Prospects abound despite Brazil crisis

Latin American countries are at the whim of the strengthening US dollar and the dire outlook for commodities prices. These factors go some way to explaining the underperformance of the region in the past year, but there are other factors weighing down sentiment.The MSCI Emerging Markets Latin America index lost 27 per cent in 2015, while the MSCI Emerging Markets index was down just 10 per cent, data from FE Analytics shows. It was Brazil that dragged the region down, with the MSCI Brazil index shedding around 40 per cent.
With the exception of Greece, Brazil was the worst-performing market last year, an annus horribilis in which it also lost its investment-grade credit rating by Fitch, notes JPM Latin America Equity fund manager Luis Carrillo.

The country is in the midst of an economic and political crisis. The hugely unpopular president Dilma Rousseff has been caught up in a scandal surrounding state-owned oil company Petrobras, and rumours of her impeachment abound.

Mr Carrillo says: “The recent replacement of Brazil’s austerity-minded finance minister suggests a waning commitment to necessary reforms in order to shore up support for the president’s more left-leaning party in Congress.”

Oliver Leyland, senior investment analyst for Latin America at Hermes Investment Management, predicts a multi-year recession in the country.

He explains: “You do have this horrible scenario of low or negative growth, [and] high inflation still. You have this huge and ballooning fiscal deficit as well, which is a problem. So spending cuts are necessary, but they’re not coming through because of this political paralysis.”

In economic terms then, Brazil appears to have fallen behind its Bric (Russia, India and China) peers. But Mr Leyland believes the country’s institutional framework is performing well compared with the other Bric nations.

Alfredo Mordezki, head of Latin American fixed income at Santander Asset Management, is positive for other reasons.

He notes: “Brazil has a strong domestic market [the biggest in the region], its external sector is improving after the adjustment of the currency and it still holds some world-class companies in sectors that did well in the current environment, like food companies, or pulp and paper producers. Fiscal policies may become more neutral in the second part of 2016 and, if inflation expectations correct, monetary policy can become less of a hurdle.”

But he thinks any potential recovery in Brazil will be a 2017, not a 2016 story.

Another cause for concern is Peru, which may be downgraded to frontier market status this year over concerns it does not have sufficient investable companies.

Meanwhile, Argentina has been one of the best-performing countries in the region, with the MSCI Argentina index up 9.8 per cent in the year to January 28 2016. The country swore in new president Mauricio Macri in December last year, replacing Cristina Fernández de Kirchner.

Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management, notes the new administration is “market friendly”. He says: “Regime change can be very powerful – it’s one of the reasons why Argentina was a big outperformer. Venezuela is another example of that.”

But Mr Gutierrez believes Mexico – the “poster child for reform” – has been a disappointment, blaming the falling oil price. “It has been this great reform story, but the oil situation has complicated things for Mexico. When you look at total oil products including refined, it’s now an oil importer because it imports refined products from the US, though oil exports are still a big part of revenue for this government.”

As Mr Leyland points out: “Eighty per cent of Mexican exports go to the US. So the relatively steady recovery in the US economy is positive for the country.

“Equally, Mexico just has a better economic framework [than other Latin American countries] – unemployment and inflation are both quite controlled, the central bank is credible, and there’s no real issue with leverage levels either at the corporate or household level.”

Invesco Perpetual head of emerging equity markets Dean Newman also sees opportunities in Mexico, which he says has a robust manufacturing sector.

“We are impressed that president [Enrique Peña] Nieto has followed through on his 2012 campaign promise to overhaul the country’s energy sector, which has been opened up for international investment for the first time in more than 70 years,” Mr Newman notes.

China-Brazil infrastructure cooperation mutually beneficial

Infrastructure cooperation between China and Brazil is mutually beneficial and should be further strengthened, experts say.Brazil hopes to attract Chinese investment in highways, railways, ports, airports and other infrastructure projects, while the Chinese government regards infrastructure building key to bilateral cooperation, they say.

“The Brazilian government can count on infrastructure investment as a way to overcome the current economic recession, and promote economic and social development,” Xie Wenze, a visiting scholar from the Chinese Academy of Social Sciences.

