, corporate delinquency increased by 120 basis points, but retail delinquency actually improved by 20bp, despite the economic deterioration since then.

“In our view, one of the reasons for the discrepancy between better corporate leverage and worse delinquency indicators stems mainly from the increase in the volume of restructurings and renegotiations, which ended up creating a backlog of future potential NPLs and making the NPL cycle longer.”

Data from the Brazilian central bank support this interpretation: the size of renegotiated and restructured corporate debt has more than doubled since 2015 to 2016, reaching 9.9% and 1.9% of total loans – from 4.2% and 0.9% at the beginning of 2015 – respectively.

However, the banks have been reacting well to the deterioration in asset quality and increased provisions to improve the coverage of these ‘troubled’ loans. Coverage now stands at 21.8% for the system (up from 13.2% in 1Q2016) – with private banks having a 35% coverage ratio – which is approaching cyclical norms; in line with 2011’s coverage ratio and close to the 10-year average of 25.8%. This suggests there could be an improvement in the cost of risk in the coming quarters, albeit gradually given the still-high leverage ratios.

Credit Suisse expects that “the cost of risk should normalize gradually and probably returning to 2013 and 2014 [levels] by 2019”.

Increased corporate leverage in Brazil in the couple of years up to 1Q16 led to a significant increase in the cost of risk of commercial loans during that period. The main component of this increased cost of risk was the need for increased provisioning by the Brazilian banks since the end of 2014. In 2016, provisions for commercial loans comprised 44.5% of total provisions for Itaú – compared with 31.3% in 2014.

For Banco do Brasil, provisions for commercial loans jumped from 58.8% in 2014 to 74.7% in 2016. The wide discrepancy in the size of provisions needed to cover troubled loans to the corporate sector means that the recent improvement will also lead to uneven improvements among Brazil’s largest banks.

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Brazilian government to press ahead with reform of TJLP

The Brazilian government is resisting pressure to reconsider its proposal to change how BNDES, the state development bank, charges interest rates to lenders.

The government has written a bill that will phase out the current long-term TJLP rate – which is set by committee and is currently 7%, below the country’s Selic base rate of 10.25% – and replace it with a new TLP rate, which will be linked to the yield on inflation-indexed government debt.

However, in a recent interview with local financial newspaper Valor, Paulo Rabello de Castro, the new chief executive officer of BNDES, suggested the TLP rate could instead be linked to the consumer price index. Two senior BNDES vice-presidents resigned after Rabello’s comments about possible changes to the new TLP rate were reported, showing the sensitivity in Brazil about the new financing rate.

There has also been an uptick in local criticism about the changes, with trade associations beginning to lobby against the changes. For example, José Velloso, chief executive of the Brazilian Machinery Builders’ Association (Abimaq), said the changes to TJLP would increase the cost of long-term funding.

According to local media reports, he said: “The new TLP will make the cost much greater than in other countries, taking the competitiveness of the industry, of buyers of capital goods.”

However, finance minister Henrique Meirelles and planning minister Dyogo Oliveira were both quoted by Reuters this week as dismissing any changes to the calculation of the new BNDES lending rate. This steadfastness is due to the fact that this change is a key part of the government’s reform programme for the financial sector – and is backed by Ilan Goldfajn, the central bank’s president.

A report from the World Bank earlier this year, titled Brazil Financial Intermediation Costs and Credit Allocation, highlights the negative impact on fiscal and monetary policy of the current TJLP rates.

According to the report, the TJLP rate in Brazil is responsible for 72% of all “earmarked” lending. Earmarked lending is credit extended by the government at subsidized, below-market rates. At the end of 2015, half of total credit in Brazil was earmarked, which was back to the levels seen in the late 1990s after it had fallen to one-third of total credit in 2007, just before the financial crisis hit.

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UBS rebuilds in Brazil with acquisition of Consenso

The acquisition by UBS of a majority stake in Consenso, Brazil’s largest multi-family office, is a significant step in the Swiss bank’s growth strategy in the country.

