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Brazil private banking debate: Brazil’s private banks adapt to a changing economy


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Wealthy Brazilians’ traditional dependence on positive real interest rates for investment returns has been undermined. Euromoney’s roundtable of private bankers discusses how wealth managers are developing new investment opportunities for their clients and how those clients are responding.

Brazil private banking debate participants


• In 2013 to date growth of assets under management has slackened compared with 2012

• Clients are nervous about returns in view of falling real interest rates resulting from lower rates and rising inflation

• Clients are therefore showing greater interest in equities, including investment abroad

• However, volatility makes them cautious about switching investments

• But a growing proportion of allocations are to assets other than fixed-income funds

• Investors are still keen to maintain relatively high levels of liquidity

• Capacity limits in Brazil are a spur to overseas investment

• Inside Brazil, most wealth management houses are expanding organically – via opening regional offices – rather than through acquisitions

Rob Dwyer, Euromoney Let’s start with a quick review of the past 12 months and projections for the next year. Flavio, I know last year Itaú was projecting 20% growth for the past 12 months. Was that accurate?

FS, Itaú No, it was a bit lower than that. The local market in Brazil, based on the official statistics from Anbima [the Brazilian Financial and Capital Markets Association] grew by 16% and Itaú is in line with that. For the next 12 months we are projecting growth in the range of 12% to 18%. The mid-point of that projection – 15% – is in our view a good reference and our budget is based on 15% growth.

Euromoney João, you were most optimistic last year, with a budget of 30%. Did you achieve that?

JAW, Bradesco Last year, yes. In the past few years, as we all know, the private banking industry in Brazil grew about 22% a year and we managed to be a bit above that. We revised our numbers for 2013 and it is pretty much the same as Itaú – 15%. If we achieve 15%, we will be happy. In the first quarter the industry grew by only 1.56%. I believe it was the lowest quarter ever, since Anbima started to measure the numbers.

In the past three years there were a lot of M&As, which drove wealth generation, but we haven’t seen this in 2013.

EF, UBS Our case is different. Since we came back to the Brazilian market only two years ago, our base is much lower. Our growth was almost 40% last year, and this year we are expecting 20% to 30% growth. In the first two quarters of the year growth was around 25%. Our projection is that the next few months will be a bit more difficult since clients are in a wait-and-see mode at the moment, but we will still have good growth this year.

MA, CSHG We had a strong 2012 and grew more than 35% last year. In the past 12 months we have grown 28%, but looking ahead we see more normal growth, by which I mean there won’t be the same drivers of growth that we saw in the past, such as stock-picking opportunities and a booming real estate market. The pipeline for net new assets is still good, and we expect to grow about 20% in 2013.

RP, BTG Pactual Last year, BTG Pactual’s assets under management grew 30%. In the past three years our compound annual growth rate was about 27%, which is about the average for the past three years. As everybody has said, this year things will be a bit different. It is a tough market, so we are projecting 15% to 20% figures for 2013. It has been a very tough first quarter for the industry as a whole; it became flat basically. We are projecting higher growth in revenues than AUM as we have had much higher compounded annual growth in revenues in the past few years.

Euromoney How are clients reacting to the macroeconomic environment? Brazil has had falling yields, a falling Bovespa, falling investment, GDP being revised down and a negative ratings outlook. Is there a new normal in expectations for portfolio return?

JAW, Bradesco Our clients are nervous like never before. Of course, in the past we have had decades with high inflation, but in the recent past inflation was normal by global standards and yet interest rates were still very high in Brazil and people became used to having high returns. Clients are now concerned that the money they have today will not be enough for them if they live to 75, 80 or 90 years of age. People are living longer. So it is a huge, new education process, and in my opinion the education starts at the bank, with our bankers. We also got used to the environment of high interest rates, liquidity and low risk, but this is over.

CF, CSHG It is the combination of lower nominal returns and higher inflation that is worrying clients the most. About three years ago you expected returns of about 11% to 12% of nominal rates, but you had 5% inflation. Now you are talking about 8.5% to 9% of nominal returns and inflation is north of 6.5%, perhaps getting close to 7%.

