Brazil extends its private banking reach

Brazil represents 42% of Latin America’s wealth management market in terms of assets under management, both onshore and offshore, according to consultancy McKinsey. The economic growth experienced in the past five years, together with the deepening of capital markets, made the country the largest and fastest growing onshore wealth management market in the region – with 577.2bn reais ($257.7bn) of assets managed locally as of the end of 2013.

All client segments expanded significantly. Local banks ramped up their presence and, as long as interest rates kept a few hundred basis points above inflation, the onshore market seemed stronger than ever. Then 2013 hit, and the gross domestic product grew by just 2.3%. The year started with historically low interest rates of 7.25%, first reached in October 2012, over inflation of 6% – the first time in years that real returns on bonds were close to zero, and the stock exchange stalled. The iBovespa index dropped by 15% in the year.

Changing dynamics

The economic slowdown subdued wealth generation and encouraged clients to move investments offshore, playing to the strengths of international managers. According to banking association Anbima, local assets under management in Brazil grew by more than 20% yearly for each of the six years to 2012. In 2013, growth was more than halved to 9.5%. New regulation, introduced a couple of years previous, allowing clients to invest offshore through local accounts is yet to gain momentum. Higher interest rates, now at 11% over 6% inflation, may encourage local investments in the future, but bankers say that the shift is not yet palpable.

As a consequence, competition increased. “Because net new money was so short last year, competition became very stiff. The moment you have a lot of liquidity events, such as initial public offerings, there’s a lot of money for every banker, but last year, growth was small,” says Joao Albino Winkelmann, Bradesco’s head of private banking. “I haven’t seen anything like that in my life in private banking, it’s one of the toughest [most competitive, markets] of the past 10 years.”

Gabriel Porzecanski, HSBC’s head of private banking in Brazil, says: “In the 10 years to 2012, Brazilians preferred to invest in the domestic market because the local real interest rate was very high, and the [Brazilian] real was appreciating against the US dollar. It was typical for a client to have a liquidity event, say sell a company for 100m reais, and keep all liquidity locally. We have witnessed a tremendous change in the past 18 months, Brazilians now want to be more diversified and invest more internationally.” 

This gives an advantage to firms such as HSBC, which couples its strong local presence with a wide international network. It also provides opportunities to other international wealth managers that want to offer their offshore products and independent advice to Brazil’s ultra-rich.

In March 2014, Julius Baer, Switzerland’s third largest private bank, increased its stake in São Paulo-based independent wealth manager GPS Investimentos Financeiros e Participações, from the 30% it acquired in 2011, to 80%. GPS targets individuals with more than 5m reais in disposable assets. Despite rising interest rates, which typically diminishes the need for advice, the Swiss bank sees great potential in Brazil.

“We still believe that there is strong demand for independent advice; for us, this is more important than the overall market growth,” says Marc Braendlin, who is in charge of Julius Baer’s Brazil operations. “Of the total market, about 10% is covered by independent wealth managers. If you compare this with more developed markets, such as Switzerland or the UK, there is room to grow.”

In a 2010 report, the Swiss Financial Market Supervisory Authority indicated that the number of independent wealth managers in Switzerland was about 10 times the number of banks.

Family values

On the other side of the client spectrum, there are less wealthy, more inward-looking investors, who would benefit from more straight-forward products such as loans, mortgages and insurance. Bradesco’s Mr Winkelmann says that the current offshoring trend among high-net-worth clients is giving the industry a needed push to explore other, potentially very lucrative, products serving this market.

“Once your profits are hurt, you have to find new ways to make money. One way to do this is providing lending, credit cards, insurance products. Years ago, private banks wouldn’t lend to clients; this is a huge opportunity that we are realising now. At Bradesco, two years ago, I would not do those things. Now, we have specialised bankers who can go to a family and set up a whole new [portfolio].”

Mr Winkelmann says that last year, 6% of Bradesco's private banking profits came from lending, and that a target of 10% has been set for 2014.

Services and products for both the very rich and the mass market are appropriate for Brazil. Improved economic conditions have allowed swathes of the population to enter the middle class. But in terms of the private banking market, income remains poorly distributed, with the majority of consumers in the lower income segment – individuals with up to $100,000 in disposable income – or at the very top – those with more than $3m to invest.

Together with Mexico, Brazil has the largest concentrations of wealth in the ultra-high-net-worth individuals segment (31% of total market) and the mass segment (42%) in Latin America, according to McKinsey. Boston Consulting singles out the country for having the largest number of families with financial wealth of more than $100m in Latin America. Brazil's 236 households with more than $100m ranks the country 14th in the world by this measure. 

All in the name

Not all of Brazil's wealthy families are being targeted by private banks, however. Because of the overwhelming size of the country, most asset managers and advisors tend to scout for clients in the richest states of Brazil, such as São Paulo and Rio de Janeiro, according to Rogerio Lot, head of private banking at Banco do Brasil. But there is much wealth outside of these urban areas, including in the less-well-connected interior of the country, where a lot of money is generated in the agribusiness sector.

“Of course, we look for people in big cities who want to invest, but I believe that the secret of our success is trying to understand where the wealth is in Brazil,” says Mr Lot. “Five years ago, none of those wealthy individuals [outside of big cities] were targeted by private banks. As a wealth manager, we have to look for these people. They are not used to buying jewels, or being in the social columns of newspapers; they invest in airplanes and machines for their businesses. They went to those areas [in the interior of Brazil] when it was a jungle and now, years later, their businesses are doing very well. There are some privately owned estates in Brazil that are larger than some European countries.”

Attracting these potential customers, and others, requires local knowledge, a local presence and a well-known brand. This is one of the reasons why Julius Baer has chosen to retain the GPS brand.

HSBC’s Mr Porzecanski stresses the importance of branding: “Brazil is a market with a strong home bias. Even if you have a strong international brand, you have to establish your brand locally, and then you have to deal with the capillarity of the Brazilian market. You may have a big presence in São Paulo but geographically the market is huge; if you fly three hours from São Paulo in many directions, you’re still in Brazil.”

Itaú Unibanco was ranked Brazil's leading private banking brand and the most valuable private banking brand in emerging markets by consultancy Brand Finance. Unsurprisingly, it too recognises the importance of brand in the Brazilian market. “The domestic market is big, and participation of domestic players is dominant,” says Flavio Souza, head of private banking at Itaú. He lists Itaú, Bradesco, BTG Pactual and Banco do Brasil as the key local names.

Mr Souza is optimistic about the growth of Brazil's private banking market this year, which he thinks will range between 12% and 15%. But the market, he says, will remain volatile as uncertainty about the economy will be made worse by political elections in the fourth quarter.

This concern is echoed by Banco do Brasil’s Mr Lot. “This year we have a very complicated calendar. The Carnival [of Brazil] was very late; the 2014 FIFA Football World Cup [will begin in June] and the country will stop; [and] only two months after the sport event finishes, we have elections in October. Volatility in Brazil will continue to be a bit high.”