Synergies with other parts of the bank and cross-selling are important for capturing wealth
Fees are not growing in line with AUM many clients prefer to stick with fixed-income investment that generates low fees
Brazilian clients are growing keener to invest onshore
Investments with tax benefits are becoming more popular, encouraged by government policies
High interest rates are depressing interest in equities
Euromoney I would like to start by getting a sense of how your organizations are doing in the current market. How fast have assets under management grown over the past 12 months and how do you see that rate of growth for the next 12?
JAW, Bradesco In the past 12 months the growth of our AUM has been about 25%, and this is where we see it for the next 12 months. This is what we have in our budget: between 23% and 25%.
RP, BTG Pactual We had very robust growth last year, with growth in AUM of around 50%; in the past 12 months it has been about 40%. We expect to deliver 35% growth in AUM in 2011. Our private banking story has changed a lot since 2009, when BTG acquired UBS Pactual. The robust growth weve had this past 18 to 24 months is a reflection of that. Since 2009, we have more than doubled our AUM.
GA, CS Hedging-Griffo We have been experiencing something like 25% growth in AUM. We expect the same growth rate for the next 12 or 24 months.
PMOS, Itaú Our trend has been similar to most in the room, with a growth rate of around 25%. We expect something similar for the coming year, mostly driven by growth in the demand for assets in the domestic market because of the opportunities we have here in Brazil with the strong real and high interest rates.
Euromoney What is your organizations strategy for capturing the wealth created by liquidity events in Brazil?
RP, BTG Pactual That is something BTG Pactual has always been very active in doing and doing well. We have lots of synergies with the investment bankers, both in capital markets and mergers and acquisitions. As long as you really coordinate with those guys from the outset of the transaction whenever possible, given regulatory issues you increase the chances that the client will become a wealth management client. Its a two-way street.
What happens in Pactual is that sometimes we refer clients to the investment banking team, when they have a transaction of sufficient size, and then that creates goodwill with the investment bankers. And so, when they originate a deal, they bring us on board, especially on capital-market deals. If the deal is public, we tend to work with the investment bankers from the outset so that we can be closer to the client going on the roadshow, for example.
According to our internal statistics, once were really involved with an investment banking client from the start of their liquidity event, as opposed to a deal that is not coordinated by our investment bankers, we are four times more likely to win their private banking business.
Euromoney Does that sound right to everyone else? Are you four times more likely to convert your own IB clients?
GA, CS Hedging-Griffo This ratio sounds correct. When the client is involved in a liquidity event, he is so focused on selling his business or selling his position that he doesnt have time to think about what to do with the money afterwards. So it is easier if you are ready when they are ready to take this step.
JAW, Bradesco One topic that has been addressed, synergy, is something that we are very focused on. We are very focused on segmentation and getting a clear understanding of the advantages we have from having such a large client base. There is no doubt that this profile has huge potential and we are still not exploring all of it.
To give you some quick examples of what we have been doing: we go to our colleagues in other departments and these guys are generating business for us without even knowing it. We are looking for highly paid professionals who get a cheque and will eventually deposit it somewhere, so we go to the credit-card division, the marketing division, the pension-plan division and the insurance division and say, for example: Who is buying insurance for boats? and then we do the cross-selling.
We also go back, look at our existing client base and really explore the potential for these clients. Sometimes we go hunting for clients and we can forget about those that are already with our bank. We have internal compensation programmes that reward [staff for] growing existing clients, who eventually become ultra-high-net-worth individuals and have money in two or three different situations, and we work very hard with those guys. Eventually, if you have good products and services, your share of wallet will be bigger than your competitors. It requires a lot of work internally to promote the private banking group.
However, with such a large, commercial retail bank, there are still some areas that you dont even know exist. Private banking at Bradesco has been established for about 10 years. I go to some branches in the countryside and they have never heard about private banking. So we have a lot of marketing to do to tell these guys: This is private banking in Bradesco, and we can help you with x, y and z solutions.
Euromoney Itaú BBA has quite a lot of autonomy from the retail banking group. How do you align and reward these cross-selling opportunities? How do you ensure that you are aware of the opportunities?