A 1-percent increase in infrastructure investment can raise Brazil’s GDP by about 0.6 percent, he said.

Currently, bilateral infrastructure cooperation is mainly centered on one-off projects. Equity mergers and acquisitions around these projects are expected to bring long-term benefits for both sides, according to Xie.

Bilateral energy cooperation has yielded great results in recent years. China’s State Grid Corp. has expanded its business in Brazil as a result.

“The experience of equity mergers and acquisitions on the part of China’s State Grid Corp. could be promoted to other … projects in railways, highways, ports and other areas,” said Ivanildo Marcos Beltrao, a Brazilian company official.

To support cooperation projects between China and regional countries, the China-Latin American Cooperation Fund was launched in early January with a startup capital of 10 billion U.S. dollars.

A similar 10-billion-dollar fund was set up in September, 2015 to support China’s investment in an array of medium- and long-term projects in Latin America.

Brazil’s Vale Will Draw $3 Billion From Credit Lines

Brazilian mining giant Vale SA on Tuesday said it would borrow $3 billion in emergency financing, a sign of distress from the world’s largest iron-ore producer.Vale said the revolving credit line would “increase liquidity and bridge potential cash flow needs.” It didn’t disclose the interest rate it received and said another $2 billion was available.

The miner, which needs capital to pay for expansion projects, is tapping the line of credit partly because it hasn’t been able to garner as much as expected through the sale of assets. Banks have gotten cold feet about financing commodities deals amid a deep rout in prices, throwing a wrench into the plans of mining companies to shore up their balance sheets as they struggle to pay for mine expansions undertaken during the boom.

Vale has been unable to obtain project financing to complete a 2014 deal to sell a stake in its Mozambique coal operations to Japan’s Mitsui & Co. That transaction, originally scheduled for completion in the second half of 2015, would have boosted Vale’s cash flows by $3 billion.

“It doesn’t bode well for [Vale] to be using this line,” said Klaus Spielkamp, a bond analyst in Miami at Latin America-focused brokerage Bulltick Capital Markets.

In addition, Vale faces the stigma of being Brazilian at a time when international capital markets have largely shunned the South American country’s companies amid a sweeping corruption scandal and economic crisis. A major accident on Nov. 5 at Samarco, Vale’s local joint venture with BHP Billiton Ltd., further rattled investors.

Brazil’s Inflation Unexpectedly Slows as Recession Bites

Brazilian inflation unexpectedly slowed last month, beating forecasts from all analysts surveyed by Bloomberg, as food prices rose less than in the previous month amid a deepening recession.The benchmark IPCA inflation index moderated to 0.96 percent in December from 1.01 percent in November, the national statistics agency said Friday. That compares to the median 1.05 percent estimate from economists surveyed by Bloomberg. 

“It’s good news in the near-term, but not something that shows clearly that core prices will be trending down,” Carlos Kawall, chief economist at Banco Safra, said about slowing inflation. “The fact that it came mostly from food prices doesn’t show that we can celebrate this.” 

Brazil missed its 2015 target as annual inflation accelerated to 10.67 percent, the fastest for a full year since 2002 and more than double the midpoint of the official target range of 2.5 percent to 6.5 percent. As a result, central bank President Alexandre Tombini had to publish an open letter to the government explaining why he fell short.

Inflation isn’t expected to fall within range this year either, even as the deepening recession and higher borrowing costs chip away at Brazilians’ purchasing power. Leading economists forecast policy makers will redouble efforts to contain consumer prices by embarking on a new round of monetary policy tightening as early as this month.

Traders agree, as swap rates on the contract due in April 2016 rose 2 basis points to 14.66 percent on Friday. The real strengthened 0.5 percent to 4.0248 per U.S. dollar amid improved appetite for emerging-market assets. It dropped 33 percent last year, the worst performer among all 31 major currencies tracked by Bloomberg after the Argentine peso.

The real’s depreciation fueled inflation last year, as did the rising price of government-regulated items, Tombini wrote in his open letter to Finance Minister Nelson Barbosa. He reiterated his commitment to reach the 4.5 percent target in 2017, while Barbosa said in a statement that the government would contribute with fiscal policy and measures designed to boost productivity.

