UPDATE 1-Cetip's investments to trigger double-digit expenses growth
* Capital spending needed to develop new products
* Fourth-quarter expenses were flat sequentially
* Cash position opens room for prepayment of bonds (Recasts to add details on expense growth; adds background, share performance throughout)
By Guillermo Parra-Bernal
SAO PAULO, March 8 (Reuters) - Cetip SA Mercados Organizados may expand expenses at a double-digit pace this year as Brazil's largest clearinghouse speeds up development of new products such as a registration platform for mortgage loan liens, Chief Financial Officer Francisco Carlos Gomes said on Friday.
Sales, general and administrative expenses, which last year grew a little more than inflation, will be spurred by capital spending as Cetip diversifies its product portfolio, Gomes said on a conference call to discuss fourth-quarter earnings.
Some of the new products include the platform to register mortgage loans, which is being developed jointly with U.S. technology provider FNC. Gomes expects the platform, which could help banks speed up credit analysis and create standardized mortgage contracts for securitization, to be ready in May.
"We will have an increase in expenses via capital spending that won't translate into a significant decline in margins," he said. "Nor will the higher capex translate into slower cash generation. Expenses won't go on a worrisome upward trend."
While those new products should help Cetip earn more revenue from a fast-growing market for home loans, the company's motivation may also be to prepare for competition. Shares fell 24 percent in the past year on concern that exchange operator BM&FBovespa SA's plan to expand aggressively in debt markets could erode Cetip's dominant position in that segment.
The success of Cetip's strategy of "innovating to facilitate life for its customers," as Gomes put it, may not only hinge on the acceptance of new products among banks but also with the clearinghouse's ability to retain clients by charging them lower fees for services.
Banks, Cetip's largest clients, are cutting costs to navigate through a murky environment of low interest rates, slow economic growth and government pressure to cap their returns. One obvious way to streamline expenses in the banking system is pressing suppliers like Cetip to cut prices.
On Thursday, Cetip posted 77.4 million reais ($39.5 million) in fourth-quarter profit, slightly missing the 78.5 million reais estimate in a Thomson Reuters poll. An unexpected surge in discounts to clients, reflecting Cetip's decision to share scale gains with market participants, was the main reason behind the profit miss.
Net income at the São Paulo-based company rose 23 percent from the prior quarter and 19 percent on an annual basis. Investors tend to follow Cetip's sequential data more closely than year-on-year numbers because the former helps them see operational and sales performance trends.
SG&A expenses remained stable on a quarter-on-quarter basis, the company added.
Analysts including Marcelo Henriques of BTG Pactual Group have for months warned that competition risks, as well as the need to diversify revenue, could result in continued high operating expenses and a larger headcount. Staff grew 10 percent last year.
"Capital expenditures is a question mark, especially after investments soared from 10 million reais in the third quarter, or 4.8 percent of net revenue, to 16 million reais in the fourth quarter, or 8 percent," Henriques wrote in a Friday note.
To mitigate concerns over the impact of higher investments, Cetip is choosing to develop those new products in partnership with other companies. "That helps us put a lid on risk and costs and take advantage of the synergies," Gomes added.
Boosting the company's bottom line was a 50 percent tumble in financial expenses after lower wholesale inflation pushed down the cost of servicing Cetip's inflation-linked notes.
The company has also been pre-paying some debt, Gomes said, adding that "every time that our cash position allows it, we will seek to prepay debt."
($1 = 1.95 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Gerald E. McCormick and Nick Zieminski)
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