That is the main thing that is changing, at least from our perspective. It is leading clients to change investment behaviour. In the past they would listen to ideas in other asset classes and then say: "No thank you. This is not for me, fixed income works fine." But not now; now they are looking for international deals, they are looking for different asset classes, even hedge funds. We all know that hedge funds are very well accepted in our industry, but in the past no one allocated into equities as an asset class; clients are now prepared to do so. Until recently, our average portfolio allocation to equities was 6%. Today it is about 10%. If you look globally, that perhaps represents a small change in mindset, but it is an important change, and it is driven more by inflation than by lower nominal rates. Clients want to know what asset classes can protect them from inflation over the next 10 or 15 years. It has been very interesting to have these new conversations with clients.

Euromoney Edinardo, you characterized your clients as being in a wait-and-see mode, but are you seeing them making allocation shifts?

EF, UBS The allocation has begun, but we have still have lots of questions for clients. It’s a learning process. For example, when we talk about the allocation of assets offshore through [CVM rule] 465 the process has already started, but I do think clients still need to learn more. They are testing the waters, but then when you have volatility like we had in the past two weeks it creates uncertainties in their minds, and they see interest rates rising again and huge stock market volatility and they decide to wait and see what happens in the next weeks.

RP, BTG Pactual Last year we spent a lot of time educating clients. It takes time for clients to realize that the new norm in Brazil will be very low real interest rates, because nominal rates were coming down and inflation is steadily high. Even if Selic [the official base rate] goes up to 8.5%, 9% or even 10% we are still going to have, for quite some time, very low real interest rates in Brazil. You have to educate the clients.

Our strategy has paid off: we started doing this education in late 2011 and there was a noticeable shift from fixed-income portfolios to hedge funds and equities. Even though the stock market has been awfully bad in Brazil, as we all know, there are managers generating 20% alpha over the Bovespa. The same is true with offshore allocation. With the US recovery and everything that is going on with Europe, the situation in China and with emerging markets growing less than people supposed that they would, we have been educating the clients to invest more offshore, especially in the US. This will be a growing trend.

In the past eight to nine years, clients allocated 90% or 100% of liquidity events to Brazil. That will change. That is already changing, and we made a big effort to enhance the product platform to capture that with some local feeder funds to invest in offshore assets. The next step is towards a shift to more long-term investments and more currency risk. Clients are investing in dollars, unhedged, in offshore products through an onshore Brazil vehicle.

PM, Itaú Although in the past credit was not very important, because of the high interest rates, it is starting to become important for our clients. For example, sometimes they are using long-term investment structures and they don’t have liquidity, so they are starting to use credit as part of their investment strategies. Also, the uncertainty about the Brazilian economy associated to the expectation of rising interest rates in the US is a mix that paralyses many clients in terms of when to move allocations and when to add a twist of aggressiveness into their portfolios.

FS, Itaú The past 30 days have been a big challenge, but if we take a look back over the past 12 months, or the past two years, this reallocation process has started in a big way. In our case, when we look back to 2011 our clients were roughly a bit more than 50% allocated to CDI-linked instruments, what would be called the money market, and this was an asset class that here in Brazil was the core part of the portfolio of our clients. Today, when we look at our position, we see that our clients now have less than 30% allocated in these instruments. That’s a big shift to many other alternatives. Our hedge fund allocation has grown 40% in the past year. And not only hedge funds, but also real estate funds, private equity funds; things that were not part of the portfolio of most of our clients until two years ago – they have also grown 40% in the past 12 months.

When we look at the industry as a whole, the fixed-income funds are pretty much at the same level that they were last year. New assets are being allocated in many different asset classes instead of fixed income.

GP, BTG Pactual Adding to Flavio’s point, what we are discussing here is the analogy between now and perhaps 1994, which was the last year in which the US raised rates. Obviously, the amount of monetary stimulus now is a lot bigger. Also, if you compare the emerging market environment now and then, we are in a much better shape now. The exchange rate can fluctuate. The debt-to-GDP ratio is basically fine. We have very large foreign-currency reserves. So I don’t think we will see too much volatility, and it is not going to be a major crisis.

However, we might be entering a period in which the dollar might get stronger against the real, or against the Australian dollar, or any other emerging market or commodity-linked currency. That said, we are at a point at which diversification might kick in. Clients were creating wealth out of M&A deals in Brazil – wealth was generated in Brazil in reais and so they said: "If I got rich that way, why not keep it that way?" It is starting to sink in that perhaps to have 90% or 100% of your wealth in reais might not be the ideal balance.

