The landscape of Latin American private banking has changed over the financial crisis but the region’s wealthy population remains optimistic. Opportunities abound for those that remain in the business.
LATIN AMERICA’S WEALTHY have suffered losses in their portfolios, but by comparison with high-net-worth individuals elsewhere they have escaped the financial crisis lightly. In 2008, the number of millionaires in the region decreased by only 0.7%. North America lost almost 20% of its millionaires, and Asia and Europe about 14% each, according to Capgemini Merrill Lynch’s 2009 World Wealth Report. Furthermore, changes to the level of wealth were much less noticeable in Latin America. The millionaires of north America, Europe and Asia Pacific lost about 22% of their wealth; Latin America’s high-net-worth individuals lost 6%.
As a result, Latin America has been a relatively good environment for private banks. Local and foreign private banks had been increasing their businesses in Latin America over the past six years as wealth creation accelerated. Indeed, second only to Asia Pacific, Latin America has had the largest growth forecast for wealth assets. According to a World Wealth Report forecast, from 2006 to 2013 the region’s wealth will grow 49% to $7.6 trillion.
But while relative domestic stability, and even optimism, have reigned among Latin America’s wealthy, the private banks that serve them have not been immune to the less cheery economic environment elsewhere. The result has been a changing landscape in Latin American private banking.
The rankings change
Until mid-2008 the make-up of the private banking industry in Latin America resembled that in most other regions. UBS dominated market share, followed by two or three large global private banks. Local private banks and smaller, primarily European, private banks shared the remainder of the clients’ wallet. "Those rankings have changed," says Lywal Salles, chairman of Itaú Unibanco International Wealth Management. His firm has certainly moved up in the rankings, and it is something of a change in the natural order when it comes to private banking in emerging markets.
The private banking message that emerged over the first years of the century was clear – globality, investment banking ties and largesse were what clients needed. Local players could expect to provide a bank account to the wealthy, and perhaps offer some lending or a mortgage, but theirs was a role reserved for the less profitable super-affluent.
But the global financial crisis has proved that message to be misleading. Globality and investment banking ties have been exactly what the wealthy in Latin America wanted to avoid over the past 12 months. The search for familiarity and a stable environment has drawn Latin American high-net-worth individuals to their domestic private banks.
Evidence of this shift is most noticeable in Brazil. The largest and most mature economy in Latin America, Brazil has several established and experienced local private banks in addition to global private banks. The country also boasts the largest number of millionaires in the region, and is also climbing the global rankings. In 2008, Brazil overtook Australia and Spain to rank 10th in terms of high-net-worth individual residents.
"The local banks have benefited from the events that have happened across the globe," says Salles. "US and Swiss institutions have been heavily affected by the asset-price meltdown, their own internal crises, Madoff investments – various things..." Salles says his firm saw inflows of clients and assets in the second half of last year, although that has since slowed.
Anthony DeChellis, head of private banking Americas at Credit Suisse, says that during the financial crisis local Latin American banks were regarded as safe harbours by some high-net-worth individuals because they had not been drawn into the financial crisis.
In part, the local banks have benefited simply because the US and Swiss banks have lost some of their prestige. Top global private banking names such as Citi, UBS and, to a much lesser extent, Credit Suisse, all had periods of extreme financial pressure over 2008 and the first half of 2009. For Credit Suisse and Citigroup that pressure has since eased, and while there has been reputational damage, the Latin American private banking business remains solid. Both firms have deep roots in the region, which has kept clients loyal.
That is not the case for everyone, points out Salles. "Prestige and reputation have been affected, but, in some cases, capacity to invest has too. Some banks have had to shift their priorities, and Latin America is no longer in the top three."
This was the case for UBS. In April this year it sold Banco Pactual back to its original managing partner’s firm, BTG, for $2.5 billion just three years after buying it for about the same price. In addition to asset management and investment banking, Pactual had a growing wealth management business in Brazil. At the time of the 2006 acquisition, the wealth management business managed $4.6 billion. As a result of the sale, UBS’s assets fell by SFr6.3 billion ($5.9 billion). The sale this year was "consistent with UBS’s policy to continue to reduce its risk profile, strengthen its balance sheet and sharpen its business focus," said the firm.
The retreat of UBS, combined with reputational damage suffered by the other large global private banks, has opened up opportunities to the local banks. "But the success of the local banks will depend on how proactive they are in seizing those opportunities that are now available to them," says Salles.
After the merger of Itaú and Unibanco in March this year, the firm now has a 40% market share of the Brazilian private banking market, says Salles, and there are plans to not only grow that but to expand beyond Brazil, now that the firm has more muscle. One advantage Itaú Unibanco has is that there "is no need to look beyond Latin America," says Salles. "We are not looking to Asia, Europe or the US, so can remain focused." He says that the number one priority for Itaú Unibanco is Mexico, followed by Chile, Peru and Colombia. "There is nothing on the table right now but we are looking at opportunities to acquire teams of relationship managers or to acquire the portfolios of clients from banks which, unlike us, do not have Latin American private banking as their core business. They may wish to sell that business."
Beyond Brazil
Brazil remains the core country to target for the region’s private banks, and the economy’s growth prospects are less dire than elsewhere around the world. GDP is a good indicator for wealth creation, and Brazil’s GDP grew by more than 5% in 2008. This year performance is somewhat muted, and GDP growth is expected to fall to about 1%. However in 2010 it is expected to rebound to 3.5%, according to the country’s central bank.