Since 2010, UBS has been plotting its return in Brazil, following its sale of Pactual in 2009, and this transaction is the most notable since its acquisition of leading local brokerage Link – which was finalized in 2013 after UBS obtained a banking licence in 2012.

Consenso has R$20 billion in assets under management (AUM) – considerably more than UBS’s R$8 billion.

The new wealth management operation will merge and be run by a combination of UBS management and Consenso founding partners, including Heinz Gruber, Luiz Borges, Maria Alice Gouvêa, Daniel Auerbach and Valéria Milani Pierini – who created the firm after leading Banco BBA Creditanstalt when that bank was bought by Itaú in 2002.

Consenso has offices in São Paulo, Rio de Janeiro, Curitiba and Belo Horizonte, and 60 employees. UBS says it has around 250 staff in Brazil. Deal pricing isn’t be revealed.

Alejandro Velez, UBS Alejandro Velez, head of Latin America wealth management at UBS, tells Euromoney that the deal will ” accelerate our expansion in Brazil”.

That expansion appears well timed: according to local banking organization Anbima, AUM of the wealth management industry increased by nearly 20% in the year to February 2017 to R$863 billion.

“We continue to believe in Brazil’s long-term prospects, as evidenced by this acquisition,” says Velez. “Brazil [is] a market that continues to be strategically important for us. Consenso has a strong track record with strong historic growth. It provides access to a large number of families in the high-net worth and upper-high net worth space.

“By combining Consenso local expertise and reputation with UBS’s standing and strengths, and maintaining the successful open platform strategy currently run by both firms in Brazil, we believe we can significantly enhance our value proposition and widen our appeal to a larger number of private clients in the country.”

Velez says UBS “continuously reviews” opportunities for further acquisitions and in 2013 Edinardo Figueiredo, then managing director of UBS, outlined to Euromoney UBS’s strategy for growing its wealth management business in Brazil. “We want to grow through acquisition,” he said. “We are in talks with a lot of family offices in order to aggregate them in our operations, possibly to do acquisitions, but there are also some asset managers in the country that are open to work together.

“But the main idea is to grow through acquisition.”

Despite the current political uncertainty, Velez says he is positive about Brazil’s longer-term outlook. “In the current climate, we think Brazil’s reform process will be delayed but not derailed,” he says and adds that the current easing cycle in Brazil – with the Brazilian central bank lowering the base rate to 10.25% from 11.25% at the previous meeting, is the key market issue for determining asset allocation strategies for clients.

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Investment One seeks niche in busy Brazilian finance space

Bernardo Parnes, co-founder and CEO of financial boutique Investment One Partners, says there is “clearly space” in the Brazilian market for independent consultancies such as his, which opened its doors at the beginning of this year.

Parnes, who was CEO of Deutsche Bank’s Latin American investment banking franchise until the German bank decided on wholesale withdrawal from the region, decided to establish his own firm after leaving in August.

His new firm will focus on two areas: financial consultancy for corporates looking to restructure, move through M&A transactions or who want independent advice on other transformational transactions such as IPOs.

The other “lateral” will be a wealth management service focused on ultra-high net-worth individuals and families – those with a minimum of R$50 million. Investment One will offer aggregation management advice for these clients who typically have their assets at multiple onshore and offshore banks.

Investment One Partners is based on Faria Lima in São Paulo and has 12 full-time employees. It has completed its first mandate, advising União Química Farmacêutica in its acquisition of Zoetis’ (formerly Pfizer) plant in Brazil, and Parnes says the bank is talking to other companies about potential M&A transactions, both on the buy side and the sell side, and he says he has one potential pre-IPO mandate.

“We have some IB mandates and we have closed one in the wealth management advisory,” says Parnes. “But we want to develop slowly – our biggest asset is our name and reputation. We offer a personalized boutique with senior advisers – we don’t have any kind of conflict because we don’t offer financing.”