Euromoney Do you think the current volatility is a passing phenomenon in the market?

GP, BTG Pactual It is very hard to say, especially after the past few days. We don’t have any big positions or bets against the economy, be it on interest rates or the real. The main part of our capital – and the clients’ – is still allocated to Brazil in certain ways, but we are trying to diversify. We are investing in things such as a timber fund, or infrastructure, and private equity remains strong. The stock market doesn’t reflect what the Brazilian economy is and there are still a lot of opportunities for consolidation and sectors that are not in the stock market that you can still profit from. Yes, you will have to have less liquidity; it is not the money market.

The US took 20 to 30 years to go through what we have been experiencing for the past 10 years. Brazil still has a long way to go. It doesn’t feel that this process will end because the inflation is 6.5% or something like that. Fifteen to 20 years ago, we used to have 6.5% inflation a day, or perhaps an hour. On the macro level the country is fine. What we need to make sure is that on the microeconomic level we will have the adjustments needed for another leg of growth. That is still not in place, but it could happen.

MA, CSHG  Volatility comes and goes, and we are going to see more and more of it in the next few months. What is most important in our mandate is wealth preservation. We had a lot of opportunities in 2012 and early 2013 when we saw a stronger dollar and were concerned about inflation in Brazil. This is the discussion we have had with our clients. At the same time, while we know that volatility comes and goes, the behaviour of our clients is well aligned with us. Clients now invest for 10 or 15 years. Our portfolios must be prepared for that. So far we have only seen volatility in this market; we haven’t seen a crisis yet. We see a very complex scenario ahead, but with a lot of opportunities.

CF, CSHG It is very interesting, because this is the first time that our clients are going to face more volatility in the new strategy of adding risk to the portfolio. I agree that volatility is not going to change the trend of lower returns: that trend is here to stay in Brazil. But this is the first time clients are being tested. I agree with everyone that this doesn’t seem to be a crisis. What is happening is a good thing. The US is getting stronger; rates are starting to normalize. It is going to take two to three years for them to normalize completely, but this is the first time clients are facing a bit more volatility. The year 2012 wasn’t a very realistic situation: fixed income yielded two times the CDI because of what happened to interest rates, and most hedge funds did incredibly well. Most equity managers generated very high alpha, sometimes three or four times the Bovespa Index. And so clients started playing this new risk game in a very nice environment, but this year the road will be bumpier. So far clients are reacting well; they are keeping the long-term perspective that whatever they get in five years and 10 years is what matters and that the world is going through change, but it will be a good change in the end.

RP, BTG Pactual We are always going to experience bumpy roads in terms of volatility. Volatility is here forever; it might be up or down. Our clients are also reacting well and what I see is, as they have been tested, they don’t come to us and say: "Let’s go back to CDI", or: "Let’s go back to fixed income, to wait and see", but rather: "What kind of asset class will profit the most from a more volatile market?"

Clients are also keeping their long-term perspective. We are talking about private equity deals in the US with some of our clients. This is a 10-year to 12-year investment. If you had talked to clients in Brazil about that perhaps 10 years ago – even five years ago – it would have been crazy.

PC, UBS One point about the volatility: there is an important price for the economy from the real interest rates. We were working with real interest rates at close to 2%, and some months ago a lot of people were saying this would go to zero, or that we would even have negative interest rates. We did a study that shows that there is a huge link between real interest rates and the savings rate. Brazil has a very low savings rate. If you don’t fix that, you cannot achieve very low real interest rates. Regarding volatility, people tend to react much more on the short term than what really matters, which in the long term in Brazil’s case is the savings rate of the country. Clients are living in a paradox, where they know that the rates are lower and that they have to be more aggressive to get more return, but on the other hand they know that the market is not good. They ask how to behave in this paradoxical situation? Their answer was credit, real estate and on the equity side dividend-paying stocks – things that are more aggressive but, in the end, you are feeling that you are playing something that has protected down-side risk. Of course, offshore investment is included in that in the sense that it is something in which you can get more opportunities, but you feel safer. It is a way of looking for more returns, but in a safer way.

