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January 26, 2010updated 05 Jun 2017 11:39am

Onshore on the up in Brazil

With only 34 percent of HNWI wealth in Brazil managed by private banks, there is some $180bn of client assets up for grabs, according to PBI research Government plans for a tax amnesty could double the amount of funds held in the country, providing a further boost to the industry

By Rodrigo Amaral

With only 34 percent of HNWI wealth in Brazil managed by private banks, there is some $180bn of client assets up for grabs, according to PBI research. Government plans for a tax amnesty could double the amount of funds held in the country, providing a further boost to the industry. Rodrigo Amaral reports

Brazil’s private banking industry is heating up as local and foreign players make an effort to up their game in one of the fastest-growing markets in the world.

A number of international banks have released plans to set up shop or boost their presence in Brazil. But they are facing strong competition from Brazilian banks which have a dominant position in the market and have emerged strengthened by the global financial crisis.

The Brazilian market was widely seen as one of the most promising for private banks before the events of 2008, as the economy had been performing well for a number of years thanks to economic stability and a dynamic and varied economic base.

An unprecedented wave of initial public offerings and the strength of sectors like agribusiness and construction created a great number of newly wealthy Brazilians.

Although the domestic economy has been hit by the global crisis, it has recovered quickly, with forecast GDP growth at 6 percent this year.

This is all good news for the country’s wealth management industry. PriceWaterhouseCoopers estimates the private banking industry should expand by 15 percent in 2010. The latest World Wealth Report by Capgemini and Merrill Lynch ranked Brazil 10th in the world by the number of high net worth individuals at the end of 2008, up from 12th a year earlier, with 131,000 people in the ‘rich’ group.

Brazil’s 200,000 HNWIs

Local projections point to even higher numbers. State-owned Banco do Brasil, one of the country's largest banks, believes there are 200,000 Brazilians with more than BRL1 million ($540,900) of investable assets. They are estimated to own some BRL500 billion of assets that could be managed by private bankers, though only 34.3 percent of this is currently managed by the industry, according to PBI research.

“Brazil is living a special moment,” says Mailson Hykavei, CEO of FinPlan, a São Paulo-based wealth management boutique.

“Assets are being kept onshore rather than offshore. Plenty of people are getting rich thanks to asset appreciation and the country carries on creating wealth,” he adds.

Banco do Brasil is one of the locally established banks that is keen to develop its private banking businesses. It hopes to take advantage of Brazil’s resilience and the declining confidence among private clients in international banks hit by scandals like the Madoff affair and the collapse of Lehman and AIG-backed bonds.

Other big players include Itaú-Unibanco, the market leader in wealth management in the country, and Banco Bradesco, a large privately-owned financial group. The former, which recently revealed an interest in acquiring bits of Royal Bank of Scotland and the Lloyds Banking Group, has plans to grow internationally in private banking.

Along with foreign players with a strong presence in the retail banking market – like Santander (which acquired ABN AMRO’s well-reputed onshore private banking operation in Brazil) and HSBC, which announced that the country is one of its priorities in the segment – the locals represent a formidable barrier to the ambitions of new entrants.

Another strong local player is Hedging Griffo, now part of the Credit Suisse group. In the past two years, local private banks have reportedly grabbed a good number of new clients who became disillusioned with their foreign providers. But global firms are flocking in anyway.

JPMorgan took the head of its asset management unit, Jes Staley, to the South American country last year to highlight investments in its onshore private banking operations. The bank has also been reported to have lowered the minimum threshold required to accept new clients, although it says the value will remain above the market average.

Goldman Sachs hired a former ABN AMRO banker to command its private banking push in the country, and Bank of America-Merrill Lynch launched a wealth management unit in Brazil in November last year under the Merrill brand.

RBC Wealth Management, BNP Wealth Management and others have also boosted their services for Brazilians in the past couple of years, and even UBS, which left the country after selling Banco Pactual last year, is said to be preparing a return to onshore private banking in the country.

