For many foreign banks, entering Latin America’s private banking scene is a natural step. Many are now entrenched in the region, have acquired local institutions with a healthy client base, and see the benefits of catering to the onshore market, particularly if collaboration can be struck with foreign headquarters.
Building trust
The idea of an onshore private banking operation backed by a foreign partner also builds trust with potential customers. To strengthen this notion, banks are ensuring their onshore teams seek advice and support from offices elsewhere. HSBC’s onshore teams in Latin America work with its private banking units in Miami, New York, San Francisco and Los Angeles.
One market that private bankers covet is Mexico, which has enjoyed a relatively stable political and economic climate. This is convincing wealthy clients to stay onshore and look eagerly for more local financial options, say bankers. Doubtless the trend is also tightening competition.
“All the major players are here,” says Jaime Alvarez, director of private banking for BBVA-Bancomer in Mexico, a unit of Spain’s Banco Bilbao Vizcaya Argentaria. “We have clients saying: ‘Hey, I’m confident in Mexico and I’m now ready to see what I can do from here’.”
Jorge Suárez-Vélez, head of private wealth management in Latin America for ING, the Dutch financial services giant, agrees. “Mexico is a natural market for any private banking entity,” he says. “The challenge is to provide clients who are investing their wealth in both pesos and dollars with alternatives that are complementary and make sense with their portfolios.”
However, getting a firm grip on the size of Latin America’s onshore market is tough. Many private bankers in the region are unwilling to speak about the business in specific terms, preferring to take a more general view.
Deals pay off
Judging by the numbers, private banking divisions in Latin America are achieving good returns. In 2003, Spain’s Banco Central Santander Hispano acquired the Latin American wealth management operations of the Coutts Group, the international private banking arm of The Royal Bank of Scotland. At the time of the acquisition, Coutts managed $2.6bn in assets for more than 1400 clients in the region. The deal is apparently paying off. Santander, which says the bulk of its international private banking business is in Latin America, not Spain, says that during the first nine months of 2004, its private banking net income grew by 40% in dollars – 27% in euros – year-on-year.
Mr Alvarez adds that private banks are anxious for customers to take advantage of the development of the region’s capital markets, along with the elimination of exchange controls in major markets like Mexico, Argentina and Brazil. “For a while, you could only invest in 30-day bonds,” he says. “Now there are deals that can last years. Every month it seems that there’s a new product here that didn’t exist before.”
Still, he says, “the idea of a true private bank is relatively new in Latin America”. Before, BBVA-Bancomer’s brokerage firm mostly attended to the needs of wealthy clients, he says. “Most of the activity involved managing short-term investments. Now you must offer sophisticated solutions. Clients want more than profits. They want flexibility, protection and advice on how to establish their businesses.”
Growth in business
BBVA-Bancomer hatched its wealth management division about two years ago, targeting individuals in their 40s and 50s. The bank now counts between 2000 and 2500 clients throughout Mexico, and says that its private banking business is growing by about 8% annually. Like other banks in the region, it is attempting to increase its private banking profile.
Meanwhile, more market vigour will depend on breaking traditional mindsets among wealthy Latin Americans, particularly among individuals making more than $1m who historically like investing in private banking, tapping US dollar-denominated fixed-income securities, namely US government and corporate bonds, as well as Eurobonds. Because of prevailing high local interest rates, the dominant attitude is to focus on yield.
Knowledge is still lacking in areas such as estate planning, tax structures, derivatives and insurance. “Although investors have participated in alternatives such as hedge and private equity funds, the complexity of those investments, their long tenure, and the moribund returns in hedge funds last year saw more investor interest in basic commodity and foreign-exchange funds,” says Gerard Aquilina, HSBC’s New York-based head of private banking in North and South America.
Open to new ideas
Yet a change in mentality may be under way. Disappointing returns from the US equity and bond markets, particularly since the dotcom bubble burst, is making Latin Americans amenable to newer products. Also, several US stock market indices registered losses last year, leading many in the region into the same pitfalls as the investor population worldwide.
