With OGX’s debt issued internationally, there was reportedly little impact from the company’s bond default and October 2013 collapse into bankruptcy on the fixed-income portfolios of Brazil’s private banking clients – fixed income being the largest asset allocation among the vast majority of Brazil’s rich.
There was greater exposure to equities, although most private bankers say the higher risk profile of the stock – as with others of Eike Batista’s range of ’X’ companies didn’t match the traditionally conservative approach to risk of clients in the sector.
Unpredictable and low cashflows and exploration and production energy risk are not the usual stable characteristics of equity stories that private banking clients chose for direct investment, and the negative impact on the Ibovespa didn’t affect an industry that is almost entirely invested in equities through active managers and stock-picking strategies. "A lot of clients were very negative about the X group. It’s easy to say now," concedes one banker, "but the fact was that there were many of us who thought it was amazing – too amazing – and never bought into the Eike story."
João Albino Winkelmann, the head of Bradesco Private Bank, says some clients had direct exposure but traded out for small losses about six months before the collapse. He says that there was some interest from investors who were tempted to invest as OGX’s stock price slumped to levels where it looked like a fantastic entry point for those convinced the company would rebound. But for Albino the OGX saga illustrates two key characteristics of Bradesco’s advisory.
The first is diversification, with an absolute limit of 5% of the portfolio exposed to any single risk: "If anyone was exposed to [a] 5% limit and they lost all of it then they lost 5% of their portfolio. If the annual return on the rest of the portfolio was 10% then the damage is limited; the client can still say they had a decent year even though they lost 5% in OGX equities."
The second point is the value of the conservative brand that Albino believes Bradesco has in the market. "Sometimes we are criticized about having a very cautious position, but sometimes it pays off, like in the 2008 crisis when we were not hit at all," he says. "When it is a sunny day and everybody is out there having a party, we are one step behind. We don’t buy the miracle stories, so sometimes we miss out [on large returns], but if there is a big hit we also miss out."
The quick implosion in Batista’s personal wealth also throws up issues around the growing role of extending credit in Brazil’s wealth management industry. In the past, high interest rates and highly liquid portfolios meant that credit wasn’t part of the business of private banking. But this is changing. Fifteen months ago Bradesco began offering credit to its customers, and it now has a client credit portfolio of R$1.3 billion.
The credit sought is usually short term and used to avoid liquidating longer-tenor portions of the portfolio. "Some of the [best] managers are so scarce that if clients start making liquidity out of those managers then they might not be able to return ever again, so that creates the need to tap short-term credit," says Sylvio Castro, co-chief investment officer of Credit Suisse Hedging-Griffo Private Banking, who believes demand for credit will increase in Brazil, especially when interest rates return to single digits. He also says that clients are increasingly taking cheaper credit abroad to leverage their international investments.
Private bankers don’t discuss individual clients and none would confirm Batista as a client, but it is widely believed he used wealth management services from BTG Pactual – Batista’s holding company EBX was a corporate client of BTG Pactual. Renato Cohn, partner and co-head of wealth management at BTG Pactual, won’t talk specifics but says the bank hasn’t lost any money through client counterparty losses.
"The private banking industry does extend credit to clients but it is different to when you extend credit to a company and the company blows up – then you have a problem. [With private banking clients] we have a collateralized loan – usually overcollateralized – and then if your collateral starts eroding you use margin calls and if those margin calls are not met then you liquidate the credit. The use of credit in Brazilian wealth management is growing, but it is a much more present and important source of revenue to international banks than in Brazil."
So no losses suffered then? Cohn stresses that he is continuing to talk about the industry in general, but a wry grin hints at personal experience: "No loss of money, no. Except for AUM. He was an exceptionally wealthy man and so of course that is a big hit to AUM."