BTG Pactual, the bank created by former UBS executives in Brazil, is a major player in the country, with BRL12.4 billion of assets under management. Itaú-Unibanco leads the pack with around BRL54.4 billion, according to Associação Nacional dos Bancos de Investimento (ANBID) figures.

Brazil’s onshore trend

International banks want a stronger presence in Brazil as the wealthy are more inclined than ever to keep their money onshore.

The appreciation of the real, which has gained almost 40 percent against the dollar since March last year, has made keeping money in Brazil a good idea. Furthermore, there is little incentive for Brazilians to move assets offshore, when they are benefiting from better investment opportunities domestically. Foreign investment in increasing, particularly in sectors like infrastructure, ahead of events like the 2014 World Cup and the 2016 Olympic Games.

Analysts expect a new wave of IPOs to hit the Brazilian market soon, which should increase the need for financial advice.

This rising tide of onshore money could be boosted further by a tax amnesty currently under consideration by the Brazilian Congress. Some analysts believe that, if approved, it could double the volume of onshore assets under management by the private banking industry.

The main change in the private banking market has probably been the consolidation of a new attitude by investors towards risk. Brazil’s world-famous high interest rates mean that, for a long time, keeping money in fixed income vehicles was the best use one clients could make of their wealth.

“People would get real returns of up to 17 percent a year with government bonds,” notes Hykavei.

“You certainly don’t need a chartered financial analyst to realise the advantage of achieving such returns with so little risk and plenty of liquidity, so financial advisers often found it hard to convince people it was worth paying for their services.”

But interest rates have fallen sharply in recent years, from a high of more than 40 percent to the current 8.75 percent, a level that still looks high compared to the standards of the developed world, but feels mercifully low for Brazilians.

Suddenly, bonds have turned boring and private investors now want to see their money working harder in the markets.

“Brazilian investors are having to re-educate themselves to the concept of risk,” says Gustavo Castello Branco, responsible for the wealth management operation of BNY Mellon in Brazil.

The development of BNY Mellon’s onshore wealth management business in Brazil shows why so many players are interested in the market today.

In 2003, one year after the unit started, it had BRL1 billion of assets under management. Today, the volume is five times higher: BRL5.4 billion, according to ANBID figures. Castello Branco says private clients in Brazil have been especially interested in investing in the local hedge funds, known as fundos multimercados.

These funds are more regulated and thus, arguably, less risky than their Anglo-Saxon counterparts.

Investing overseas

In 2008, the authorities also approved the creation of a new family of funds by which highly qualified investors can have access to financial products registered in other countries.

This has opened opportunities for international banks to sell their global platform of investment products to wealthy Brazilians. But increased contact with the financial services industry means these wealthy Brazilians are also becoming more demanding.

Hykavei, a former private banker at ABN AMRO in Brazil, who set up FinPlan last year, says many have shown dissatisfaction with the services they receive from the big banks.

“In my contact with clients, I noted they were unhappy with the fact bankers had only a superficial understanding of their situations,” Hykavei says.

“I would say that the quality of people working with private banking in Brazil today still is at least questionable.”

The main reason for the dissatisfaction, in his view, is the segmentation policy applied by the big retail banks that dominate the market.

“A lot of habits from retail banking persist in private banking departments,” Hykavei adds.

FinPlan is not the only company to adopt a boutique approach to the market. A number of small outfits have been created by well-respected asset managers, including Gávea Investimentos and Rio Bravo Investimentos, which lists a number of former Central Bank and Economy Ministry officials among its partners.

The extensive network of branches owned by large retail banks is a particularly important weapon to service clients in a country as big and diverse as Brazil, and also provides a wide net for customer acquisition.

But more sophisticated private investors are still likely to be attracted by the broader product range and international expertise the foreign players bring with them.

“Competition is getting harder, but opportunities can be found by companies that can offer differentiated services to private banking clients,” he says.

Brazil

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