JAW, Bradesco Liquidity, in my opinion, is still an issue for most clients. They want to keep some liquidity. It is fair enough to say that most clients at this point are willing to allocate perhaps 40% to 60% in medium-term to long-term investments, but liquidity is still important to clients. And sometimes it is good to keep a little liquidity because a lot of opportunities appear when there is turmoil, when there is volatility.

Euromoney Are you seeing any desire for increased liquidity from clients because of the recent volatility?

JAW, Bradesco Volatility made people nervous – things started to change after October or November last year, but it has got deeper and stronger. It is too early to say if people are shifting back to liquidity, but at present it is not so easy to convince clients to allocate to the same products that they used to allocate to three or four months ago.

RP, BTG Pactual Let’s remember that after the shift in portfolio allocation clients are now invested in hedge funds in Brazil that have 90 days’ or 100 days’ liquidity. Whenever they are in equity markets funds they are in 30-day or 60-day liquidities. It is of course much longer for private equity. You can’t just go back and forth, you can’t just go back to liquid products; clients understand that.

Euromoney What are the opportunities in equities? Can managers still generate alpha through stock-picking in the consumer-oriented companies?

GP, BTG Pactual  I am going to answer that with a reference to a product that we launched last year, which in a total lack of creativity is called Alpha. The strategy is to have on the long side a basket of managers; we leveraged the basket and then we go short on the Bovespa. The strategy is working very well so far, not only because managers can generate alpha, but because the index is a backward-looking index. As the stock increases trading volume it gains weight in the daily Bovespa, but the Bovespa will not necessarily reflect what is good out there. In the past 10 to 20 years it has certainly not been reflective. If you look back to the late 1990s you would have a lot of telecom. In the beginning of 2000 possibly you wouldn’t want to be long telecoms, you would want to be long the cyclicals, and now it is quite the opposite – you want to be long consumer stocks, not the cyclical; not energy, not oil. The strategy is working beautifully and this still might be the case, as long as they don’t change the Bovespa.

So to answer your question, yes, equities are not the Bovespa – the asset class is something else. If you look to the international portfolios, the guys that are the most conservative are losing money now because fixed income is down by 5% this year. If you are more aggressive you are making 7% to 8% this year in dollars. As long as the S&P dividend yield is still higher than the 10-year bonds, that is something we advise our clients to do.

MA, CSHG  I agree. We are well allocated in equities, but they do not reflect the Bovespa. Since 2012 we have allocated more to equities abroad. We also set up a global equities fund in which to invest abroad. We placed some structured notes, with capital protection linked to either the S&P or to US real estate. We predicted a recovery in the US market, and when we have a client with a long-term view, we put in place a global asset allocation. We are going to keep a balance in investments here and abroad.

CF, CSHG The success that the equities class has had in the past year and a half is due to differentiation from the Bovespa, as well as international equities. If we look at clients’ portfolios today, the most allocated strategy is long bias. That is something that we didn’t really have some two or three years ago. Managers have the freedom not only to stock-pick whatever they want but also to short stocks or stay in cash. That has enabled them to have extraordinary performance compared with the Bovespa index. To answer your question, yes, we do have a lot of expensive stocks in the market today. After 2012, 2013 has started in a very difficult place. Defensives were very expensive. But you can still find good stocks to buy in the small and mid-caps. A lot of people, including myself, were concerned about this year: a lot of good expensive stocks, and a beaten-up Bovespa index. Maybe recent volatility will bring us opportunities.

PC, UBS We have very good managers in Brazil, a lot of good opportunities in companies, but the best performers were the bottom-up managers. If you are a bottom-up manager, you don’t look at commodities because you don’t have an advantage in doing that; that is much more a top-down approach. Commodities were not doing well, so the bottom-up managers performed well. But I don’t know when this trend will change; when the commodities will start to rebound. But when commodity stocks begin to rise I am concerned about the performance of these kinds of managers. They are very good, they can adapt, but this is a concern.

Euromoney When we are talking about geographic diversification are we talking about the US or are you seeing interest elsewhere, specifically elsewhere in Latin America?

