The Portuguese government's tax amnesty on repatriated funds is expected to channel an influx of euros into the country's private banking sector. Yet banks must meet the post-crisis needs of investors with new portfolios favouring simpler structured products with a capital guarantee. Writer Peter Wise

Portugal's private banking and asset management industry is preparing for an unprecedented influx of cash as a result of a government tax amnesty on repatriated funds. The global financial crisis is expected to make the reprieve highly attractive to private banking clients, but market turmoil has also brought about a fundamental change in how they invest.

"I think the days of the structured product are almost over," says Nuno Teixeira, vice-president of Banif Investment Bank. "Private banking is going back to basics. Clients want products that are totally transparent and easy to understand. Banks are no longer using the concept of structured products in the way they used to. They are no longer the core of the industry."

Much of the hundreds of millions of euros that the Lisbon government expects to be repatriated is likely to be invested directly in fixed-income securities, index-tracking instruments and guaranteed-capital funds, rather than more complex structured products. Under the amnesty, approved in April, the government will forgive false accounting and allow the repatriation of funds in return for a 5% charge. A similar scheme in Italy saw about €100bn repatriated last year.

"Whatever the underlying asset - commodities, bonds, state debt - the structure has to be very simple," says Bernardo Meyrelles do Souto, managing director of Deutsche Bank Portugal's private and business clients division. "In the current environment of very low interest rates, there's an opportunity for products with a low level of risk, but which also offer a degree of remuneration. These are essentially simple structured products with a capital guarantee. Clients are no longer interested in complex, opaque investments. But there is still some appetite for the right structured products."

For Carlos Cid Álvares, general director of Millennium Private Banking, two key issues for private bankers in the post-crisis world are the protection of capital and the careful matching of portfolios to client profiles. "We pay a great deal of attention to profiling our clients - we have five different types of profile - and we invest strongly in advisory services and robust controls to ensure that each client's portfolio is properly tailored to their profile. This supports our fundamental priority of protecting the capital each client invests," he says.

He adds that clients who held onto their investments have seen their portfolios regain most of their value, typically gaining 15% to 20% over the past year as equity markets recovered. Millennium, he says, adopts an open architecture approach to private banking and includes the group's own products in portfolios only at the express request of clients. "We are seeing a gradual return to products with an element of risk," he says. "We feel confident in advising our clients that, over a five-year period, products with a minimum level of risk will deliver a better return than term deposits."

Changing relations

New attitudes towards risk in the post-Lehman world are fundamentally changing the relationship between individual investors and their private bankers, says Mr Teixeira. "There's a global tend for high-net-worth individuals [HNWIs] to buy corporate paper directly on the primary market," he says. "They want to be exposed to the bonds they prefer, rather than structured products. They are now calling their banks and placing orders directly in the book for debt issues." As a result, he says, up to 30% of high-profile corporate issues are being placed in private banking accounts. It is also, he believes, one of the reasons why many recent corporate issues have been highly oversubscribed.

This disintermediation process, in which a growing number of individuals believe their own decisions are as good as their fund managers', is likely to increase, says Mr Teixeira, and will change the role of private bankers. "We need to keep very up-to-date and know what issues are in the market on a daily basis," he says. "Investors are very concerned about having the power to manage risk and liquidity and bankers have to be on top of those two variables. Instead of structured products, banks are now offering their clients portfolios of five or six corporate and bank debt issues."

When it comes to equity investments, says Mr Teixeira, HNWIs are opting for exchange-traded funds that track indexes such as the Euro Stoxx 50 or the S&P 500. "Investors no longer want to pay anyone to manage their exposure to equity," he says. "They prefer to buy index tracker funds and make their own assessment of risk. The decision process is moving away from managers to clients."

In Portugal, such movements reflect what Mr Meyrelles do Souto sees as a highly sophisticated market. "Portugal is a relatively small banking market, but it is very competitive at every level, from mortgages and corporate credit to deposits and private banking," he says. "The market is very mature and the local and foreign banks operating here are highly competitive."

Deutsche Bank acquired a stake in a Portuguese financial consulting company in 1978. The firm later developed into an investment bank, which came under Deutsche Bank's control in 1988. The group launched private banking and consumer finance operations in Portugal in 1997, but only began to expand its branch network nationwide in 2005. It now has 51 branches focusing on HNWIs and two private banking centres in Lisbon and Oporto. Another 24 agencies are run by local agents affiliated to the bank.

"Despite the global recession, our private banking business has developed surprisingly well in Portugal over the past four years," says Mr Meyrelles do Souto. "We have always kept ahead of out initial targets, even during the worst years of the crisis. I believe the worst is now over and I am confident we can maintain this pace of growth over the coming years," he adds. In comparison with Portuguese competitors, Deutsche Bank Portugal benefits from the lower funding costs of its parent bank and can also offer clients a wide range of products created by its international productions teams.

Because of the overall liquidity of the Deutsche Bank group, there is no need for the Portuguese operation to engage with local competitors in 'deposit wars', in which private banking clients are offered highly remunerated deposits, often at loss to banks that need the funding. Most medium-sized Portuguese banks tend to fund themselves solely through customer deposits, only occasionally tapping international markets, usually in the form of covered bond issues. Loss-making deposits are generally seen to be compensated for by cross-selling other products as part of an overall banking relationship with the client.

Millennium's private banking operations, like others in Portugal, were affected by the impairment costs resulting from the leveraged pre-crisis positions of a number of its clients. This caused private banking's contribution to the group's net income fall to €400,000 in 2008. But lower impairment costs in 2009 saw it climb back to €4.9m, despite a 6.9% drop in net interest income. Client deposits increased 10.5% to €2.2bn.

Millennium Private Banking manages about 10% of the group's total assets with about 2% of its employees. Mr Álvares is confident the division's contribution will steadily return to its pre-crisis level of 10% to 15%. Millennium's growth in Poland, where it has 6000 employees and 470 branches, may also offer the potential for expanding affluent and private banking clients outside Portugal.

Private equity thriving

Despite some initial scepticism, Portugal is proving a strong market for private equity deals. Explorer Investments, for example, is preparing to close its third fund at €340m, having invested €262m in 16 acquisitions over the past four years and, since mid-2008, consistently ranking among the top 10% of European buy-out funds for internal rate of return.

But when it launched Portugal's first independent private equity fund in 2003, many in the Lisbon financial world dismissed the project as doomed to failure. "We were told we wouldn't get anyone to invest and that even if we did, there were simply no deals to be done in Portugal," says Elizabeth Rothfield, one the fund's three founding partners.

"Slow growth may make Portugal look unattractive from an economic perspective," she says. "But the market is extremely interesting at the company level. Private equity is underdeveloped, there is very little competition and there are plenty of investment opportunities," she adds.

In 2006, João Talone became the only Portuguese member of the three founding partners of private equity firm Magnum Capital, expecting that investments by the €866m fund targeting industrial buy-outs in Iberia would be heavily weighted towards Spain, a country with about six times more companies than Portugal in Magnum's target range of €50m to €150m equity tickets.

Four years on, Portuguese companies account for 78% of the fund's portfolio, representing an investment of €270m out of a total investment to date of €350m, 40% of the fund's total committed capital. To date, Magnum has made three investments in Portugal and two in Spain. "We invested €270m in Portugal in just eight months and became by far the largest foreign investor in the country," says Mr Talone. "Two years ago, I could never have imagined the balance of investment would be this way round."


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