PMOS, Itaú In terms of new business development, we have a separate unit that has a strong focus on business generated within our firm. We have private banking professionals who sit in the IB and corporate finance offices they participate in most of the issues there. This really works; we have a continuous stream of opportunities coming from this unit.
We also created another initiative a couple of years ago. We brought part of the investment banking team within our private bank practice. We have these people solution partners who go out to meetings with the private bankers to meet our clients. Their role is to get leads and opportunities that might be too small for an investment bank. This strategy has been successful in generating new business opportunities.
LSR, Itaú We work very closely with not only the investment bank but also the corporate bank. Sometimes the private bank has better access to the owner of the company than the investment bank or the corporate bank. We introduced new solutions partners and real-estate advisory services, looking to the client not just for the liquidity that he has with us, but also for the illiquid assets sometimes its in real estate, sometimes its with corporate business, opportunities that are not yet in the market. We introduced this service in 2009; we have better numbers than we expected and, more importantly, we are giving a more complete service to the client. So even though we are in a separate division from Itaú BBA, we have a strong partnership with it.
Euromoney Can you give us some sense of the revenues that are being generated from this solutions partners initiative?
LSR, Itaú This market depends more on the economy than on our own efforts alone but we are benefiting from the strong Brazilian economy. Since starting this new business, it has been growing by about 50% to 60% a year, but it is still just beginning.
Euromoney Moving on to fees, we have AUM rising by 25% or more, but can you give me a sense of how quickly fees are growing in comparison? What are the factors that restrict fee growth and how you can maintain profitable margins?
LSR, Itaú AUM is growing faster on the ultra-high-net-worth segment, which is more price-sensitive. We have revenues growing, but return on assets is lower than it was in the past, simply because bigger clients are more price-sensitive. We are very disciplined with our price targets and price goals.
GA, CS Hedging-Griffo I fully agree. The ultra-high-net-worth segment is growing most quickly and it is most price-sensitive. I would just add that the high interest rates we are seeing are another challenge. The liquidity is in the fixed-income segment, which traditionally gives us lower fees. So there are two challenges here: one is the segment of growth and the other is high interest rates, which attract a lot of liquidity.
JAW, Bradesco Unfortunately, fees are not, in our case, growing as fast as we would wish. This is mainly because there are a lot of customers who are willing to pay a little for greater liquidity within fixed income. They talk about diversification and becoming active in risk funds and hedge funds, etc, but they listen to everything we can offer them and then at the end of the day they say: OK, I am glad you have told me about all the options I have, but I want to keep my portfolio in fixed income. In our case, this is the product that gives the lowest fee for private banking. The bank as a whole can make a lot of money because it can then lend this money on to the corporate segment. But for the private banking business, it is not good we are doing well in AUM growth, but this isnt matched in fees. There is a lot of concentration on fixed income and demand for liquidity in case things get better with the equity market. It is tough.
RC, BTG Pactual We are all talking about the same type of client, and they usually react to uncertainties in the market. The problem was very serious during the 2008 crisis, when a huge amount of assets went to fixed income and, of course, it is the lowest fee-generator for everyone in private banking. Some diversification out of fixed income returned during 2009, but we are still a long way from what we saw in 2006 and 2007. I think we all agree on this. On the other hand, while interest rates are high right now, we do not believe that this environment will stay for the next 10 years. We believe clients are getting prepared to diversify their portfolios into other types of products, not necessarily riskier products, but alternative products. And that would give us the industry as a whole the opportunity to generate new ideas with better fees.
Euromoney What about clients appetites for diversifying their wealth outside Brazil? For example, what proportion of money generated by a liquidity event is kept onshore today?
GA, CS Hedging-Griffo Looking at our currency, now would seem to be a very good moment to send money abroad, but clients are very focused here they want to be here, they want to invest here, they feel they have other possibilities in Brazil opportunities to invest again and again with high interest rates. It is very rare for our clients to want to send money abroad.
