Private banking: Latin American wealth in context
Domestic private banks and family offices in Latin America are booming, as the region experiences the world’s fastest-growing wealth market and many clients transfer away from international houses because of their tarnished reputations.
Brazil’s biggest domestic private banks – Unibanco Private Bank, Banco Itaú Private Bank and Bradesco Private Bank – seem to be the main beneficiaries, as they are the main local private banks in Latin America’s biggest wealth market and private clients are concerned about wealth managers with high exposure to sub-prime woes.
Rich people in Brazil and in other important wealth markets in the region, including Mexico and Chile, are also becoming more inclined than before to leave or bring their assets onshore, as they are concerned about US dollar depreciation and the hit that developed market asset classes have been receiving.
Latin America’s wealth market reached $6.2 trillion in 2007 and grew at 20.4%, making it the fastest expanding wealth market, according to Merrill Lynch/Cap Gemini’s latest World wealth report (see Private banking: Latin American wealth in context, Euromoney, August 2008). North America’s wealth market surpassed $11.7 trillion but grew by only 4.4%.
Latin America has 400,000 high-net-worth individuals (defined as those with at least $1 million in financial assets, excluding collectables, consumables, consumer durables and primary residences) while the US has 3.3 million. However, Latin America has the world’s highest proportion of ultra-high-net-worth clients (those with at least $30 million in financial assets): 2.5% of its rich people fall into this bracket, whereas in North America the proportion is only 1.3%.
Marco Navarro, head of investment advisory and wealth management at Unibanco Private Bank, says: "Around 20% to 25% of the Brazilian clients of well-known international wealth managers are transferring their accounts to domestic private banks, including ours. They are doing this for two reasons: during the past year their portfolios with the international houses have not performed well and they are worried about these banks’ exposure to sub-prime."
André Xavier, a partner and head of the financial services practice at the Boston Consulting Group in Brazil, says: "We are witnessing a reversed flight to quality: international houses used to be seen as more sound than domestic banks but now the reverse is true. UBS Pactual, in particular, has seen some of its senior private bankers leave and must be concerned about its position in the Brazilian market."
Brazilian billionaire André Esteves, who founded Brazilian investment bank Pactual and went on to hold prominent positions at UBS, parted company with the Swiss bank in June. In a sign of the times, it is rumoured that he tried to put together a deal to buy the whole of UBS before his departure.
However, UBS Pactual denies that it is suffering a loss of client confidence. Eduardo Oliveira, head of wealth management at UBS Pactual, Brazil’s second-biggest private bank with about 5,000 private clients, says: "The wealth market in Brazil is growing much more slowly this year than last. Last year, the assets that we manage doubled, even after taking into account the Pactual acquisition. Since January this year, we have lost 3% of assets under management but we’re seeing growth in the overall market."
Brazil has been the star performer among Latin America’s wealth markets: at the end of 2007 it had 143,000 of the region’s 400,000 high-net-worth individuals, up 19.1% last year, according to Merrill Lynch/Cap Gemini. The amount of new wealth created in Brazil was $1.6 trillion between 2004 and 2007, while the US generated $2.2 trillion in new wealth during the same period. BCG says that the wealth market in Brazil grew at 32% annually between 2002 and 2007.
Santander Private Banking estimates that the wealth market of Latin America is valued at $3.4 trillion: Brazil accounts for about 40% of the market, Mexico 30% and Chile 10%.
Last year, Brazil had one of the world’s strongest IPO markets, with a total of 64 new listings, totalling more than $30 billion, but this year the market has been flat: only four IPOs took place during the first half (although one of them included the $3.4 billion listing of energy group OGX, founded by Brazilian entrepreneur Eike Batista in December 2007). The main reason for the big drop in flotations has been the marked deterioration in international markets: 70% of the investors in Brazilian IPOs last year were foreign.
Wealth creation
However, a strong M&A market is partly compensating for the much weaker IPO market: between January 1 and May 28 this year, 169 bids were made for Brazilian companies, valued at a total of $40.6 billion, compared with a total of 444 bids last year, valued at a total of $46.7 billion, according to data provider Dealogic.
Latin America has also had some of the strongest stock markets this year, although it has suffered recently as a bearish mood has taken hold worldwide. Overall, the Bovespa index had its worst first-half performance in more than three years. It peaked at 73,400 on May 19 but by July 11 was back down at around 60,000.
Paul Arango, managing director of Credit Suisse Private Banking based in Miami, says: "Last year, the IPO market in Brazil was extraordinary. A great deal of new wealth was created and a large proportion of it was monetized and left onshore. The commodity cycle is still very much in Latin America’s favour and that is creating considerable new wealth. The strong M&A market is helping to fill part of the gap left by the much weaker IPO market this year. However, it’s true that monetization is not so fast as before."
Darcie Burk, head of Merrill Lynch’s global wealth management group for Latin America, says: "The Merrill Lynch/Cap Gemini report shows that Brazil has been an engine in terms of wealth creation – the growth in its high-net-worth population was only surpassed by India and China.