“No matter what happens with other policies, the central bank will adopt the measures needed to meet the target,” Tombini wrote.

Banco Safra’s Kawall expects a 150 basis-point tightening cycle this year, starting in January. Higher interest rates would be a bitter medicine for an economy headed to a deep two-year recession, forecast to be the worst since at least 1901. Fearing more job losses, members of President Dilma Rousseff’s Workers’ Party have publicly opposed additional increases to borrowing costs. December data strengthens the case for holding off, according to Enestor dos Santos, principal economist at BBVA.

“We should be more patient and wait for more data, but in my view it takes some pressure off the central bank,” Dos Santos said. “Inflation peaked in December and it will start to decline from January. I think this would not be the best moment for the central bank to tighten monetary policy.”

Deeper Recession

The central bank has held the Selic rate at a nine-year high even as Brazil’s recession deepened. The slump contributed to slower price increases for food and beverages as well as housing. The biggest single contributor to inflation in the month was the price of airfare, a volatile component that rose 37.07 percent.

A rate increase at the January meeting of the monetary policy committee known as Copom isn’t a foregone conclusion, with banks including BBVA and Banco Fibra expecting no change. Higher borrowing costs would hurt investment more than contain inflation, and Brazil should instead consider raising its inflation target, Workers’ Party President Rui Falcao said in a Dec. 28 interview.

“Any dovish decisions in the next Copom meetings will spur market suspicion that the central bank is facing greater political interference, even if technical reasons for a more moderate approach exist,” Chris Garman, managing director at political consultancy Eurasia Group, wrote in a note before the release of the data.

BTG Pactual Sells Distressed Debt Unit to Itau Unibanco

Brazil’s largest private sector banking group said on Thursday that it had agreed to acquire the distressed debt unit of the troubled investment firm BTG Pactual for about 1.2 billion reais, or about $307 million.The banking group, Itau Unibanco, will acquire 82 percent of the distressed debt unit, Recovery do Brasil Consultoria, for 640 million reais and approximately 70 percent of the firm’s nonperforming loan portfolio for 570 million reais. The portfolios have a face value of 38 billion reais, the bank said in a filing. Both stakes correspond to BTG’s entire ownership of each.

The International Finance Corporation, the World Bank’s private investment arm, will retain its minority stakes in both the firm and the nonperforming loan portfolios.

The price was less than the 1.7 billion reais than BTG had sought, according to multiple people with knowledge of the negotiations. Some in the market thought BTG could have fetched the higher price if it had been more patient. That suggests that BTG continues to face pressure to demonstrate liquidity and good financial health after the arrest of its founder and former chief executive, André Esteves, on Nov. 25.

Mr. Esteves faces charges by Brazil’s attorney general of obstruction of justice and interfering with the broad investigation into corruption involving the state-owned oil giant Petrobras. Although he was released from jail on Dec. 17, he remains under 24-hour house arrest awaiting trial and cannot return to work at BTG. He has resigned as its chief executive and chairman of the board.

BTG’s stock fell by about half in the weeks after his arrest and was still trading near its low at around $15 a share on Thursday.

BTG continues to grapple with turning a corner. In a December research report, Goldman Sachs said that it expected the firm’s cumulative funding gap — as measured by assets versus liabilities — to reach 1.6 billion reais by the end of this year and widen to 11 billon reais by the end of next year.

In a respite, BTG obtained a line of credit of six billion reais this month from the private credit firm Fundo Garantidor de Créditos, which is funded by Brazilian banks.

Yet it continues to be on an aggressive campaign to sell assets, and Recovery was one of its most prized.

“They were putting a lot of pressure to get it done quickly,” one of the individuals with knowledge of the negotiations said of the speed of BTG’s sale of Recovery. That turned off some potential buyers, he said, as BTG “did not want folks to be able to check under the hood” before reaching an agreement.

If BTG had been more patient, that person said, BTG may have fetched as much as two billion reais for Recovery. “There was no reason to push for a close by the end of the year,” he said, other than demonstrating financial health in the calendar year.

Initially, Itau Unibanco was neither BTG’s preferred buyer nor the most likely candidate, according to several people who spoke on the condition of anonymity. BTG was close to reaching a deal this month with the American investment firm Lone Star Funds, according to two people.

