* 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 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
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
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
"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)