PMOS, Itaú There is another issue here in the financial crises that we have had in the past, the safe draw was always international markets. Nowadays you cannot say to your client: "Invest in the US or in Europe, you are going to be safe with offshore investments." Very low interest rates, high currency volatility and unstable economies in developed markets make the domestic investment opportunity much more appealing.
A long way
RP, BTG Pactual There are a couple of things that matter. Of course, the currency and interest rates play an important role but, as Paulo said, Brazil has come a long way in terms of being more institutionalized. There are more economic opportunities.
There is a saying that we hear a lot from the older generation of clients: Brazil is a great place to make money, but not necessarily a great place to keep your money people keep their wealth abroad. But such a philosophy has changed among the new generation of entrepreneurs. They make money here and they keep their money here, investing it here in the financial markets or in real estate ventures. That has a lot to do with the stabilization of the country and the current growth opportunities.
We have another saying that if you ask a person: "How wealthy are you? What are you worth?", someone in the US will say "I am worth $50 million", a European will say "I am worth 50 million" and the Latin American will say "I am worth $50 million". But we are entering an era when a Brazilian would say: "Im worth R$50 million [$32 million]." There is faith in the currency. We have come a long way and it has taken a long time, but the country has achieved maturity in the past two decades.
JAW, Bradesco The only situation when I have seen Brazilians sending money abroad recently is to buy real estate: I have seen so many Brazilians buying real estate in the US, particularly in Florida. I have a client who 18 months ago sold his commercial building in São Paulo and bought real estate in downtown Manhattan; he paid less in downtown Manhattan per square metre than he received for his São Paulo property. São Paulo has become a very expensive city. Imagine downtown Manhattan being cheaper than São Paulo!
Euromoney Gustavo, I know your banks platform has been developed to enable your private banking clients to take advantage of CVM [Securities and Exchange Commission of Brazil] rule 456, which allows Brazilians to buy foreign assets. Is that generating any interest now, or is it something for the future?
GA, CS Hedging-Griffo Over the past 12 months its value has probably been more for opportunistic trades, for some specific assets that clients sometimes want to buy. It has not been used as a global diversification tool with clients looking to keep their money onshore but still buying, say, 50% international assets. It is more a way of taking advantage of specific opportunities. Having said that, these opportunities do arise and we have seen clients buying assets in this manner.
RP, BTG Pactual The client is accepting more alternative investments that are less liquid, and allocations into different markets and asset classes other than the typical local Brazilian instruments. We have had some success in the past 18 months in establishing projects that take advantage of CVM 456. We have seen some clients willing to diversify their assets into different asset classes abroad, though domiciled in a local fund. We have developed three local feeders in the past three years, which are mostly invested in offshore hedge funds. The experience so far has been great. One of our funds is worth R$1.4 billion, which is quite a lot by local industry standards for a multi-market fund. The client accesses the financial markets abroad but at the same time doesnt himself have to establish an account abroad.
GA, CS Hedging-Griffo The situation will change in the longer term, so you have to be prepared, because I dont believe clients will just want to invest here forever. You have to build your platforms so that you can take advantage when client appetite turns.
PMOS, Itaú Another important issue that we have been facing at Itaú is this issue of capacity in our domestic capital market. For our budgeted growth of net new money for 2011, for instance, the initial allocation in hedge funds had to be scaled down, as many of the targeted funds were either closed to new investments or could not take new allocations from us, as we already had big positions with these hedge funds.
Euromoney It is a fixed-income environment at the moment. To what extent is the current monetary cycle stifling the desire for other assets? Are private banking clients just sticking with fixed income and, if so, how long do you think this cycle will last?
LSR, Itaú We can say that the CDI [Brazils interbank lending rate] is still a very good investment. But we are seeing many of our ultra-high-net-worth clients investing in the long term. Now they accept five- or 10-year investments, which is very different from five years ago. The stock market here is not doing that well, but the real economy is doing very well, and we observe clients looking for private equity alternatives. Even with the high interest rates, we have seen many clients who want this kind of new investment.
Euromoney How is the liquidity-to-return trade-off developing among private bank clients?