Lone Star was widely seen to be the favorite as it had been talking to BTG well before the arrest of Mr. Esteves.

“Lone Star was the pretty obvious buyer from the beginning,” said one of the people, adding that, “I did not think anyone was ahead of them.”

Recovery was particularly attractive to foreign buyers because it allowed them a way to enter Brazil’s lucrative distressed debt market without having to build their own operation here.

Yet talks with Lone Star broke off last week for reasons BTG Pactual has yet to disclose. One individual said the two parties were apart on price by about approximately 300 million reais. Sam Loughlin, Lone Star Funds president of the Americas, did not respond to an email requesting comment.

Before these negotiations, more than 20 firms had expressed interest in Recovery. BTG gave a deadline of Dec. 16 for submitting nonbinding final offers.

Clint Kollar, a managing director with TPG Special Situations Partners, the dedicated credit platform of TPG Capital, met with BTG at its São Paulo headquarters this month, according to one person with knowledge of his plans.

The Fortress Investment Group showed interest until Dec. 16, but was told its bid would be too low, so it backed out. Although Fortress recently closed its macro funds, having faced huge losses in Brazil, according to an article in The Wall Street Journal in October, its credit business, which includes distressed and special situations, continues to have interest in Brazil.

Apollo Global Management had also taken interest in Recovery. Cerberus initially looked at it but balked at a price of more than one billion reais.

The terms of the deal with Itau are subject to regulatory approval.

CEO of Brazil’s largest investment bank arrested

Brazil arrested the CEO of Latin America’s largest investment bank and the governing party’s leader in the nation’s Senate on Wednesday.The arrests stem from an investigation into a money laundering scandal that has undermined Brazil’s government and once-strong economy.

The scandal involves Brazil’s state-run oil company, Petrobras, and has entangled many of the country’s business and political leaders. It has even caused Brazilians to demand the impeachment of President Dilma Rousseff.

Brazil, once a major economic success story, has been plunged into a deep recession by the scandal and the global downturn in commodity prices.

The country’s Supreme Court authorized arrest warrants for Senator Delcidio Amaral and Andre Esteves — the billionaire CEO of BTG Pactual — on suspicions of obstructing justice.

A judge said he issued the warrants on evidence that Amaral and Esteves had tried to silence a key witness in the corruption probe.

BTG Pactual confirmed that Esteves was cooperating with police.

The bank’s shares fell more than 20% on the news.

There was no comment from Amaral’s office in Brasilia. Amaral is a veteran lawmaker for the Worker’s Party, considered close to former President Luiz Inacio Lula da Silva.

The arrests mark a new stage in the investigation into allegations that construction companies paid huge bribes to Petrobras officials and politicians — many from the governing coalition — in exchange for lucrative contracts.

Many investors have already pulled out of Brazil, and the latest developments are likely to keep many away for some time to come.

The country’s stock index, Bovespa, is down 5.5% this year.

“Today’s arrests are meaningful and validate our assessment that the probe will deepen the political crisis into 2016,” Eurasia Group said in an analysis.

Central Bank in Brazil Forcasts 2016 Inflation Above Target Ceiling

While there was a consensus among financial analysts that consumer inflation in Brazil would top ten percent this year, the latest report by the Central Bank (CB) shows that analysts’ forecasts for 2016 inflation are also above the target limit of 6.5 percent. According to financial institutions surveyed by the CB for its Focus Report, inflation in 2016 is likely to reach 6.64 percent.The Focus Report, released by the Central Bank on Friday shows that forecasts for the 2015 inflation increased for the 10th consecutive time, going from 10.04 percent to 10.33 percent. Now, according to the BC inflation is only expected to fall within the target range in 2017.

This is the first time analysts have forecast inflation above the government target for 2016. If analysts’ forecasts are confirmed for this year and next year, it will be the first time official inflation is registered above the target ceiling for two consecutive years since 2002-2003.

According to the government’s system the center of inflation target is 4.5 percent, with a two percent tolerance in each direction, so that consumer inflation falling anywhere between 2.5 percent and 6.5 percent is considered within the target.