Mexico is also top of private banks’ priorities although perhaps to a lesser extent than a year to two years ago. Brazil and Mexico account for about two-thirds of all of Latin America’s millionaires. But Mexico’s close economic relationship with the US, along with swine flu, has affected the economy. Mexican GDP is forecast to contract by 6.3% this year, although next year it is expected to grow by about 3%. HSBC has a big presence in Mexico through its 2002 acquisition of Banco Internacional (Bital). Peter Yeates, head of private banking, Latin America, says there is still opportunity for growth in Mexico. "The valuation of people’s portfolios has diminished and wealth has been affected in Mexico, but there are still people making money and there is a lot of business to be done there," he says. "Even in this environment there are still opportunities for families to sell their businesses, for example, and when they do they will need advice and then management of that wealth." Credit Suisse bolstered its Mexican private banking business this year when it went onshore. DeChellis says the firm would consider an acquisition in Mexico if something obvious came up, but until that time it will build organically. Credit Suisse Private Bank increased its onshore presence in Brazil when it bought asset manager and private banking company Hedging-Griffo in 2007.
Breakdown of High-net-worth individuals’ geographic asset allocation
2006 to 2010 estimates
Source: Capgemini/Merrill Lynch Financial Advisor Surveys 2007, 2008, 2009
The second tier of countries is Chile, Peru and Colombia. Chile is considered a mature market in private banking but is often overshadowed because it is small compared with Brazil and Mexico. Citi has a strong presence in Chile resulting from the 2007 merger of its Chilean banking assets with those of Banco de Chile. "In Chile, we are very satisfied with our partnership with Banco de Chile; we are also looking to see if we can do more in Peru onshore," says Alexander G van Tienhoven, chief executive of Citi Wealth Management in Latin America.
Back onshore
The move onshore is also reshaping the Latin American private banking landscape. One private banking executive says he believes that UBS’s retreat was partly because it could not get the onshore model right. "There always seemed to be some confusion as to whether to operate a model whereby clients had access onshore, but were serviced offshore, or whether to be onshore serving clients onshore. The model broke down in the US, and I think that, and the firm’s financial situation, led to the rethink in Brazil."
The onshore/offshore debate has been raging for many years, but now, more than ever, assets have a reason to be onshore. For one, investment opportunities in domestic markets look appealing. Optimism about domestic economic growth in Latin American countries means that high-net-worth clients want to invest in domestic companies, and therefore book onshore. Real interest rates are also higher than outside Latin America, encouraging money to return. Brazil’s interest rate is 9.25%. Even with inflation tipped to be 4.5% this year, it is much more attractive than the US’s 0.25%. In Brazil, legislation has also allowed money that went offshore in the past 10 to 15 years to come back, says Salles. "People are taking that window of opportunity," he says. There has been talk of an amnesty in Mexico also. Salles says for money that left Brazil 30 to 40 years ago, there is little chance of it being able to come back onshore, however. DeChellis says that the move to onshore from offshore is not as prominent as is believed, rather it is new wealth that is staying onshore because of the optimism. "That said, where banks with complementary offshore businesses will benefit is for those Latin American private clients who want to have currency diversification or international investment opportunities," he says.
Mexico, Houston, New York, London and Geneva therefore remain important booking centres for Latin American clients, although bankers say Miami is becoming increasingly relevant. The US is seen as politically safe, and there is a comfort with dollar-based assets. Miami has also become something of a second home for Latin America’s wealthy as the price of vacation homes in Florida has plummeted.
Turning a profit
Being offshore is also more profitable for the banks, and it can be a struggle to make an onshore business succeed. "Onshore businesses tend to be less about products, so therefore the margins are lower," explains van Tienhoven. And it can depend on what type of product is sold. In Brazil, where products are more developed and alternatives and structured notes are sold, margins are higher than in such countries as Mexico, which is more conservative and less mature.
Putting further pressure on margins is the move away from riskier products to cash and fixed income. "Evidently when you have a movement into more conservative investments like treasuries or cash, you have a different revenue stream," says van Tienhoven. "You have to readjust your expense base, or it can be difficult to focus without the same levels of profitability." He says the relationship with the client is crucial. "We have remained very close to clients over the economic crisis, in constant dialogue and altering risk-return profiles when necessary. We have a big onshore presence which is at a low margin already, so we have been less affected than others perhaps would be."
However, margins might start to pick up. Private bankers are already reporting an uptick in interest for new investment opportunities. HSBC’s Yeates says it is the high-net-worth clients rather than the ultra-high-net-worth clients that are feeling more confident. "In the ultra-high-net-worth space there was greater exposure to public companies through ownership, and falling share prices destroyed a lot of value," he says. Brazil’s stock exchange, Bovespa, lost 19% in the 12 months to July 15 2009.
Van Tienhoven agrees that Latin American clients are beginning to get back in. "Over the past two months, there has been some repositioning into alternatives. Last month we saw some money going into distressed, long/short and fixed-income funds."
Furthermore, bankers say that the corporate pipeline is beginning to fill. In Latin America, investment banking and private banking are highly correlated since most companies are held privately by high-net-worth owners. "The IPO market should get back on its feet again some time in the second half of this year, and that will have a positive impact for private banking businesses," says Salles. "There’s a lot of opportunity. Private banking is a good business to be in right now in Latin America."
Euromoney - 17 Aug 2009
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