(Bloomberg) -- UBS Group AG’s broker dealer powerhouse is a key part of advanced talks with Banco do Brasil SA to create a local investment-banking joint-venture, according to people familiar with the matter.
The Swiss lender would control the venture, which would handle equity and futures trading as well as investment banking, the people said, asking not to be identified because the discussions are private.
Banco do Brasil, the nation’s biggest asset manager, doesn’t have its own brokerage to trade stocks or derivatives, handing that business off to other banks. The Brasilia-based lender had 1 trillion reais ($244 billion) in assets under management as of July, according to Anbima, the country’s capital markets association. UBS’s broker dealer, which has ranked No. 1 in Brazil equity trading since 2014, is in second place so far this year, according to data compiled by Bloomberg.
The partnership with UBS would be similar to other arrangements Banco do Brasil has with Mapfre SA in some branches of its insurance business and with Principal Financial Group Inc. on pension plans. The structure would give the government-owned bank the majority of capital, but UBS would have the most voting shares. Giving UBS control means the venture wouldn’t have to comply with some of the constraints Brazil places on state-owned entities, such as restrictions on bonuses and hiring.
UBS would gain more access to Banco do Brasil’s trading flows and also the bank’s deep relationships with Brazilian corporations. Banco do Brasil is the biggest lender in Brazil by assets, with a loan book of 686.6 billion reais as of June. Loans to large corporations accounted for about 154 billion reais of the total. The state-owned bank could also help UBS win investment-banking deals that require credit, providing bridge loans for acquisitions or underwriting for local bonds -- markets that are booming this year.
UBS ranks seventh in advising on mergers in Brazil this year and sixth in equity underwriting, according to data compiled by Bloomberg. The Zurich-based lender doesn’t participate in the local bond market.
Sylvia Coutinho, UBS’s Latin American head of global wealth management and chief executive officer for Brazil, and Banco do Brasil CEO Rubem de Freitas Novaes are among those negotiating the deal, the person said.
UBS declined to comment, as did Banco do Brasil, which referred to its statement on Friday where it said it is analyzing alternatives for its capital markets businesses, including partnerships, but there are no binding talks at the moment.
UBS’s broker dealer lost its No. 1 rank in Brazil equity trading this year to XP Investimentos SA as many international investors pulled away from the Latin American nation, according to data compiled by Bloomberg. XP handled 724.6 billion reais in gross value this year, while UBS took second place with 557.9 billion reais, the data show. XP also owns brokerages Clear and Rico, which add an additional 176.6 billion reais to the firm’s total.
UBS’s head of Brazil equity trading and electronic trading for Latin America, Nilson Monteiro, left the firm earlier this year with another executive and took some clients with him to Ideal Corretora de Titulos e Valores Mobiliarios, two other people familiar with the matter said. Another obstacle for UBS: A change in market rules that makes it easier for high-speed traders to use many brokerages to deliver orders, one person said.
UBS sued Monteiro, arguing he wasn’t respecting a one year non-compete agreement that included a remuneration from the bank, according to Mauricio Pessoa, an attorney at Pessoa Advogados who represents UBS. Judge Katia Bizzetto granted UBS an injunction saying Monteiro should give up any management position at Ideal. The judge also imposed a 60,000-real daily fine if he didn’t comply, since Monteiro had “access to confidential and strategic information” at UBS, according to a public filing.
The two parts already reached an agreement, two people familiar to the matter said.
Monteiro and UBS declined to comment on the agreement.
UBS’s brokerage, which doesn’t operate in the retail market in Brazil, has been the nation’s biggest in electronic trading, where foreign investors dominate. The share of foreigners on equity trading markets in Brazil fell to 45.7% this year through Sept. 5, from 48.9% last year, while local retail investors increased to 18.3% in the same period, from 17.9% in 2018, according to Brazil’s stock exchange B3.
Although UBS lost market share, its revenue is still growing as the market overall expands, according to a person familiar with the matter. Total daily equity-trading volume in Brazilian markets through Aug. 31 this year was 43% bigger than the same period last year.
--With assistance from Steven Arons, Nicholas Comfort and Vinícius Andrade.
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