Several private bankers agree that they have seen a steady upturn in fund repatriation and investment in local market opportunities, including real estate. “I think there will be an increasing amount of work onshore and a sophistication of product range,” says Mr Aquilina, whose background includes time at Merrill Lynch’s international private client group, along with stints in London, Saudi Arabia and Greece. “The product range in domestic private banking is increasing and bankers and clients are focusing more on asset allocation and subjects like volatility.”
Changing needs
Gone are the days when private bankers in Latin America only dealt with secrecy and one-shot investment deals. “Latin Americans’ needs have changed,” says Mr Suárez-Vélez of ING, who is based in New York but hails from Mexico City. He is trusted with building onshore businesses that can complement activity at ING’s offices outside of Latin America.
“You now see individuals with more liquidity and stronger ties to multinationals. They require exit strategies, solid tax planning. Wealth is now more out in the open in Latin America, and you’ll be judged by the quality of the solution rather than your ability to keep assets hidden.”
Brazil attracts attention
Private banking remains a relatively small niche market in Brazil, reports Jonathan Wheatley from São Paulo. Yet Merrill Lynch reckons there are 80,000 people in the country with $1m or more to invest, and that has already proved enough to attract some of the biggest names in private banking worldwide, and to persuade local institutions to set up their own operations.
Bankers say the market is growing – and this growth is about to accelerate. Lywal Salles, senior managing director at Banco Itaú in charge of domestic and offshore private banking, says growth has been driven by recent events such as the spate of seven initial public offerings (IPOs) on the São Paulo Stock Exchange last year and by the stability Brazil’s usually volatile markets have enjoyed in the past 18 months.
Lywal Salles: predicts an acceleration in growth
Last year’s commodities boom also produced new wealth, along with a wave of mergers and acquisitions and foreign direct investment. What people do with their money, Mr Salles says, is changing less quickly.
While stability means more people are prepared to keep their money in Brazil rather than send it overseas (the traditional choice), this has been offset by the downward trend of Brazilian interest rates. And while some wealthy Brazilians have brought their capital home, the trend is still outwards.
“A lot of Brazilians send their money overseas to buy Brazilian assets [such as sovereign and corporate bonds],” Mr Salles says. “They’re diversifying their currency and keeping the same risk.” But that habit is being broken as the returns on Brazilian bonds fall and those on US bonds go up.
The tradition of investing in overseas assets puts investment advisers in an ambiguous position. Banks in Brazil may sell only Brazilian assets. And while it is legal for Brazilians to buy foreign assets, bankers may not advise them to do so – though some banks clearly do. “The bank can show the options, but the customer has to make the decision,” says one executive at a foreign bank. “You can’t sell a foreign insurance policy in Brazil, for example, but there are Brazilian clients who buy them. We don’t sell them, but other banks do.”
Brazilian investors and the products they buy are becoming more sophisticated, although the scope for sophistication on local markets is limited.
“The Brazilian market has achieved a certain maturity, but it’s still not 100% developed,” says Eduardo Oliveira, head of UBS Wealth Management in São Paulo. “But there has been a wave of new independent fund management companies that have been very successful and have brought new expertise to the table.”
New multimarket funds have appeared, for example, along with specialised fixed income funds, hedge funds, and structured products. But the range of assets on which those products are based remains limited to fixed rate notes, floating rate notes, stocks and currencies.
There is no secondary market in corporate securities, for example, although there have been some recent attempts to create liquidity. Paper and pulp company Suzano, for example, hired a market maker in January to promote trading in debentures issued last year.
Augusto Videira, director of Santander Banespa Private Banking, says lower interest rates, if and when they come, will give Brazil’s private bankers the boost they have been waiting for.
“Until recently it was so easy to make money [on fixed income], and it still is, that there wasn’t much point in paying a bank to do it,” he says. “And until a few years ago, most banks weren’t interested in making 1% on their liabilities when they can make a fortune on spreads. Now the economy is stabilising and interest rates are coming down, banks are taking another look.”
So much so that even the government-controlled Banco do Brasil opened a private banking arm last year.