However, the firm does plan to run a small private equity group that will focus on the healthcare sector – aided by the sector speciality of partner Fabio Jung, who joins from Bank of America Merrill Lynch. Parnes says he is relishing returning to client work on a daily basis. “I have just been to a site visit,” he says when welcoming Euromoney to his new office. “I think the last one before today was in 1997 for the Vale privatization.”

Parnes declines to talk in depth about Deutsche Bank’s decision to leave Latin America and says his departure was amicable and logical following that decision. He believes that the bank should have retained its presence in Mexico, Argentina and Brazil – the bank retains a slimmed down São Paulo office – but that ultimately the withdrawal was part of a wider strategic rationalization of the bank’s global presence.

Parnes says there will be synergies between the IB consulting side of the business and the wealth management service, which is being headed by Raphael Zagury, who also joins as partner from Deutsche Bank and had previously worked for Bank of America Merrill Lynch and Goldman Sachs.

Brazil has a competitive wealth management market, but Zagury believes there is a need for an aggregation advisory service for the country’s richest families.

“These people almost always have assets at multiple banks in Brazil – and usually a couple of international banks as well,” he says. “There can be a lack of awareness of the risks that he or she is running in particular asset classes.

“This is particularly true when you add in corporate assets to the full picture: often risks within a business are too closely correlated with family assets and even in international portfolios – Brazilians can quite often buy international bonds for their offshore portfolios instead of diversifying in a broader manner.”

Zagury says Investment One will charge a flat management fee. “We had a lot of discussions about our business model, but ultimately we wanted to align our interests to the client and a flat fee based on the assets is the best way to do this,” he says.

Zagury argues performance fees align interests in the upside of performance, but a lot of his service will be protecting on the downside – encouraging reach for return doesn’t reflect this wealth-preservation aspect.

“A portfolio return should only be a consequence of a certain level of risk,” he says. “Our duty to clients is on managing their risk, first and foremost. A flat fee allows us to purely focus on this mandate.”

One investment banker at a full-service firm queries whether the Brazilian market has the scale for independents to thrive. “I was in New York last week and they had three IPOs on the day I visited the exchange,” he said. “There were hundreds last year. This year, Brazil would be happy if we did six, so I think the markets are very different.

“In the US, the top banks focus on the deals they want and there is still room for second-tier banks and independents. That simply isn’t the case in Brazil – there isn’t the scale for us all to generate enough fees to sustain these independents.”

However, Parnes takes comfort from the growth of independent investment banks in the US, such as Moelis, which has now opened an office in Brazil. “We see the existence of other independent banks as proof that there is room for these type of services in Brazil – and that will only grow as the economy recovers,” says Parnes.

“Our aim is to give clients the assurance that they will be discussing transformational ideas with senior bankers, who will then be the same people who lead them through negotiations.

“We want to make a lot of money, but we are not desperate for fees. Our aim in starting this firm was to build very deep technical expertise to deliver a top-tier job for our clients – but also one that isn’t political and has a fun working ambiance.”

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Four is company at Grupo Aval

Banking consolidation is often cited as a challenge in Latin America. In the past, banking crises have led to acquisitive growth opportunities for those banks that have been relatively less stricken, while customers have sought out the strongest banks for fear of the smaller ones failing. These factors have been supplemented by others, such as costs of regulation and technology for smaller entities, to drive an increase in the market share of the leading players.

This has led to some very large banks, such as Itaú in Brazil and BCP in Peru. But the model is slightly different in Colombia.

Consolidation of market share is evident here, too, but less conspicuously. A quick look at the market reveals banking plurality, but this is something of an illusion. Grupo Aval has majority holdings in four of Colombia’s banks. Banco de Bogotá (68.7%), Occidente (72.3%), Popular (93.7%) and AV Villas (79.9%) – quite apart from its 100% holding of BAC Credomatic, the leading central American bank.