FS, Itaú  In Latin America, equities are doing well. The economies in Colombia, Peru, Mexico and Chile are performing better than in Brazil. However, when an average Brazilian client makes the decision to diversify he is – most of the time – going to have a large offshore exposure in the US or developed markets. Our clients have allocations in Chile, Peru, Colombia, through corporate bonds, but those markets are much smaller than Brazil. Mexicans love Brazil, but Brazilians are not very familiar with Mexico, so we do not see Brazilians investing heavily in Mexico. Our clients do invest in other countries in the region, but most of their assets are still linked to the US, especially right now with the perspective of the US economy.

GP, BTG Pactual  The US is the usual suspect, but Europe, on a distressed basis, might present some good opportunities. We bought some good infrastructure assets in Spain, so that could be a decent cashflow for the clients at attractive yields as the markets are a little bit shaky. Also clients are getting more interested in Japan, for instance, as the shift in economic policy there is happening. We got in and out of Japan last year; we made a lot of money. Now we are a little bit out of the game, but as volatility is there, there might be some decent opportunities in structured products, both on the Nikkei and on the yen. We don’t have an edge in stock-picking there, but through the index and through symmetric returns on derivatives it could be quite interesting to allocate a little bit there. It is possibly a big move. It is reasonably cheap and it might present some decent opportunities.

Euromoney What about the currency risk with international investments? Do your clients generally accept the currency risk, or do you do any risk overlays?

GP, BTG Pactual We construct the portfolios, we basically allocate regardless of the currencies and we treat the currency exposure as a layer on top of the asset allocation. If the client wants to be more in reais, more in dollars and yen, or whatever, we treat that differently. The bank is very pragmatic about currencies. With derivatives you can protect the downside. Sometimes the volatility can help you out in building up structures in which you can explore a view, but with limited downside.

CF, CSHG The real has been very strong for the past four or five years, so when you look forward, clients are eager to have some currency exposure, especially to the dollar, but also to some other currencies that we might find interesting in a long-term view. We think there is room for currency allocation as well as asset allocation.

JAW, Bradesco The currency allocation depends on the size of the client. A big client is a citizen of the world nowadays. He wants to keep purchasing power in different countries. For this kind of client you need a strategic currency allocation in currencies other than just dollars and euros and Swiss francs and whatever. Currencies are important to smaller clients too, of course, but play a much more tactical role. In this case you can play around in different things, such as commodity currencies or dollars against the real.

Perhaps one of the reasons why the industry grew only 1.56% in the first quarter is that we have seen a lot of clients looking at having offshore investments and, at least in the case of Bradesco, the movement we see now was greater only in the second half of 2002 when [president] Lula was about to be elected. He was elected and, it is not a joke, but I keep repeating that Brazilians like to buy expensive dollars. The real was $1.60 to $1.70 for almost a decade and no one thought about selling. Now that it is $2.15, perhaps $2.20, there are a lot of guys rushing to send money abroad. That happened in 2002, when Lula was re-elected. When [president] Dilma [Rousseff] was elected we didn’t see that movement of people coming to us and asking: "I would like to have offshore investments". Usually they keep in dollar terms – either real or dollar. We don’t see much demand for Australian dollars, Canadian dollar, pounds, yen, but yes, a lot of Brazilians are conceding to allocate in different currencies.

Euromoney Is there a capacity issue for the best equity managers and private equity as well?

FS, Itaú  We are seeing a proliferation of new opportunities in this area, but not everything that comes to market is going to perform well or as expected. There are many more opportunities now than there were in the past, but we are very careful about what we send to our clients, as we are seeing a lot of people basically buying whatever we tell them to buy. There are good opportunities in private equity in Brazil, but we are also offering our clients private equity opportunities abroad. It is important to have this diversification because in terms of good alternatives in Brazil there is an issue in terms of capacity.

MA, CSHG Talking about capacity, we probably don’t have 10 hedge funds or 10 long-bias funds with a long-term record available in Brazil. We have a situation where most of them are closed for new investments. When we discuss asset allocation, the future here is CVM Directive 465 [the rule that allows clients in Brazil to invest abroad]. We are going to find good investments and opportunities abroad. In our case we are going to replicate abroad the same platform that we have in Brazil. It means open architecture, whereby we constantly seek out the best investments, not only in Brazil but globally as well. Capacity is only an issue if most of the clients want to invest 100% in Brazil, but now that clients are starting to diversify investments abroad, it is our mandate to find good solutions, good products and good services, both in Brazil and abroad.

