According to the old joke, Brazil is the country of the future — and always will be. Investment bankers can be forgiven if they don’t see the humor.

International investment banks that were counting on Brazil to make up for problems in their home markets have been sorely disappointed as Brazilian deal volume has slowed down this year and domestic players have won a larger share of the business. Unless the market recovers soon, foreign banks are likely to put their expansion plans on hold or even make cutbacks, industry executives say.
Virtually all the major international firms, including Bank of America Merrill Lynch, Barclays Capital, Deutsche Bank, Goldman Sachs Group and JPMorgan Chase & Co., have been building up their Brazilian operations in recent years, hiring bankers, traders and back-office staff. In contrast to the weakness in the firms’ domestic markets, Brazil’s strong economic growth, unfettered capital markets — a stark contrast to the other BRICs — and surging deal flow persuaded many bankers that the country offered seemingly boundless opportunity.  
The foreign invasion coincided with a big domestic buildup. Leading local players such as Banco do Brasil, Banco Bradesco de Investimento, BTG Pactual, Caixa Econômica Federal and Itaú BBA have beefed up their businesses substantially, as have international banks with a long-standing presence in the market, such as Credit Suisse and Banco Santander. The result is one of the most competitive investment banking markets in the world, with at least ten firms slugging it out for supremacy.
The growing army of bankers is chasing fewer and fewer deals, though. The pace of equity offerings this year has slowed to the lowest level since 2005 as stock prices have tumbled. São Paulo’s Bovespa Index was down 23.1 percent for the year as of late last month. With prospective valuations reduced, a number of companies have postponed plans for initial public offerings of stock. Merger activity has suffered an even bigger decline, running at barely half of last year’s pace. The sudden evaporation of fees is squeezing banks and arousing tensions among domestic banks and some of the newer arrivals.
“I think most of the international banks — including Barclays Capital — that have invested in Brazil recently have done so with a medium-term view of around three years,” says Alceu Lima, head of investment banking for Brazil at Barclays Capital and president of Banco Barclays. “However, the slow equity capital markets activity this year will probably lead some of our competitors to review their head counts.”  
“Basically, the market for IPOs is on hold for now,” says Jean-Marc Etlin, head of investment banking at Itaú BBA. “Whether we see activity pick up depends largely on what happens next in Europe. An orderly resolution of the ongoing regional debt problems could provide the market with a more positive tone.”
Commodity names make up 50 percent of the Bovespa index and telecommunications companies and utilities a further 25 percent, according to Credit Suisse. However, the index no longer reflects the real shape of the Brazilian economy, in which retail and consumption have become much more important. Bankers say issues from these hot sectors — especially consumer — are in the greatest demand by investors and most likely to have a successful flotation, especially if they are priced at a discount to established names in the sector.

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