According to Maria Francisca Barriga, financial analyst at Davivienda Corredores, the bank is the leader in the consumer and commercial portfolios. As of February, Grupo Aval had 26.5% of net loans in the Colombian financial system ($33.1 billion) and 27.6% of deposits ($31.5 billion). It had 26.6% of all assets ($48.7 billion), while its $1.7 billion of net income for 2016 was 44.6% of that for the whole Colombian financial system.

There are historical reasons for the multi-brand strategy – they had all been standalone banks and to this day each bank has a different sector and strategy. For example, Banco de Bogotá, the third-largest bank in Colombia, is a commercial bank (76% of its loan portfolio), whereas Banco Popular operates mainly in consumer and public-sector business and is heavily concentrated on payroll loans. AV Villas is the smallest of Grupo Aval’s banks and is mostly focused on mortgages. However, each bank is evolving its strategy. AV Villas has broadened into commercial and consumer loans. Banco de Bogotá’s main strategic aim is to win market share in mortgages.

As each of the banks broadens its business mix, analysts increasingly question the utility of operating independent banks, with the replication of senior management and other costs. Would it not make sense to pull down the internal walls within Aval?

“It is important to remember that we currently operate under four banks that are the result of multiple mergers,” says Luis Carlos Sarmiento Gutiérrez, who has been president of Grupo Aval Acciones Y Valores since 2000. “We still operate them separately because from a strategic standpoint it works as they focus on different segments with distinct products.”

However, Sarmiento says that the bank is still chasing operational efficiencies and he can see a point where the value generated by operating multiple brands is exhausted. “We have been working behind the scenes to have all the banks running in the same core system and with the same ERP [enterprise resource planning]. We have made advances, but it is a multi-year project. We are not in a rush to merge, and if the decision of merging is taken, it will be done after we have completely minimized the potential risk of value destruction.”

This cautious approach sometimes frustrates analysts who argue that it will be hard to reduce the cost-to-income ratio to the industry standard by back-office simplification. Frederic de Mariz, banking analyst at UBS, initiated coverage on Grupo Aval in January this year with a buy rating, but highlighted that the group’s “efficiency is worse than Colombian peers”, saying he does “not expect Aval to merge its four banking subsidiaries into one [and that] we expect the cost-to-income ratio to remain around 51% in the coming years [versus 44% for Davivienda and 47% for CIB].”

“Our cost-to-income ratio is actually well below 51% and currently stands between 47% and 48%,” responds Sarmiento. “So I guess we have proved analysts wrong on that. But to be fair, there will be cost synergies that we will not be able to achieve with our current structure. In the meantime, however, we will continue to work on implementing strategies to control cost increases while we continue to expand our business. We expect to be below 45% on a cost-to-income basis in two to three years.”

Sarmiento is more in agreement with the analysts who point out that it will be tough to maintain its current level of profitability – the last few years have seen returns on equity of around 15%.

“This is a tough challenge as capital regulation constantly requires financial institutions to retain more capital,” says Sarmiento. “Having said this, we will have a boost in returns thanks to the fiscal reform, which will help us improve, or in the worst scenario, maintain our returns. On a more strategic discussion, the ability of banks to remain profitable will depend on how fast are they able to migrate to cost-efficient channels and how good they are at defending their products versus new ways of doing banking.”

‘Cost-efficient channels’ and ‘new ways of doing banking’ mean, of course, digital banking. And Grupo Aval’s banks are no different to the rest of those in Latin America. The large footprint the bank has (with 1,543 the Group comfortably has the most branches, compared with 817 at Bancolombia and 592 for Davivienda) is both an opportunity and a challenge.

Sarmiento says that digital investment allows the group to completely “re-imagine our processes and operations” to reduce operational costs. “In short, digital should help us to serve our clients more efficiently and, more importantly, the way they want. There’s no trade-off between customer experience and efficiency. Digital should allow us to do both.”