PM, Itaú Directive 465 will be a much simpler way for smaller, sophisticated clients, who have scale as a barrier to opening accounts overseas, to diversify and be in the international markets.

GP, BTG Pactual  With the protection of the local regulator.

PM, Itaú That is correct, which they didn’t have in the past.

PC, UBS There are two ways of looking at capacity: from the distribution side and the asset management side. What is happening is that the domestic managers are increasing international asset classes in their portfolio, because they are also facing the problem that they have to close the funds. To have the funds bigger and open for more time you have to add new assets. In the end, the inclusion of offshore instruments is growing in two ways: among the private banking clients, who are adding in foreign asset classes, and on the product side, where the managers are including the products.

EF, UBS The new clients that we see confirm this trend. The new clients that are joining UBS here in Brazil allocate in reais, but a lot of them say: "We want to be close to a global bank, a bank that has the global content to offer international diversification because we know that, perhaps not now but in the near future, we will have to allocate globally". A lot of the interest is in the US, but the ultra-high-net-worth clients also want to hear advice more globally: clients asking about Turkey, clients asking about Europe, Spain – either private equity, or different options of investment.

Euromoney We haven’t talked about real estate in depth or any of the new tax-efficient capex bonds there? Is there anything that you think is a likely growth area for the next 12 months?

JAW, Bradesco Since you raised the tax-efficient products, probably the number one demand right now is for [LCDs] – the best option. The returns are pretty decent; they are liquid assets, so there is a high demand for those products. The main asset class that I see today are inflation-linked notes, because there is a lot of concern about inflation.

RP, BTG Pactual What we have tried to do, in the past as well, is to add to the portfolio some alternative investments that have no correlation whatsoever to most liquid financial markets. It plays a role in decreasing volatility in clients’ portfolios and educating them in investing in different things. Guilherme mentioned investors investing in timber in Brazil, alongside our own proprietary capital that we are doing for instance. There has been some acceptance from clients. We have attracted funds from clients to infrastructure, which is a by-product of private equity, but mostly focused through the infrastructure deals in which we participate. Clients have co-invested with us in the retro-insurance market abroad. That has produced 20%-plus returns for clients offshore, which is completely uncorrelated to any major asset class – it doesn’t matter if the S&P is coming down or what is happening with the exchange rate.

GP, BTG Pactual  The Brazilian economy is a reverse of China, in that China grew by investment and we grow by consumption. If that changes a little bit, perhaps infrastructure is the place to be. The banks made a shift, as Rogério said; we raised our $1 billion-plus infrastructure fund. Timber is more or less related to that as well. It might be the case that we could see a longer-term period of investment in Brazil. If you look to FDI last year it was $60 billion; people were bullish about Mexico and how the Mexican economy is booming. FDI in Mexico is probably a quarter of that in Brazil.

The Brazilian economy has scale and needs capital, provided that the government doesn’t make things too difficult on the micro side. It might be the case that in the next 10 to 20 years investments in Brazil as a real part of the economy might perform well. To your point, that will also include the capex bonds, but the focus will be on the equity side of capex. It could be a nicer opportunity.

FS, Itaú  We had this discussion last year about capex bonds, and the market is pretty much ready to allocate more money. The structure is not quite ready, but people are anxiously waiting to allocate more money. There are some concerns in terms of government intervention and project returns, but this is a market that has a tremendous opportunity to grow. At the moment we feel comfortable to structure products and to make these available to our clients in a more intensive way. That is going to pick up and grow rapidly, but it is not there yet.

CF, CSHG One concern that we had about the capex bonds – and all bonds for that matter – was that there was a very tight spread on the interest rate curve at the end of last year and the beginning of this year. Although they are tax-free and a very interesting way of investing, real returns were not that great five to 10 years ahead. On a positive note, this recent volatility has brought back better yields. In this sense, volatility can be very positive for us. Interest on fixed-income assets, the more complex fixed-income structures, is going to be much higher from now on.

Euromoney What are the challenges to your businesses and the market in general for private banking? Edinardo, as the newest entrant to the market in Brazil, could you give us a little bit of flavour of your strategy and how you will be pursuing growth for your bank?

