Private banking 2008: When the ultra-wealthy bump into the sub-prime
IT HAS BEEN a bumper year for private banks in Latin America. According to the Euromoney 2008 private banking poll, net incomes for private banks increased in Brazil by 29.3%, in Mexico 19.5%, in Argentina 18% and in Chile 11%. The four countries remain the largest markets for wealth managers in the region, and the battle between the domestic and global private banks there is increasing. The good news is that Latin America’s wealth is growing at a rate that should allow room for all banks over the next few years. High-net-worth wealth in Latin America is expected to grow at an annual rate of 7.2% from 2006 to 2011, according to the Capgemini/Merrill Lynch World Wealth Report, outpacing the global growth rate of 6.8%.
Total investable assets held by high-net-worth individuals in Latin America are estimated to total about $5.5 trillion. The majority of that wealth is in Brazil, and it has been outgrowing the region’s wealth as its economy has boomed. Lywal Salles, chief executive of Banco Itaú’s private bank, estimates that wealth in Brazil has been increasing at a rate of 15% to 20% over the past three years, and a similar growth rate is expected in 2008. "More opportunities for foreign investment, coupled with the fact that Brazil should become an investment grade country in 2008 or 2009, are attracting more resources, and will increase wealth in the country yet further," says Marco Navarro, head of investment advisory and wealth management at Unibanco Private Bank, which manages about $15 billion in onshore and offshore Brazilian high-net-worth assets.
This rapid rise in the number of high-net-worth clients is putting pressure on the private banking workforce. Salles jokes that it is more difficult to find relationship managers than clients in Brazil. As private banks develop their onshore businesses in the country, this pressure is certain to increase. Eduardo Oliviera, head of wealth management at UBS Pactual, which tops Euromoney’s rankings for Brazil in our 2008 private banking poll, says the firm has 47 bankers in Brazil and hopes to increase this to about 70 by the end of 2008. "It could be challenging," he says, "and we may consider looking outside of wealth management to find relationship managers, such as corporate bankers."
The majority of Brazil’s new wealth has come from entrepreneurs, who are taking advantage of the positive environment and seeking to monetize their businesses and real estate assets. Brazil has the deepest capital markets in the region, and as foreign investment increases, so does liquidity. In 2007, there were more than 60 IPOs in Brazil, and at the end of November, Brazil’s stock exchange, Bovespa, had a market capitalization of $1.4 trillion.
The growth in the IPO market has enabled private banks with capital markets expertise to attract Brazil’s new wealthy. JPMorgan has $45 billion in Latin American high-net-worth assets under management, of which $12 billion has been generated over the past 18 months. Its head of private banking, Alvaro Martinez-Fonts, says one reason it has succeeded in attracting Brazilian clients is by providing products and services to cater to this increasing liquidity shift. "Brazil is globalizing and M&A activity there is increasing, foreign direct investment is up and Brazilian companies can go public in New York, London or Brazil itself. So we have been working with Brazilian clients on IPO planning, and structuring their new wealth ahead of their liquidity events." The firm has some onshore capabilities in Brazil, although it plans to expand its investments offering in 2008.
The Swiss connection
UBS’s 2006 acquisition of local investment bank and broker/dealer Banco Pactual has aided the Swiss bank’s growth in high-net-worth assets in the country, says Oliviera. "Pactual presented UBS Wealth Management with a broader range of products and opportunities to better access the capital markets locally, and the benefits of that relationship have been very noticeable over 2007. Since the integration of UBS and Pactual we have an increased ability to help clients in M&A and IPO activity."
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Latin America: a profitable region for private banks |
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Changes in average net income for private banks in Latin America |
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Source: Euromoney |
Credit Suisse has been using its strong investment banking reputation in the region to be involved in IPOs for high-net-worth individuals. Anthony DeChellis, chief executive of Credit Suisse Private Banking Americas, says the firm has led more than 30 IPOs in Brazil over 2007. The bank’s acquisition of a majority interest in Brazilian wealth manager Hedging-Griffo in 2007 has enabled it to gain access to high-net-worth clients in the country through offering the services of Hedging-Griffo to the executives of the companies Credit Suisse has taken public. Hedging-Griffo’s assets under management rose from $7.6 billion at the end of 2006 to $20 billion in 2007.
DeChellis says one option for Credit Suisse Private Bank in Mexico would be to follow a similar strategy, but it has yet to uncover any suitable local partner. Credit Suisse plans to set up onshore operations in Mexico in 2008. "There is an incredible amount of wealth being created in Mexico and clients in the country are now demanding services delivered locally from a global bank like Credit Suisse," says DeChellis.
Mexico the target
Credit Suisse won’t be alone. Brazil’s Banco Itaú plans to expand into Mexico in 2008, as does UBS Pactual. Indeed, second to Brazil, Mexico is a key target for private banks that, up to now, have only had an offshore presence in the country. Mexican high-net-worth assets increased 20% year on year for private banks in Euromoney’s 2008 poll. "Mexico already benefits from an investment-grade rating, and the country’s economy has really stabilized. The opportunity to serve clients there is greater than ever," says Oliviera.