RC, BTG Pactual It depends a lot on the type of product. If it is fixed income, they will tend to look for liquidity, especially in multi-market funds or hedge funds. Our clients are more comfortable with tax-benefit products for the longer term. We also had a great experience with private equity, which is not familiar to our typical Brazilian wealth-management clients. But we raised a lot of money for our private equity funds to co-invest with the bank. Our products have a maturity of between six and eight years, and to have a lot of money going to this type of product is a very different situation from what we had about 10 or even five years ago.
PMOS, Itaú Yes, five to 10 years ago, you didnt have appetite for these assets.
RC, BTG Pactual Private equity used to be just for foreign institutional investors. But now, depending on the type of products, some clients are willing to commit more time to receive better returns.
GA, CS Hedging-Griffo It depends also on the origin of the money. I agree that it is easier today to raise private equity funds than it was five or 10 years ago. Then, it was not possible to raise huge private equity funds locally. Today, clients who have sold their companies are more willing to invest in the longer term. It is different from the type of client who created his liquidity on his working salary his income depended on him still working at the company and so he had a different view. These new clients experience a very big liquidity event, they are entrepreneurs, they receive their money but they are not entirely happy with a huge amount of money invested in CDIs. And so they want to do something with the money, something to do with the real economy again and that is why you now see private equity funds being raised, because it feels like [the investment] is coming back to the real economy.
Euromoney What is the appetite like for products with tax benefits? And do you think tax incentives will be key to motivating the kind of investment the government has signalled it wants to encourage into infrastructure as an asset class?
JAW, Bradesco Everybody likes these tax-efficient assets.
Euromoney CRIs [real estate receivable certificates]?
LSR, Itaú CRIs, LCIs [real estate credit notes], LCAs [agribusiness credit notes] any kind of investment with tax benefit.
JAW, Bradesco There is nothing better than that these days. They have short liquidity, in six months or less, with high returns and no tax.
RC, BTG Pactual Clients are becoming more familiar [with these products] on a daily basis because they invest 1% of their portfolio [in them], then 3%, then 5%; it is increasing. We have incentives for the LCIs and CRIs in the real estate sector and LCAs in the agriculture sector, and now the recent incentives for the infrastructure sector. It is a good policy from the government and clients will buy them. At the beginning, these were short-term products, but now they are becoming longer-term. If you look at the issuance of CRIs, they had a one-year maturity, then three years, and now they go up to five- and even 10-year maturities. For the infrastructure-linked investment, it is going to have to be the longer-dated bond, and there are clients who will be interested in them. They are now happy with maturities of between three and five years; and they would have to go to seven and 10 years to match infrastructure needs. It is a good policy for the government to encourage longer-term infrastructure investment with tax breaks. Of course, you also have to have the incentives of a high interest rate.
GA, CS Hedging-Griffo It shows that tax incentives are a very powerful tool for the government. Private clients respond very quickly and it really makes the client invest when they see this profile of tax with return.
PMOS, Itaú Its also noteworthy that, according to real estate experts, in two or three years time, savings deposits in Brazil will not be enough to continue financing the strong growth that the real estate industry has shown so far. In 2010 the real estate market raised 65% R$56.2 billion reaching its highest level. This year, specialists expect to achieve 50% more than in 2010. On the other hand, savings deposits are maintaining growth of 15% to 20% a year. The government will be able to close this gap by creating more products with tax benefits, which will positively affect our clients.
RP, BTG Pactual It [the tax incentive programme] is a very important tool for the government, not only for developing these markets but also for lengthening the maturity of investments in Brazil. I guess the incentives will do the same thing with infrastructure. I dont know what the result of infrastructure investment will be, but I can assure you it will be better with tax incentives than without.
RC, BTG Pactual At the end of the day, it is a great signal of the countrys maturity that the capital and financial markets can finance the countrys needs be it real estate, agriculture or infrastructure. This has been achieved over the past 10 to 12 years.
Euromoney Moving on to equities: last year, it was very hard to generate alpha. What kind of performance have your equity funds had and what results have these had on high-net-worth individuals attitudes to equities, both in the short term and in their perceptions for the longer term?
