Brazil, Mexico and Argentina
continue to be Latin America’s private banking powerbases but
countries such as Chile and Columbia are growing fast. Ivan Castano
finds out why local banks are rapidly expanding their services at a
time when many foreign banks are careful considering, or even
closing, their Americas arms.

Not too long ago, wealth management
bankers were unwilling to touch some of Latin America’s more
impoverished and politically volatile markets, fearing that chasing
wealthy clients in them would bring more losses than profits.

But that view has now changed with
many global wealth management houses now interested in expanding in
these markets, due to an improved political framework, impressive
GDP growth and a swelling number of wealthy families interested in
growing their fortune.

Their incursion comes as Latin
America’s wealth management sector is poised for strong growth,
with economic juggernaut Brazil generating some 19 Brazilian real
millionaires a day, according to bankers present at a recent Latin
America private banking conference in Miami, US.

Amid this backdrop, it is no
surprise banks are more willing to enter some of the region’s
riskiest and smallest markets including Ecuador, Bolivia and parts
of Central America.

 

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By GlobalData

Overlooked
markets

 

One such bank is BNP Paribas, which
has been sounding out business opportunities in all of those
countries, as well as in Guatemala, among others.

Isabelle Wheeler, senior vice
president and head of investment services at BNP Paribas overseeing
Latin America, says these markets have a growing number of wealthy
families untapped by most banks. And while due diligence and
risk-profiling processes can be more complicated and long-winded
than in more developed markets, the potential returns are worth the
effort. In many cases, they can be much higher than in other parts
of Latin America, observers say.

One banker requesting anonymity
says these overlooked markets are worth some $125m, a tiny fraction
of Latin America’s $10trn wealth market, which itself accounts for
4% of $230trn of global wealth.

He adds that 1trn of Latin
America’s wealth is invested in offshore funds of which 500m are in
US bank accounts. Of that, 75% comes from clients in Brazil,
Mexico, Chile and Argentina.

 

Smaller markets offer
higher fees

 

Despite being much smaller, the
banker claims banks can reap higher fees in these under-penetrated
markets, if the proper due diligence is carried out. He highlights
Ecuador, Bolivia, Paraguay, Guatemala and Honduras as the most
promising markets.

Banks, he adds, can fetch a 1% ROA
in these countries versus .50 basis points in more mature markets
such as Mexico or Brazil, where clients are much more
sophisticated, knowledgeable of the investment markets, and
therefore much more demanding of their managers.

“In Mexico, clients are likely to
ask you for custody fees, mark-ups on fixed income gains or lower
commissions on trading,” the banker notes. “However, in Ecuador or
Bolivia you are unlikely to get so many demands so you can charge
higher fees.”

The banker, however, warned that in
Guatemala, compliance issues, such as tax or laws protecting
foreign bank investments, can be tricky so wealth management houses
need to be extra careful when treading into these markets. The
story can be similar in nearby El Salvador or Honduras, conference
attendees say.

Photographs of Claudio Mifano, Claritas Wealth Management Brazil; Emerson Pieri, Haliwell Bank; Flavio Souza, Banco Itaú Europa; Jose Becerra, Boston Consulting Group

 

Buoyant growth

Risky markets aside, Latin America’s
wealth management sector is forecast to grow strongly in the medium
term, fuelled by a rising number of millionaires, and not just in
Brazil. Chile and Colombia also have a bright outlook according to
Jose Becerra, senior partner and managing director for the Boston
Consulting Group in Chile, Mexico, Argentina.

“Brazil, Mexico and Argentina will
remain the biggest markets, but growth will be larger in Chile and
Colombia where we could see gains of over 10%,” he predicts.

In terms of assets under management
(AUM), Becerra expects 8 to 9% annual growth by 2015 as Latin
America’s economies continue to grow strongly, fuelled by rising
commodity sales to Asia, though of course, this could change if
China’s growth locomotive loses some of its steam.

 

Demand for commodities
expected to remain high

 

Flavio Souza, chief executive of
Banco Itaú Europa, expects China and Asia’s demand for the region’s
bountiful metal, energy and food commodities to remain high in the
near to medium term.

Pull quote by Jose Becerra, Boston Consulting Group“Some of
China’s demand has slowed recently due to overstocking but it’s
likely to continue strongly for some time,” Souza says. “Latin
America’s commodities super-cycle is hardly over.”

That means more money flowing into
Chile (the world’s largest copper producer and a top seller to
China), Colombia, Peru (which also sells copper, silver and oil to
Asia) and of course, Brazil, which exports a wide range of food and
energy commodities to Asia, Europe and the US.

Brazil still represents a rich seam
for wealth management houses and the region’s growing ranks of
multi-family and family offices. After all, the country has the
biggest economy in Latin America and the fastest-growing
middle-class consumer segment. GDP is forecast to increase at an
average of 4% in coming years.

 

Brazil generating 19
millionaires daily

 

According to Emerson Pieri, head of
wealth management for Latin America at Haliwell Bank, Brazil has
been generating 19 millionaires (in local currency terms) a day
since 2007, mostly in the 1m reais to 5m reais ($539,000-$2.7m) net
worth bracket, though some observers said that estimate seemed “a
bit overhyped”.

Nevertheless, there is plenty of
business for wealth managers as the industry is expected to grow
22% this year to some $250bn, observers say, adding that most banks
are targeting individuals holding $1-$10m though the $20m and
$30m-plus segment is also growing – and not just in Brazil.

“We also see these individuals
popping up in Mexico, Colombia, Peru and Chile,” Souza says, adding
that Itaú hopes to sharply expand in these markets in coming
years.