Aval has been redesigning its products and services for digital implantation. For example, AvalPay is a digital wallet that offers benefits to clients in the places they transact, ranging from discounts at restaurants to being able to buy tickets at the exclusive pre-sale of concerts through ‘Experiencias Aval’. The Aval master brand is becoming more visible in the Colombian market. “We’re also working on the efficiency front,” says Sarmiento. “We’re starting to work in the digitalization of the key banking processes – or ‘journeys’ as consultants are now calling them – which should result in faster and more efficient solutions for the banking needs of our clients.”

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Bradesco BBI aims to become regional investment bank

Bradesco BBI is aiming to become a regional investment bank in Latin America over the next couple of years, according to its managing director Leandro Miranda.

Leandro Miranda, Bradesco BBI Miranda, who has headed Bradesco’s investment banking unit since late 2014, laid out the bank’s new expansion strategy exclusively to Euromoney. Miranda says he expects to grow rapidly its offices in New York, Mexico City and Buenos Aires to become a truly regional investment and commercial banking platform.

Miranda says the decision to become a regional player solidified after BBI’s recent experiment of expanding its trading desks to cover other Latin American bonds.

“For the past five years we have had one of the largest trading desks in Brazil and we frequently got enquiries to trade Mexican, Argentine or Chilean bonds,” he says. “We had to say no, but then we decided to broaden into these products and the surprising thing was that our portion of these clients’ Brazilian business also increased.

“This is because these counterparties like to have a single bank of choice where they can concentrate their business. They would rather have regional bank rather than single country banks.”

The decision to grow Bradesco BBI into a regional player is a marked departure from the division’s previous Brazil-only strategy. How far does Miranda think he can move to the regional model?

“A lot! I see Bradesco going LatAm very, very fast,” he replies. “We have just started to cover LatAm in research and trading in LatAm bonds. I foresee the same for equities in the very near future. ”

And then last, but not least, we will need to approve credit lines as we push to be a truly Latin American bank.”

The push to developing the investment bank will precede the development of a regional commercial bank – complete with a significant balance sheet – resulting in a CIB franchise. The development of a regional retail banking operation is not part of the bank’s new Latin American strategy.

This development strategy is similar to the approach taken by the bank when growing its Brazilian investment bank. “I came to Bradesco in 2011 [from Credit Suisse] when were ranked second or third in the league tables. In two years we had become number one,” he says. “When I became head of the investment bank we were ranked 12 in M&A. Last year we were number one. And now I am backing equity – that is the build.”

Miranda’s growth model fits with his view of global investment banking. “There is a major trend for universal banks around the world,” he says. “Unless you are Goldman Sachs, which has been an independent investment bank for a long time, then there is no room for standalone investment banks in the future.

“The model needs to be: be a great investment bank as part of a great financial conglomerate. That’s the only way to become the trusted adviser and bank of choice [for corporates].”

Miranda says he has been using this strategy to build its equity business, which is now one of the top-ranked banks in the league tables. He argues that winning IPO mandates requires banks to provide capital, combined with having the credibility from league-table rankings and being able to provide clients with ideas and market insight.

“If you only have ideas and the league table, it won’t guarantee [your franchise] mandates,” he says. “And if you aren’t guaranteed mandates at some point you will lose your league-table position and then you will be left with just ideas – in which case you should be an adviser and not a bank.”

Miranda’s approach unashamedly leverages the large corporate balance sheet of Bradesco. He also says the investment bank’s traditional weakness – lower-ranked research – has been bolstered by its acquisition of HSBC’s Brazilian unit.

“The HSBC acquisition was very complementary on the research side – around 50% of our research comes from HSBC and some of them are top-ranked,” says Miranda. “It has made a major difference and we have been able to use this to increase our sales effort, as well as other recent hires of bankers from competitors such as Bank of America, Goldman Sachs and Morgan Stanley.”

Meanwhile, Miranda says stability on the origination side has helped developed trust with the senior managers of their corporate clients. “Most of our origination bankers have been at the bank for the last five years and have made these companies a lot of money through fixed income and M&A transactions, and are now well placed to extend that into equity mandates,” he says.

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