Consumer inflation is one of the indexes taken into consideration by the CB’s Monetary Policy Committee (COPOM), when deciding the benchmark interest rate (SELIC). According to financial analysts surveyed by the CB for the Focus Report, the SELIC which has been increased for the past seven consecutive meetings, is likely to remain stable during the upcoming Committee meeting this week, at 14.25 percent. This will be the last meeting of the COPOM this year.

Other indexes, like the IPCA (Consumer Price Index) in Brazil, rose by 0.82 percent in October, and according to the IBGE (Brazilian Statistics Bureau) it the highest inflation for the month since 2002. In this index the inflation rate now accumulates an increase of 8.52 percent for the first ten months of the year, the highest for the period since 1996.

Foreign Investors Buy into Brazil, Lead M&A Activity

Brazilian companies are the cheapest they have been in years, presenting bargain hunters with prime buying opportunities.But foreign investors appear to be keener on the nation’s prospects than Brazilians, many of whom are spooked by the political turmoil that is worsening the nation’s economic slowdown.

Earlier this month, New York’s Coty Inc. agreed to pay $1 billion for the beauty-care unit of São Paulo-based Hypermarcas, expanding its presence in Latin America’s largest economy.

Through October, international investors such as Coty closed on 285 mergers and acquisitions in Brazil, up 5% from the first 10 months of 2014, according to data from PricewaterhouseCoopers. Brazilians, meanwhile, signed 275 deals this year, down 26% from the same period in 2014.

It is the first time since 2000 that foreigners have outpaced locals, according to Rogerio Gollo, partner and head of mergers and acquisitions in Brazil for Pricewaterhouse. “If you had asked me in January, I would not have told you this was coming,” he said.

What has turned the tide for many investors has been the weakening of the Brazilian currency by more than 30% to the dollar so far this year, which has helped foreign investors. In addition, the deepening of Brazil’s economic malaise—exacerbated by weakening political leadership—has hurt local companies.

Such cyclical booms and busts are common in emerging markets, and investors expect South America’s largest country by GDP to bounce back on the strength of its rising middle class and wealth of commodities. For those willing to endure some volatility, betting on Brazil now could pay off handsomely, said PwC’s Mr. Gollo.

“The buyer who is looking at Brazil with a horizon greater than three years is getting a good deal,” he said.

But the current picture is bleak. State involvement in key sectors and loose monetary policy unleashed during President Dilma Rousseff’s first term has left the government awash in debt and struggling to plug a massive budget hole. Reforms have taken a back seat as Brazil’s Congress focuses on the massive corruption scandal at state-run oil giant Petróleo Brasileiro SA, and impeachment efforts against the president.

“When you have a crisis of this magnitude, you need a vision…but the government does not have that,” said Ricardo Lacerda, founding partner and CEO of BR Partners, a boutique investment bank based in São Paulo.

As a result, business, consumer and investor confidence have collapsed. GDP growth is projected to contract by more than 3% this year. Urban unemployment recently hit a five-year high of 7.6%. Inflation is running at nearly 10%. Industrial production plunged nearly 11% in September from a year ago.

Among the hardest hit is Brazil’s auto industry. Vehicle sales through October totaled 2.15 million units, down 24% compared with the first 10 months of 2014. Thousands of auto workers have been laid off or furloughed. Some manufacturers who bet big on Brazil are putting on the brakes.

Chinese auto maker Chery Automobile Co., Ltd. is delaying a planned $300 million investment in its existing factory in the city of Jacareí, said Luis Curi, the company’s vice president in Brazil. Through October, Chery’s Brazil sales totaled 4,704 vehicles, down 38% from the first 10 months of 2014, according to the national auto-dealers association, Fenabrave.

Mr. Curi said the company has been hit by slumping demand and soaring prices for imported parts because of the weak real. “We’re living a perfect storm in Brazil,” he said.

In contrast, Honda Motor Co.’s Brazil sales have increased 15% to 125,061 vehicles so far this year, according to Fenabrave. But the Japanese auto maker, too, is retooling its investment plans amid concerns about the nation’s shaky economy and unpredictable politics.