EF, UBS We are one of the newest, or perhaps one of the oldest coming again. But our strategy is to be a pure wealth management player, we don’t have the corporate business like most of the other banks here today and we don’t have the retail business. For us, in order to grow you need scale. It is a big country. You need to reach out for different locations. Wealth, we know, is concentrated in São Paolo and Rio, but there isn’t wealth only in São Paolo and Rio. We want to grow through acquisition. We have been analysing some opportunities. The intention is to open an office in Rio this year and most probably one in the south of the country next year. What we have seen is, due to high costs, that a lot of the multifamily offices that have from R$300 million to R$1.5 billion under management are struggling to grow. Therefore, we are in talks with a lot of family offices in order to aggregate them in our operations, possibly to do acquisitions, but there are also some asset managers in the country that are open to work together. But the main idea is to grow through acquisition.

Euromoney Rogério and Guilherme, I know BTG is opening offices. Is your strategy purely organic growth?

RP, BTG Pactual Yes, in Brazil. From last year until today we have opened offices in Brasília, Ribeirão Preto, Salvador and Curitiba. Outside São Paolo and Rio we now have seven regional offices. We firmly believe that being close to the client is the way to go. Since we are an investment bank and we don’t have branches all across the country, opening regional offices is a very wise strategy. The Belo Horizonte, Recife and Porto Alegre offices that we had before have paid off really nicely; since the end of 2009 and 2010 they have been growing quite substantially.

There are very few targets to acquire here in Brazil. Whoever is here and is big does not want to sell the business. I personally don’t believe in the acquisition of family offices. It is not a strategy that we want to pursue. What I do think is going to happen, and we are in the midst of it, is a consolidation in that space as well. If you come to think about it, a lot of the independent family offices in Brazil have become part of bigger institutions. We have Gávea as part of JPMorgan and GPS selling a stake to Julius Baer, and I would assume that Julius Baer would want to increase the participation there. Costs are increasing; you have to have scale, you have to have infrastructure and I don’t see a bunch of new, independent family offices. You will always see a proliferation of smaller firms, but most of the big ones will either merge, as we have seen, or become part of larger firms, or even both.

However, we have a more aggressive acquisition model elsewhere in Latin America. We acquired Celfin Capital in Chile, which is one of the largest investment banks in Chile; and Bolsa y Renta in Colombia. Celfin had a presence in Peru already. The bank has recently opened an office in Mexico as well and we are debating whether we should open up shop in wealth management there. It might be a discussion for 2014/15.

Euromoney For the other banks is it largely winning new clients from the investment banking side?

FS, Itaú  In our case we would love to do acquisitions, but it is going to be difficult for the reasons that were mentioned before, especially for us in Brazil. But we believe that there are lots of opportunities from exploring our own bank. We have a very well-established partnership with all Itaú divisions. The referrals that we get from the investment bank arm of the group are very important to us and we have a client acquisition team fully dedicated to work with them. Some of our prospectors are based inside the investment bank structure, working on cross-referrals. The same happens with our retail presence. We have a very well established affluent segment in a Brazil operation called Personnalité that is also a very important source of referrals. In addition, we expanded our geographic presence last year, opening new offices in Recife and Porto Alegre, and intensified our presence in Belo Horizonte, Curitiba and Ribeirão Preto.

Besides that, we are focusing on two additional initiatives. The first is a big demand to structure our family offices service. We see not only an opportunity but also a demand from our clients to restructure this service. There are many advantages to being independent, but there are also many advantages to being part of a big institution. It is not important in terms of revenues at this stage, but it is already relevant in terms of volume, and we believe that we can grow extremely fast in this type of service.

The other thing that we are doing is reviewing the role of our bankers. The idea is to have a much larger team dedicated to investments, working closer to clients and at the same time freeing up bankers’ time to chase new assets and new clients. This is the strategy for Brazil.

Regionally, we are also in acquisition mode. We are open for investments and are considering local targets, such as in Peru and Colombia. In Chile we did a joint venture with Munita, Cruzat & Claro two years ago and we are considering not only doing more of this in the region, but also buying portfolios in the traditional jurisdictions – be it in the US or Switzerland – to leverage and expand the presence that we already have in both locations.

