THE BANKER (FINANCIAL TIMES): The battle for LatAm riches

Fund managers from across the globe are studying Latin America, once the Cinderella of private banking, and are liking what they see. The region’s wealthy are shaking off their reputation for producing dodgy fortunes and salting them away in Miami and Switzerland. Instead a newly-moneyed class is bringing cash home to invest in the region’s burgeoning capital markets and appreciating currencies. 

Today, the region is the favourite for expansion-hungry international private bankers suffering in home markets that are mature or in decline. The region beats out Asia too. Indeed, “interest in primary region cross-border distribution is higher by a margin of three to one compared to Asia,” according to Daniel Enskat, head of global consulting at Strategic Insight in New York. Large, concentrated asset pools in Latin countries and strong growth prospects are creating significant opportunities for global asset managers and service providers, chimes a State Street report.

The region is a relative minnow with $2.25 trillion in total assets of which $1.4 trillion is in mutual funds, compared to the US and Europe which have $13 trillion and $10.5 trillion, respectively, says Mr Enskat. But the difference is that growth in Latin America has been vertiginous and will continue. The mutual fund industry alone could reach between $2.8-3.6 trillion in assets by the end of the decade with pension funds adding another $3 trillion, he says.

Banks are making hay and positioning the region as a strategic priority. “We have been growing 17-18% per year for the last six years in Latin America,” says Ricardo Manuschevich, market manager for the Southern Cone at JPMorgan. Santander grew assets in the region 15.65% last year in dollar terms to reach $67.9 billion. “The region has entered a virtuous circle with raw materials and consumer demand driving growth. That is fundamentally changing the pyramid of the population with a rapidly-growing middle class. In countries such as Chile, Brazil and Mexico this is happening at a very fast pace,” says Luis Moreno, head of Santander private banking strategy and marketing.

The region’s wonky income distribution skews riches to a high number of very wealthy and very poor, helping explain why HNW has long been dynamic in the area.

Economic Boom

The region’s strong economy, an upsurge in currencies, and deeper local financial markets are making wealthy clients question the age-old Latin practice of offshoring. “Latin America came through the financial crisis relatively well and local investment opportunities have skyrocketed, making people much happier to invest within the region,” says Peter Yeates, head of private banking Latin America at HSBC.

“Clients are getting more confidence in their own region and seeking local advice as well as keeping a larger portion of their assets in their home country,” agrees Paul Arango, managing director of private banking, Latin America at Credit Suisse.

This is a seismic change and requires international asset managers and private banks to think local. At the same time, the banking crises in the US and the more recent European sovereign debt crisis has left European banks vulnerable to asset and talent poaching.

“There are concerns about foreign banks and European banks are a particular worry. The result is that Brazilian banks left the crisis in a much stronger position and with a better reputation,” says one senior Brazilian banker.

US and European banks are quick to counter the perception that they are less trusted. “We didn’t lose many accounts during the crisis and have most of the same accounts as before. In Mexico we are seen as a local player thanks to the ownership of Banamex. Today, we’re recruiting talent from European banks and able to take market share from them,” says Jose Fuentes, CEO, Citi Private Bank Latin America. 

Santander is among the strongest banks in Europe with market and business-line diversification, says Mr Moreno. Its huge presence in Latin America allows it to cover the full range of clients, he adds. “We reach clients via our huge branch network and we have dedicated segments for each wealth range. We adapt to the clients’ needs and size and tailor specific offerings as their wealth grows and leads them to our private bank,” he says.

Whatever the level of trust in foreign banks, local banks are doing well. The case of Brazil, which has low foreign bank penetration compared to most of the region, is particularly stark. BTG Pactual had a negligible $250m in 1999; it now has close to $23bn, says Rogério Pessoa, wealth management co-head at the bank’s São Paulo headquarters. That has come despite the vicissitudes of the bank’s ownership. UBS bought Pactual in 2006 and UBS Pactual took a hit during the crisis when its Swiss parent was struggling with losses and US tax evasion accusations. It was a “tremendously stressful period with UBS, given the credit crisis,” Mr Pessoa admits. Since then, things have looked up. Assets jumped 50% in 2010 and a further 30% last year, he says. Partners co-invest in funds with outside investors, which sparks confidence, he says.

There’s been a sea change in attitudes with HNW clients seeing Brazil a safe place to invest with a developing financial market, says Joaquim Levy, chief strategy officer at Bradesco Asset Management in São Paulo. Client profiles are changing too. Wealth creation in the region is being driven by corporate activity with M&A activity fizzing in the region. “It’s no longer just old money and these new clients are more knowledgeable, more shrewd,” explains Levy. “They are often capable operators who have built up their own business and so understand the financial marketplace,” he says.

To keep up with the trend to onshoring and compete with the locals, private banks are retooling strategies to ‘tropicalize’ themselves.

JPMorgan, the heavyweight of foreign private banks in the region, is seeking to adjust to the tendency to invest in local markets. “The way that the business is evolving will require us to have more local capability in the future in Brazil, Mexico and Chile. Clients are interested in investing locally. Brazilians are allocating 50% of their liquid worth in local products and Chileans 30%,” says Mr Manuschevich. “The local markets are just more transparent today and investors feel comfortable investing there,” he says.

Asset managers are looking to pick up on this trend by piggybacking on the growing appetite for open architecture. “Open architecture has a tendency to grow over time no matter where you look. That is happening in the region, but just not as quickly as in other places,” says Bill Pingleton, managing director for the Americas at Franklin Templeton. “It will arrive though,” he says. Franklin has been growing assets by over 20% per year from the region.