In Mexico, private banks are
targeting the $1-5m wealth segment, according to Jose Fierro Von
Mohr, investment director at Mexican brokerage house GBM, which is
looking to become a regional player with plans to enter Brazil,
Chile and the Andean region by 2016.

Graphic showing 2015 projections in Latin American private banking

 

Local players gain market
share

According to Souza, a string of
struggling European banks have exited the market in recent months,
generating growth opportunities for local rivals, who are rushing
to grow their presence.

“Local players are growing a lot as
they move to take the space left by international competitors,” he
says, adding that Itaú recently acquired HSBC’s private banking
operations in Chile while it is mulling buying some of France
Crédit Agricole’s regional operations.

Barclays Wealth announced this
month that it had sold its Argentinean unit after acquiring it from
Lehmans in 2008 and Standard Chartered exited the Latin American
market in 2011. At the same time, other global players are
expanding. This month, Credit Suisse has been granted a
broker-dealer license in Chile to provide HNW and UHNW individuals
in Chile with a range of wealth management services locally.

 

Latin American banks
expanding aggresively

 

Itaú also wants to become a
regional player and is moving to build a presence in Mexico, Chile,
Colombia and Peru, Souza says.

Itaú is leveraging its regional
retail and investment banking presence to flesh out its private
banking franchise which already commands 25% of the Latin American
market, in line with Bank of America Merrill Lynch and behind
market leaders JP Morgan and UBS, Souza says.

He adds that Latin American banks
are expanding so aggressively he expects them to outflank foreign
managers in the next five years.

This has already happened in
Brazil, for example, with Itaú controlling 25% of the market while
Bank of America and UBS together have 15%, down from higher
percentages in 2006, Souza adds.

 

“Lack of trust” in foreign
managers

 

Fierro says Mexican wealth managers
are also winning business against international ones, mainly
because of a rising “lack of trust” in foreign managers.

“Wealthy people have become very
worried about doing business with international banks so there is a
shift of money to local banks,” Fierro explains, adding that this
is happening across Latin America. “This is because clients have
faster access to local fund managers and can make stronger
relationships with them.”

Adds Fierro: “Many people have been
burnt by managers [working for foreign banks] that were very far
away from the institutions they worked for, as well as their
owners.”

This preference for local managers
also means many Latin millionaires prefer to invest in onshore
instead of offshore instruments, as offshore products can carry
more risk and volatility.

This, says Becerra, is becoming a
major challenge for wealth managers as they look for ways to
diversify their portfolios to maximise returns.

Chart showing Latin America segmentation

 

Tougher tax
compliance

Tax compliance is also becoming a
major industry challenge, observers say.

“Latin American governments are
becoming tougher at enforcing their tax laws as well as any
information exchange agreements with other countries,” Souza
says.

Consequently, wealthy individuals
are demanding more tax-efficient investment structures to avoid
legal problems, observers say.

“Clients understand that it is no
longer about hiding money but about using more efficient investment
vehicles to help them pay less tax. We and other banks are working
to create these structures as soon as possible,” Souza says.

In Mexico, such structures are
called Sistema Internacional de Cotizaciones (SIC) and work as
special purpose vehicles (SPVs) that enable people to invest in
foreign equities without having to pay capital-gain taxes, which
can be as high as 30% in Mexico.

Observers say similar structures
are being rolled out in Brazil and other Latin American countries
to allow wealthy individuals to meet stricter tax governance while
optimising investment returns.

 

Family offices come to the
fore

Tax issues apart, the advent of
multi-family and family offices is also challenging private
banks.

“Banks don’t serve all of their
clients’ interests like we do,” boasts Claudio Mifano, executive
director at Brazilian multi-family office Claritas Wealth
Management.

“If a client wants to sell his
company, for example, the bank manager will have to show it to his
bank first and if the bank doesn’t want it, then go to another
bank-allied party. In our case, we can show the company to all
types of investors, giving the client a much broader choice.”

According to Mifano, many wealthy
families in Latin America are frustrated with private bank
managers’ need to satisfy their institutions “sell side”
requirements, which are not always in line with theirs.

“Clients have realised that with a
bank they are more tied to what it wants to do, to buying its
products and following its interests,” Mifano adds. “With us, they
don’t have to worry about any of this. We give them a much wider
array of wealth-creation choices.”

 

Family office space poised
for strong growth

 

Of course, family offices must
deposit their client’s money somewhere, so they are working with
private banks to do this, Mifano says. In turn, private banks are
offering more services to family offices, partnering with them or
in some cases, even acquiring them.

Observers say they expect these
alliances, as well as M&A activity, to increase as private
banks struggle to keep family offices on their side or work to
eliminate their competitive threat altogether.

Nevertheless, Mifano says the
multi-family and family office space is poised for strong growth
and could account for 20% of Latin America’s wealth management
sector by 2015, up from 10% now.

 

Lack of talent

 

Regarding other challenges, Becerra
says a dearth of talented sales agents and investment managers is
also a problem in Latin America.

“The sales force and management
efficiency needs to improve through better compensation and
incentives,” adds Becerra.

“These people are inefficient
pre-Madonnas that charge too much for mediocre results.”

Could what is happening in Latin
America be a warning for the emergent private banking market in
Asia? Latin American and Asia share rapidly growing regional
economies which has fuelled rapid swelling of its HNW ranks.
Staffing shortages and tightening tax regulation are also similar.
But as the market matures south of the US, foreign banks are being
cast off for local players who are better trusted and have stronger
connections to HNW.

A growing number of new HNW and buoyant economies should mean
rich pickings for private banks, but it does not guarantee it.
Foreign private banks in Latin America need to carefully consider
what it is they do best in the region and how to do it – success is
not guaranteed.

Map showing Latin American private banking assets under management