MA, CSHG  There is high collaboration among all divisions in Brazil. In 2012 we had a lot of cross-selling activities, which directed strong net new assets to our franchise. We have reinforced our team in Porto Alegre and in Belo Horizonte and expect to open an office in Recife, in the northeast of Brazil. These steps will enable us to seize opportunities all over the country. At the same time, the agenda is not just to hire bankers but also more specialists. We are discussing with our clients not only about investments but also about tax planning and estate planning. We have hired many specialists in these areas and will continue to recruit in this area.

JAW, Bradesco For us it will be organic growth; not really through acquisition, because the players that are well established and would make a difference are not for sale. If you acquire a small player it doesn’t change the ball game. We have a well-established regional presence, with 17 offices throughout the country. One thing we realize is that it is necessary to spread out because it is important to be as close as possible to rich families, but the ultra-high-net-worth clients would rather be served through São Paulo, not locally.

We have 27 million individual accounts. It is a blue ocean to explore. In addition to that we have 700,000 mass-affluent clients. If just 0.1% of those clients for some reason have some liquidity event, imagine the size of your growth, just fishing on your own portfolio.

PM, Itaú There are still a lot of private bank portfolios spread out throughout the retail banking system in Brazil. A lot of clients in the past were very satisfied to stay in the retail bank, for the reasons we discussed earlier – they were happy with CDI-type products. Of course they are not happy anymore in the current situation. They are seeking advice and they don’t find this advice in the retail banking system. That is an opportunity for all of us, not only in our own pond, but also in somebody else’s pond as well.

Euromoney Are fees becoming healthier as you move away from commoditization to consulting?

FS, Itaú  In the long term I am very optimistic for our industry on what is going to happen with average fees. When we look at the US market, which is the largest wealth management market in the world, the average return on asset is around 100 basis points. They have had very low interest rates for many years. Why is that? Because clients are seeking advice, they are taking risk and they are diversifying their portfolios. We are at an early stage of this process in Brazil. We can already see some impact on the positive side of diversification, from performance fees. Moreover, many of our clients had and still have part of their portfolios linked to the CDI. We have observed spread compression with the reduction of the CDI, but that, in our case, has been compensated for by the increasing return on assets with the diversification. We are still building this bridge, so the participation of CDI-linked instruments is important. Projecting this business a few years from now, with CDI representing 10% to 15% of the client assets and all the rest allocated in different asset classes, we will see a better environment for all of us.

MA, CSHG  Fees are highly competitive, but on the other hand we have a higher level of assets under management than in 2012, so we are going to earn more recurring fees. But the fee levels are basically the same. We have been putting more products and services on our platform, as we have seen in the international market, where there is high liquidity and leverage and wide credit availability. We see a lot of activities abroad that we do not see in Brazil yet, because of the high interest rates here. But I am very optimistic that we will see these products more and more in the local market.

EF, UBS Our clients expect us not only to allocate their investments, but also to take care of them through their life cycle. They expect us to organize their structures, their companies, to sell companies, to do investments and to prepare the next generation. In that sense you charge for the whole service, more than just allocating their liquidity.

JAW, Bradesco Fees are a very sensitive issue. We all know that. And our costs have been increasing in the past three years as we have been investing heavily in system optimization and we are starting to get the results now. IT investment was a very important element. And investment in staff is really the name of the game. If you develop a good team, that will make the difference.

Something new is the provision of credit lines. This is something we started late last year and it is going to become pretty soon a very important source of revenues for private banking at Bradesco. We have been increasing all the products and services that a private client needed, for example, life insurance. We will have specialists within the team that will take care of credit cards, life insurance, pension plans, things like that. We have added a lot of new services that are generating more profit.

RP, BTG Pactual In the past three years we have been growing roughly 30% in terms of AUM. Our revenues are growing at a 50% annual rate, so we saw an increase in returns on assets in our portfolios these past three years; 2013 is no different. Even though competition is fierce for prices, the diversification into offshore investments, into credit, equities – everything that has been said here – has been good for us and for the industry. It is going to be a continuing trend for clients to give more discretionary mandates and powers to the banks. It is a new environment and clients don’t really know how to navigate within that scenario by themselves and everybody here is investing in product specialists – on the portfolio investment side, or on the wealth planning side, or family office. This will create new opportunities for newer sources of revenues for the industry as a whole.