LSR, Itaú We work with open architecture, so last year, even though the Bovespa didnt do well, some third-party funds and some Itaú Asset Management funds did very well and performed between 10% and 20% above the benchmark. Nominal returns were even higher than the CDI. Just to go into the other question, because it is related, we see that clients are investing more in equities than before and we have seen in the past 24 months that hedge funds are losing ground to equity long-only funds. Clients are migrating from hedge funds, not just into equities, but also to credit. Equities are more important than they were in the past and they are performing well.
JAW, Bradesco Some funds out there are performing quite well despite the fact that last year there were people who wanted to sell. We have some clients who are happy with the equity funds that are focused on the consumer sector and that are performing quite well. But again, when you have interest rates above 12%, it is difficult to come up with different ideas and solutions. I remember that when interest rates in Brazil were about 8%, clients would almost take any assets to have a higher return. But with fixed income still providing reasonable returns, this is where we are staying for the moment.
Euromoney How low do interest rates have to fall to spark interest in moving into equities?
JAW, Bradesco Looking back, when interest rates were below 10%, we saw a movement to equities. When interest rates are 10%, clients are happy with these returns; when it is 9%, they think this is not good enough. Then they start to look to equities. If we have a one-digit interest rate, the mentality changes.
GA, CS Hedging-Griffo I would say 1% a month is the psychological barrier.
RC, BTG Pactual When interest rates were at 8%, there was a lot of interest [in equities]. Now there is not such strong migration because equities have been at the same level for the past 18 months. People are very prepared to increase their equity allocations. They already have in the past five or six years, but now they are in a holding mode.
As soon as we get a sign of a little positive performance, people will want to jump in; they are more willing to invest, especially in the more alpha-driven products rather than the indexed products. There are good names in the market; some of them generated double-digit alpha last year. As Luiz said, it is interesting that when you have double-digit alpha, you at least match our domestic interest rates. And hedge funds are not performing as well, so I agree with him; people are looking more into the alpha generators in equities.
RP, BTG Pactual In 2007 clients were buying hedge funds like crazy, thinking that they were like proxies for the CDI, because everybody was buying the Brazil kit and the markets were moving up constantly. Since the crises, clients are much more interested in deciding their asset allocations themselves rather than mandating that to the hedge fund. But clients should ultimately switch the asset-allocation decision back to managers.
There are a bunch of different names in Brazil that created alpha last year; there are a lot of people who have generated 10% to 20% alpha, depending on the kind of fund. A lot of people made money on dividend funds, for example. Despite this trend, equity funds have not attracted a lot of new funds to the industry.
JAW, Bradesco There is too big a risk in equities relative to fixed income. The companies in Brazil are global, they are also affected by the global mood and there is no mood for the stock market. You cannot speculate any more if you see things going on in Greece. You ask: Will it go or not? When will it recover? What is going on in Spain and the whole of Europe? And then ask: Why is the mood really not there for equities? Compare that with fixed income with investment grade, huge reserves, political and economic stability; it is a huge premium to be in fixed income in Brazil.
Euromoney Lets imagine an environment that is less favourable to fixed-income domination a Brazil with single-digit interest rates if you pick one asset class to be the star performer in this environment, what would it be?
JAW, Bradesco Hedge funds.
PMOS, Itaú Private equity would be there.
LSR, Itaú I agree I still believe in private equity. Companies in Brazil are changing size and so there are good opportunities here for more profits. Revenues are growing by 20% to 25%, which you dont find in many places around the world, so clients are willing to invest longer-term. Private equity is bringing in a lot of interest and will bring a lot of return.
LSR, Itaú We see a lot of space for consolidation in the Brazilian economy. After consolidation, the stock market is a possible exit route for those companies.
Euromoney You are saying that private equity will be popular. Could there be a capacity issue of too much money chasing too few experienced, quality, private-equity managers?
PMOS, Itaú Some of the private-equity players in the market tell me that they are already seeing some prices moving up too fast. I talked to a friend of mine today; he was close to getting a deal closed and then all of a sudden two other big private equity players came in and outbid him by about 30%. There is a lot of money chasing few opportunities here.