The company said in late October it would delay the launch of a second Brazil vehicle-assembly plant that was slated to open in the first half of 2016. The new facility, which has been constructed in Itirapina in São Paulo state, will open “according to market developments,” Honda said in a statement. Paulo Takeuchi, director of institutional relations for Honda South America, said the auto maker remains confident about Brazil in the long-run, but is taking a cautious approach for now.

“What concerns us most is uncertainty, both political and economic,” Mr. Takeuchi said.

Brazil keen to further strengthen trade ties with India

Brazil today called for expanding a trade pact with India by adding more products such as frozen chicken (whole) and processed soyabean in the tariff agreement and also stressed on technology transfer and investment in agriculture research. Brazil is also keen to export ethanol and milk products to India and boost shipments of edible oils. 

India and MERCOSUR, comprising Brazil, Argentina, Uruguay and Paraguay, already has a preferential trade pact. 

“We would like to expand tariff agreement,” said Katia Abreu, the Brazilian Minister of Agriculture, Livestock and Food Supply. 

She said that existing agreement is “timid” in field of agriculture and there is a need to expand the base from the current about 450 products to 2,500 products. 

India-MERCOSUR preferential trade agreement (PTA) came into effect from June 1, 2009. The major sectors covered in the offer list under the PTA include meat, chemicals, leather goods, iron and steel products, machinery items and electrical machinery. 

India and Brazil have a bilateral trade of USD 11.36 billion. 

“We can bring frozen chicken (whole) to India. We face difficulty in chicken,” Abreu said at a FICCI conference. 

Speaking on the sidelines, the minister stressed on easing the rules for trade apart from improving the trade agreement. 

“We would like to expand our relations well beyond the area of just tariff. Most important is to improve and better rules,” Abreu said. 

Brazil has been emphasising with all the countries to harmonise and make rules easier, she said. 

On trade agreement, Abreu said: “We currently have about 450 products included in the tariff agreement. We would like to see this figure grow to 2,500”. 

She said that Brazil is interested in exporting ethanol and milk products, which have great demand in India and boost exports of edible oils as well. 

In dairy sector, Brazil wants to help India boost milk productivity. It is keen to bring to India the gene bank for milk-producing cattle as well as embryo and semen. 

Abreu spoke about enormous opportunities for collaboration between Indian and Brazilian agriculture sector through technology transfer and investment in research. 

She emphasised on the need to remove intermediaries and develop an independent commercial relationship between the two nations. 

“Either the two countries could allow the other international players to lead the trade for them or India and Brazil could remove the intermediaries and develop an independent commercial relationship,” Abreu said.

Europe’s Top Banks Are Cutting Losses Throughout Latin America

European banks are on the retreat all across Latin America.Societe Generale SA announced in February that it’s dismissing more than 1,000 workers while exiting the consumer-finance business in Brazil. In August, HSBC Holdings Plc sold its unprofitable Brazilian unit, with more than 20,000 employees. Two months later, it was Deutsche Bank AG’s turn. The German lender said it’s closing offices in Argentina, Mexico, Chile, Peru and Uruguay and moving Brazilian trading activities elsewhere. Barclays Plc is shrinking its operations in Brazil too.
The exodus threatens to deepen Latin America’s turmoil, making it harder for companies and consumers to obtain financing. The region already is out of favor as sinking commodity prices drive it toward the worst recession since the late 1990s. European banks, meanwhile, are looking to cull weak businesses as they struggle to generate profits and meet tougher capital requirements back home.
“All large European banks are under great pressure from regulatory changes and low stock prices to change their business models,” Roy Smith, a finance professor at New York University’s Stern School of Business, said in an e-mail. “These changes have to be quite significant to make enough difference.”

