Many of Latin America's high-net-worth individuals are repatriating their funds and an increasing number of foreign investors are targeting the region, thanks to its rapidly expanding economy. With such demand for local product providers, domestic firms are finding themselves having to pit their specialist knowledge against the international reach of large foreign banks, making competition tough.

Fund managers from across the globe are turning their attention to Latin America. Once the Cinderella of private banking, the region’s burgeoning capital markets and appreciating currencies are now attracting not only local capital, but also expansion-hungry international private bankers suffering in home markets that are mature or in decline.

Some argue that interest in the region is higher than it is in any other emerging market. According to Daniel Enskat, head of global consulting at New York-based research firm Strategic Insight: “Interest in primary region cross-border distribution [in Latin America] is higher by a margin of three to one compared to Asia.”

Large, concentrated asset pools and strong growth prospects in countries across Latin America are creating significant opportunities for global asset managers and service providers. The region is a relative minnow, with $2250bn in total assets held locally – of which $1400bn is in mutual funds – compared to the US and Europe, which have $13,000bn and $10,500bn, 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 $2800bn and $3600bn in assets by the end of the decade with pension funds adding another $3000bn.

Banks are making hay, targeting the region as a strategic priority. Ricardo Manuschevich, market manager for the southern cone at JPMorgan, says: “We have been growing 17% to 18% per year for the past six years in Latin America.”

In 2011, Santander grew assets in the region by 15.65% in dollar terms to reach $67.9bn. Luis Moreno, head of Santander private banking strategy and marketing, says: “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.”

Domestic pride

The uneven income distribution in Latin America means that a large proportion of wealth is attributed to a small number of people, which is why high-net-worth individual (HNWI) banking is so well established in the region. But Latin America’s strong economy, an upsurge in currencies and deeper local financial markets have changed the dynamics of the sector, with wealthy clients reconsidering their need to offshore.

“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 Latin American private banking at HSBC.

According to Paul Arango, managing director of Latin American private banking at Credit Suisse: “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.”

This is a seismic change which has forced international asset managers and private banks to think local. At the same time, the banking crisis in the US and the more recent European sovereign debt crisis have left international banks vulnerable to asset and talent poaching. According to one senior Brazilian banker: “There are concerns about foreign banks, and European banks are a particular worry. The result is that Brazilian banks [emerged from] the crisis in a much stronger position and with a better reputation.”

US and European banks are quick to counter the perception that they are less trusted. Jose Fuentes, chief executive of Citi Private Bank in Latin America, says: “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 are recruiting talent from European banks and are able to take market share from them.”

Mr Moreno is keen to highlight that Santander is among the strongest banks in Europe, with market and business-line diversification. He says that its huge presence in Latin America allows it to cover the full range of clients: “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.”

The battle for Latams riches GRAPH

Rise of local banks

Whatever the level of trust in foreign banks, local banks are doing well. In Brazil, where there is low foreign bank penetration compared to the rest of Latin America, the success of local banks is particularly stark. São Paulo-based BTG Pactual had a negligible $250m under management in 1999; it now has close to $23bn, says Rogério Pessoa, co-head of wealth management at the bank.

This growth occurred despite the vicissitudes of the bank’s ownership. In 2006, Switzerland-based UBS bought BTG Pactual but in the years following UBS struggled with losses and accusations of tax evasion in the US. It was a “tremendously stressful period with UBS, given the credit crisis", says Mr Pessoa. But UBS sold Pactual back to its managers in 2009 and since then, things have looked up. Assets jumped 50% in 2010 and a further 30% in 2011, according to Mr Pessoa. Partners co-invest in funds with outside investors, which sparks confidence, he says.

Attitudes towards the country as a whole have also changed in this time as well, with HNWI now considering Brazil to be a safe place to invest, 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, and the number of mergers and acquisitions are rising.

“It is no longer just old money. These new clients are more knowledgeable, more shrewd. They are often capable operators who have built up their own business and so understand the financial marketplace,” says Mr Levy.

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

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 investment firm Franklin Templeton. “It will arrive though,” he says. Franklin has been growing assets by more than 20% a year from the region.

Credit Suisse, which owns one of Brazil’s most famous wealth and asset managers, Hedging Griffo, is also looking at onshoring in other markets. It has a licence in Chile to act as a broker-dealer and give advice to clients and is also onshore in Mexico. 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,” says Mr Arango at Credit Suisse.

Latin America came through the financial crisis relatively well and local investment opportunities have skyrocketed, making people much happier to invest within the region

Peter Yeates

Investment changes

Onshoring is calling for substantial changes in underlying investment portfolios. Latin investors are demanding more sophisticated and complex products as they look to move away from fixed income, where returns are rapidly falling as economies stabilise 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, who says that in some areas, cash 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. In Brazil, it is the top end that is proving most willing to diversify. This group is increasingly comfortable with illiquid markets such as private equity.

“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,” says Mr Levy. 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.

Mr Pessoa at BTG Pactual has noticed a similar trend. “Fifteen years ago, Brazilians sent 80% of their wealth abroad or left it 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,” he says.

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 a large size.

Brazil dominates with $1400bn of the total assets, and it is growing faster than the region as a whole. Private banking accounted for $238bn and assets jumped 21.6% in 2011, according to Brazilian financial markets association Anbima. But Brazilian legislation is overelaborate. Mexico, the second largest country in terms of assets under management in Latin America, has a much lower $250bn in assets to play with, but a more open industry.

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

Jose Fuentes

For most bankers, Brazil cannot be ignored, while Mexico and Chile continue to prove popular. 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 HNWI monies. It is being eyed as an example by Peru and Colombia where a surge in pension fund and wealth assets would overwhelm nascent 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 Mr Yeates. He also sees more intra-regional investments. Ultra-high-net-worth Latins are investing in Brazil and betting on the real, one of the strongest currencies during the past two years.

At the other end of the scale are markets that have areas of high wealth but where it is difficult to operate onshore, such as Argentina and Venezuela. Many wealth managers and private bankers tread a wary 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 Latin America is getting to grips with the widening base of HNWIs 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 HNWI 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 Mr Moreno.

Specialist private banks counter that 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 further down into the HNWI segment. “We are putting many more resources into HNWI. This is a rapidly emerging wealth segment that you just cannot ignore,” says Mr Manuschevich. However, it is a trickier market to operate in where the identification of potential clients is more onerous. “These are not 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, which means banks will need to be in it 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. But if banks get that relationship right, he notes, Latin clients are stickier than US counterparts, with many staying with the same bank for 20 or 30 years.


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