RP, BTG Pactual Capacity is not an issue now, but it may become an issue. The pipeline of opportunities that we see and that our private equity team or merchant bank team are looking at is larger than the amount of money that we can put in. There is going to be some space for other managers as well. There are very good local managers and there are many different private equity firms establishing themselves here in Brazil.
GA, CS Hedging-Griffo Our public market is still small compared with the amount of private companies. If we look to other developing, emerging markets, you will find a much bigger stock market in terms of the proportion of companies listed. So we still have room in terms of assets to be bought. Another issue, for sure, is the quality of the managers, but again, as Rogerio just mentioned, we have a lot of solid private-equity managers trying to understand the market, trying to come here and raise money, so I dont see this as an issue in the short term.
LSR, Itaú Private equity is also an opportunity for clients to participate in the GDP play. Because our stock market is so much about commodities, it is becoming more related to Chinese-driven growth.
JAW, Bradesco It might just be the ultra-high-net-worth clients investing in private equity at first, but then and I have seen this you get a guy who has never heard of private equity and has no risk appetite, but hears this is a good opportunity, and comes to you and asks: Do you have this? What the hell is private equity?
RP, BTG Pactual Private equity funds are even mentioned in the soap operas these days.
JAW, Bradesco Yes, and sometimes [clients] have no real idea what [private equity] is and when I ask: Why do you want this?, they have no clue. Theyve just heard the name. They see the key players going to private equity, they are followers and so they will probably ask for the same.
PMOS, Itaú We have recently been developing some studies that try to forecast the new trends of the private banking industry in Brazil and how the younger generation will deal with it. What we see and we did extensive studies with consulting firms that interviewed clients of ours and non-clients is that this young generation in Brazil has an appetite to be entrepreneurs. They want to participate, as Luiz said, in our GDP growth; they want to have banks as their consultants and partners.
Euromoney What do you think are the biggest challenges both for the industry and for your organizations? What dominates your strategy meetings at the moment?
LSR, Itaú The industry needs to be very careful about a price war because it would not be good for anyone, even for the client. In fact, mainly for the client, because what will happen, if the return to the bank goes very low, is that the service will get worse. Clients dont want this. This is one issue. Human resources are another big issue. The industry is growing 25% a year and even with additional training and retention, we are still going to have a big gap in personnel needs.
Euromoney Is profitability getting so stretched that the service to the client could become a real issue?
LSR, Itaú Not yet, but we need to be careful. The market is growing and revenues are still growing, but as I said before, there is a limit to this revenue growth, which will impact on service levels. If service quality seems to drop, we will face a real problem.
PMOS, Itaú Quality is an important point. We invest a lot of time, energy and money in improving quality in everything that we deliver to our clients. We feel that our clients value, more than ever, the quality of our service over the performance of products that, in many circumstances, are fairly standardized in our domestic market.
JAW, Bradesco Luiz was very precise when he said a price war. It is not nice to say, but you get what you pay for. This is a big issue, and again I go back to interest rates currently, they are so high in Brazil that customers have for the past 12 to 18 months been calling for a single product: CDIs.
We have to be ready when the market turns around and know how to place funds in the equity market properly and diversify elsewhere. I always remember the old days in Brazil. The interest rates were so high that lending to clients was a marginal activity. The moment that interest rates dropped and banks resumed their credit business, most banks didnt know how to lend, how to read a balance sheet or how to approve lines of credit. Credit officers were lost and non-performing loans increased a lot.
RP, BTG Pactual I agree with what everybody has said, but the profitability issue is, unfortunately, here to stay because as long as you have a market that is growing as Brazil is at 23% and new entrants want to come in, how are these people going to come in? The answer is price they are buying clients with price. We see that happening every day and, in the short term, our projection is that we are not going back to what return on assets used to be like in 2007. It is going to take a long time for us to go back to those levels. As Renato said, revenues are going up because we are putting in more money and the business is growing, but in terms of return on assets, there is still a big challenge for us as an industry to improve.