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Broker and Broker | A Lean Year for Intermediaries


Member brokerages of ANBIMA — Brazilian Association of Capital and Financial Market Institutions

Source: Valor Econômico— Portal ClippingMP.
Translation: C. Brayton

Frustrated by growing costs, most Brazilian independent brokerage houses will close out 2012 in the red. In a survey of the 27 largest Bovespa traders not tied to the major banks, 16 lost money in the first three quarters of 2012.  Among the  houses operating in the black, only one reported profits higher than R$1 million — US$500,000.

The year was notable for internal restructuring and new product distribution strategies. With a view to the future, brokers in this sector are searching for partners in order to survive.  The goal is to rationalize and reduce costs to compensate for lesser margins.

Edemir Pinto, of the BM&F: “Brokerage houses need to think about consolidation.”

This was a year of internal restructuring and new product distribution methods, following the example of the investment houses.

In view of the sector’s murky outlook, these brokers have committed to the strategy of joining forces and looking for partners to help them survive. Their goal is to reduce fixed costs to compensate for lesser margins.

The leading player in the brokerage  space,  XP Investimentos, earned a mere R$ 5 million with its brokerage operation, not counting the group’s other business activities.

“Expenses increased because we doubled our workforce,” says founding partner Guilherme Benchimol. After suffering consequences of the European crisis, such as the slowdown in the new IPO pipeline, brokerage houses also lost revenue from custody of customer accounts because of cuts to the basic interest rate.

In this scenario, it is generally believed that a new wave of industry consolidation is on the way.

Case in point: BTG Pactual acquired 100% of the Colombian Bolsa y Penta just last week. Another: In November, BTG Pactual completed a merger with the Chilean Celfin Capital.

I wonder what the market would look like taking into account cross-border M&A? In light of efforts to engage regional and international market players in the São Paulo stock and commodities exchange, it would make sense. A consolidated intercontinental platform like the NYSE-Euronext complex — something like the interoperation agreement of the Bovespa and the CME.

A study by the consultancy A.T. Kearney, in partnership with financial consultant Finenge — the two closely monitor the brokerage sector — indicates that the number of independent brokers should shrink 30% in the next two years. This translates to around 25 of the 84 brokerage houses currently authorized to trade on the exchange.

The Kearney/Finenge reports have not been published by their authors yet as far as I can determine.

The BM&F’s Operational Qualification Program is imposing more stringent conditions.

Certification depends on the maintenance of well-trained teams and a contingency plan. In other words, the entire infrastructure — employees and IT — must be duplicated as a risk management measure.

Considering the competition in the sector, where the current trend is to combine traditional “home brokerage” and the sale of such products as LCI, CDB and mutual funds, heavy investment in IT is obligatory, “brokers should consider consolidation, mergers or partnerships.

Among industry execs, there seems to be little or no resistance to this imperative. “This strategy presented the industry with an excellent way out,” says BM&FBovespa president Edemir Pinto.


The exchange, meanwhile, is taking part in a study of ways to restructure the brokerage market in Brazil. The group includes Anbima — the Brazilian Association of Capital Market Participants — Ancord — the National Association of Brokers and Distributors — and the global custody house Cetip. The Banco Central and the CVM — equivalent to the U.S. SEC — will accompany the initiative as observers.


Silvana Machado, a partner at A.T. Kearney, sees larger brokerage houses on the verge of acquisitions, but calls special attention to a trend toward mergers among smaller institutions.

“We can expect two or three mergers in 2013,” she said. Two brokerage mergers took place in 2012: The merger of Prosper and Planner and the acquisition of 100% of Banif by Caixa Geral de Depósitos (CGD).

“All the brokerage houses have been approached about partnerships or consolidation. What is more, at least three foreign institutions are considering whether to enter the Brazilian market,” says Aleixo Vaquero, a partner at Finenge.

The A.T. Kearney study identifies the following as merger or acquisition targets:

  1. Alpes
  2. Ativa
  3. Concórdia
  4. Gradual
  5. Mirae
  6. Octo
  7. SLW
  8. Socopa
  9. Solidez
  10. Spinelli
  11. Título
  12. Tov
  13. Um Investimentos
  14. Walpires

[[ See sidebar for brokerage house reactions to this analysis ]]

Although the sector is home to 84 brokerage houses, it is actually highly concentrated. According to A.T. Kearney, the five largest brokers in terms of volume represent 57% of the market.  The top ten share 71% of total revenues.

The challenge during an industry consolidation is to find an ideal partner. It is hard to analyze the financial condition of a broker, and one of the most difficult to gauge has to do with tax  liability.

During the sale of shares in BM&F and Bovespa held by brokers in 2007 — the year the merged exchanges demutualized — part of the profits was not taxed. The federal tax authority questions the tax owed on profits from the sale, alleging that the exchanges were signing assets over to the brokers.  Before 2007, the  BM&F  and the Bovespa themselves figured on the list of brokers.

“The issue is pending. Although some banks and brokerages are setting aside contingency accounts, there exist legal ways to avoid having to do so,” says attorney Celso Costa, a partner in the banks, insurance and capital markets practice at Machado Meyer. The firm is representing more than 10 brokerage house in the case.

Valor discovered that among the 15 independent brokerage houses  with the highest trading volume, taking into account the amount reportedly held in reserve in the event of a disfavorable verdict, the set-aside totals R$ 73 million

Another barrier to consolidation of the sector involves family firms whose owners are unwilling to surrender control.

“A deal makes sense only if the two parties complement one another in some way,” says Aleixo. “For example, a broker that works with individuals could join forces with another focused on derivatives in the BM&F.”

Few such partnerships were born this year, but rumors were widespread.

One such rumor is that Magliano was closing a deal with Spinelli. Raymundo Magliano Neto, who succeeded Raymundo Magliano Filho at the helm of Magliano, admits having talked to quite a few brokerages. “But Spinelli was merely one among many. There is nothing of substance to report.”

The problem is the lack of consensus about the performance of the stock market.  “The ideal would be a partnership, but how can you negotiate one when one party is bullish and other is bearish?” Magliano said

Among brokerage houses suffering losses this year, two are rookies –Octo Investimentos, in business since mid-2011, and Clear, in business for only 7 months.

It is therefore reasonable to conclude that these losses directly reflect the investments made.

At SLW, in the meantime, it was a “housekeeping” year, says CEO Antônio Milano Neto. SLW’s R$6 million losses as of September is attributed to expense related to layoffs as well as investment performance. This year, SLW invested R$ 3.3 million in technology and celebrated achieving its PQO certification from the exchange.

Icap, which suffered the most extensive losses of the group, says its results are gradually recovering and that the company, which does business in 300, remains firmaly committed to Brazil. “The individual investor market is filet mignon,” says Paulo Levy, CEO of the “home broker”.

Fator Corretora, in turn,racked up losses of R$ 4 million between January and September. Fator CEO Rogelio Gonzalez says the company’s workforce has been cut by 42%.  “This is not going to be a good year. It will resemble last year, but at least we have made adjustments and taken precautions.  (Colaborou Aline Cury Zampieri)