Credit Suisse, which owns one of Brazil’s most famous wealth and asset managers in Hedging Griffo, is also looking at onshoring in other markets. It has a license in Chile to act as a broker-dealer and give advice to clients and is also onshore in Mexico, says Mr Arango. At the same time, Brazilian banks are going after Hispanic business outside of Brazil. “Brazilian banks are a new entrant in Hispanic Latin America and we find ourselves competing with them in Miami and New York,” he says.

Investment changes

Onshoring is calling for substantial changes in underlying investment portfolios just as Latin investors are demanding more sophisticated and complex products as they ditch fusty fixed-income, where returns are rapidly falling as economies stabilize and rates fall. Bankers are responding by grappling with a range of new products, Asian equities are particularly popular right now, at a time of a profoundly unpredictable global economy and stomach churning volatility in financial markets.

The move to riskier assets is nuanced though. Brazil continues to have high, if rapidly falling, real interest rates relieving the pressure to find returns elsewhere. In Venezuela, real rates are negative. The impulse to move out of bonds and into higher returning assets is also being checked by weak performance out of global stock markets and thinly-traded markets at home. “We have as much as 30% of our clients’ money in cash, which is high by historic standards,” says Mr Arango, noting that in some areas that is earning negative real returns. The bank is advising Latin clients that have been more fixed-income oriented to look at equities with higher dividends as an alternative.

That has put barbell investment strategies, where the bulk of investments are kept in low risk fixed-income investments with a small portion in high-risk assets, in the limelight. Higher risk investments include real estate and private equity investments either in Latin America or in developed markets, says Mr Fuentes.

In Brazil, it is the top end that is proving most willing to diversify. They are increasingly comfortable with illiquid markets such as private equity, Mr Levy notes. “These people are not just trying to preserve assets and capital; they really want to invest and expect returns from domestic and international assets. They want real diversification,” he says. His clients are picking up more real estate, playing further out on the government yield curve, and moving into corporate and structured bonds, he says. The opening of the Brazilian Depositary Receipt market, which lists US companies on the local market, is giving access to blue chips onshore, he adds.

“Fifteen years ago, Brazilians sent 80% of their wealth abroad or left them in very conservative fixed-income instruments at home. But clients don’t want that mix any more and are looking for diversity and a wider range of products,” agrees Mr Pessoa.

Priority markets

As they survey this land of promise, bankers are having to decide which countries to focus on in what is a heterogeneous region. Latin America has a confusing array of legal frameworks and few of the markets are of size. Brazil dominates with $1.4trn of the total assets and is growing faster than the region as a whole. Private banking accounted for R$434bn (US$238bn) and assets jumped 21.6% last year, according to Brazilian financial markets association ANBIMA. But Brazilian legislation is finnicky. Mexico, in second place, has a much lower $250bn in assets to play with, but a more open industry.

For most bankers, Brazil cannot be ignored while Mexico and Chile continue to be in vogue. Chile has the most sophisticated asset management industry in the region and is a significant net exporter of capital thanks to its large pension fund and HNW monies. It is being eyed as an example by Peru and Colombia where a surge in pension fund and wealth assets would overwhelm teething local financial markets.

“Chile, Colombia and Peru all have very strong economic prospects and are in HSBC’s list of leading economies that will be moving up the rankings through 2050,” says Yeates. He also sees more intra-regional investments. Ultra HNW Latins are investing in Brazil and betting on the real, one of the strongest currencies over the last two years, he notes.

At the other end of the scale are markets which have significant pockets of wealth but where it is difficult to operate onshore, such as Argentina and Venezuela. Many wealth managers and private bankers tread a weary path in these markets, but others continue to see opportunities. “Argentina still has pockets of wealth but unpredictable policies make this a game of capturing market share from your competitors,” says Mr Pingleton. Much Argentine wealth is parked in neighbouring Uruguay.

Even the offshoring market has been subject to flux. Before the Patriot Act, much Latin offshored money came into the US but much has since been redirected to Europe, Hong Kong and Singapore, says Mr Pingleton. Panama is emerging as a rival centre too, he says. While there are lots of private banks in Panama, there are lingering questions over the transparency of the market.

Business models

The next great challenge for banks in the region is getting to grips with the widening base of HNW and mass affluent clients.

Full-service banks say they provide all-in-one solutions for a wide range of wealthy clients. Their investment banking and retail arms feed into their HNW management solutions. Santander for one has concentrated on building domestic private banking, leveraging existing relations and paying particular attention to Brazil, Chile and Mexico. “We take a full banking approach where we manage all a client’s needs from investing their wealth to retail banking transactions. After all, even the richest man in the world needs a credit card account,” says Moreno.

Private banks counter they are not compromised by the conflicts of interest seen at retail banks with an asset management arm and offer a differentiated service and aspirational brands. Moreover, privately they say they can remunerate their executives at the market rate whereas commercial banks are hamstrung by internal wrangling. 

But it will be hard work for pure private banks to step down into the HNW segment. “We are putting many more resources into HNW. This is a rapidly emerging wealth segment that you just cannot ignore,” says Mr Manuschevich. It’s a trickier market to operate in where the identification of potential clients is more onerous, he admits. “These aren’t the families you read about in the business pages of the newspaper every day,” he says. The much-broader mass affluent sector will remain the preserve of local banks.

The Latin America business model relies on relationships are banks need to stick it out for the long haul. “You need a franchise with a long history so you can build up knowledge of families and relationships. This is a relationship-oriented market where clients want to know who is in charge of them personally and they can take a very detailed interest in transactions,” says Mr Fuentes. Latin clients are stickier than US counterparts, with many staying with the same bank for 20 or 30 years, he notes.  

(This version is an unedited version of the final article)

This entry was posted in Articles, The Banker. Bookmark the permalink.

Comments are closed.