Spain, Switzerland

The exits are opening opportunities for local rivals and global banks from the U.S., Spain and Switzerland willing to wait out the economic slump.
Latin America’s economy will probably contract 0.5 percent this year, squeezed by falling commodity prices and a slowdown in Brazil that’s predicted to be the longest since the Great Depression, estimates compiled by Bloomberg show. That would make it the first recession in the region since 2009 and the biggest since 1999. Demand for investment-banking services is tumbling, with fees plunging 45 percent this year through Oct. 15 to a 10-year low of $817 million, Dealogic said.
“European banks have fairly weak profits right now and in some cases low capital levels,” Erin Davis, an analyst from Morningstar Inc., said in an e-mail. That leaves “little wiggle room” to absorb losses or low profits from Latin America, even if they believe in its long-term potential, Davis said.
Deutsche Bank, which started operating in Latin America in 1887 with a unit in Argentina, has about 269 jobs in the five countries it’s leaving, according to its 2014 financial statements. In Brazil, it has about 334 employees.
“The region is attracting fewer investments, and that reduces the need for investment banking,” Ricardo Mollo, a professor at Insper business school in Sao Paulo. At the same time, demand for loans is waning and late payments are rising.
Brazil, Latin America’s biggest economy, is also the place cuts pay off the most for some European banks. In addition to Societe Generale dropping its consumer-finance unit there, HSBC sold its Brazilian subsidiary to Banco Bradesco SA in a $5.2 billion deal announced in August. Barclays, which had about 150 people in 2013 in Brazil, has reduced the team to 80, people familiar with the matter said.
Societe Generale “remains committed to Brazil and will continue to serve its institutional and corporate clients through its local entities,” the bank said in a statement. Barclays declined to comment.

As for HSBC, Chief Executive Officer Stuart Gulliver has said the pullback was needed as part of a plan to reduce expenses by as much as $5 billion by 2017. Elsewhere in Latin America, Gulliver said in June in an interview with Mexican newspaper Reforma that HSBC would stay in Mexico, after previously saying the country was one of four potential markets the bank would leave.

HSBC Scrutiny

Complicating HSBC’s decisions about the region are money-laundering and tax-evasion scandals linked to Swiss accounts in Brazil. It’s also been under scrutiny in the U.S. since 2012 after it reached a $1.9 billion deferred-prosecution deal to resolve claims it helped Latin American drug cartels launder money.
Global banks with sizable Latin American subsidiaries that operate trading and investment-banking businesses could pick up some of the business European banks are leaving behind, Fitch said in a report, singling out Citigroup Inc., Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, JPMorgan Chase & Co. and Bank of America Corp. Local players in the region, such as Itau Unibanco Holding SA and BTG Pactual Group, might also benefit, Fitch said.
JPMorgan says it doesn’t plan to make changes to its team in the region, while Bank of America, which has about 1,000 employees in Latin America, added 150 people this year. Citigroup sold its consumer and commercial units in Peru, Costa Rica, Panama, Nicaragua and Guatemala, and is maintaining its corporate and investment-banking businesses.

U.S. Improvement

“The U.S. economy is doing better, so it’s normal that U.S. banks are also doing better and being more aggressive in taking risks in Latin America,” Mollo at Insper said.
Argentina is the country where perceptions are shifting the most, 10 days before a presidential election where the two main candidates have promised change from a dozen years of populism led by the Kirchner family. Hedge funds and other investors say the departure of President Cristina Fernandez de Kirchner could bring a more market-friendly government and a profit windfall.
Many Swiss firms are still bullish on the region as well. Julius Baer Group Ltd., the third-largest wealth manager in Switzerland, announced in July it would acquire a stake in Mexican firm NSC Asesores after boosting its interest in GPS Investimentos Financeiros e Participacoes SA to 80 percent in Brazil last year. Credit Suisse Group AG is keeping its team in Latin America, and its Brazilian unit hired 15 people this year for private banking. UBS AG, the biggest wealth manager in the world, is also hiring in the region. Chinese banks including China Construction Bank Corp. and Bank of Communications Co. are buying local lenders and increasing their presence.

Santander’s Confidence

And Spain’s Banco Santander, which withstood Brazil’s 1999 currency devaluation and financial crisis in 2002, remains confident about the country’s prospects. Chairman Ana Botin said in September that reforms under way could mean a return to growth as soon as next year.
For many of her competitors, time has run out for that kind of optimism.
“Going back a few years, global banks were trying to offer all products to all people in all locations, said Richard Barnes, an analyst at Standard & Poor’s in London. “With tightened regulatory requirements, you just can’t really do that anymore.”

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