By Cary Springfield – cary.springfield@internationalbanker.com
By the end of 2012, Brazil was widely regarded as being among the premier locations for private banking. The 2012 World Wealth Report by Capgemini and RBC Wealth Management asserted that Brazil was producing high-net-worth individuals (HNWIs)—those with at least $1 million in investable assets—at a faster rate than most countries, including China, with an additional 10,000 multi-millionaires having emerged in 2011. As a result of such rapid wealth creation, private banking in the country experienced a major shot in the arm. Data from the Brazilian Financial and Capital Markets Association, ANBIMA, calculated that total assets under management (AUM) of local private banks in Brazil grew by 22 percent per year between 2010 and 2012 to reach 527 billion reais by the end of 2012: a near-doubling of the amount invested in private banks was experienced in just three years. Such remarkable growth inspired private-banking giants such as Credit Suisse, Julius Baer and UBS to expand business operations in Latin America’s biggest private-banking market.
Given that many of the world’s economies in 2012 were still feeling the effects of the global financial crisis, wealthy Brazilians were more comfortable investing their money domestically, with some estimates suggesting that 95 percent of new wealth being generated was staying within the country’s borders. By 2013, the country was deemed as the largest and fastest-growing onshore wealth-management market in Latin America, and Brazil came to represent more than 40 percent of the region’s onshore and offshore wealth-management industry.
Private banking hamstrung by economic stagnation
Following such explosive growth rates, however, Brazil experienced some major economic woes that have had significant implications for private banking. Wealthy Brazilians, who once kept the majority of their assets within the country’s borders and invested domestically, are now sending more of their wealth overseas due to a combination of economic stagnation and political instability over the past 12 months or so. Between 2004 and 2011, Brazil’s economy grew at an average 4.3 percent per year before growth began to rapidly decelerate. Last year, GDP grew by a mere 0.7 percent, while the first three-month period of 2015 has already seen negative growth of -1.6 percent on last year’s first quarter.
The economic and fiscal policies adopted during President Dilma Rousseff’s first term are often cited when explaining why Brazil’s economy has come to a standstill—interest rates were cut during times of accelerating inflation, government spending was hiked when tax revenue was falling, and consumption was encouraged despite the strain that the country was experiencing from a credit-led consumer boom. The plunge in oil prices and agricultural commodities such as coffee, of which Brazil produces about one-third of the world’s output, has exacerbated the fall more recently and has been underpinned by waning demand for commodities from China, its biggest trading partner. Moreover, Brazil’s biggest company, oil producer Petroleo Brasileiro (Petrobras), has been rocked by a major corruption scandal in which several in Rousseff’s government were involved. Indeed, having served as chair of Petrobras from 2003 to 2010, Rousseff’s own reputation has been significantly tarnished. In February, Petrobras was downgraded to junk-bond status by ratings agency Moody’s, and many expect Brazil to lose its sovereign investment-grade status in the near future. Business confidence, therefore, has been dealt a severe blow that has led to a sizeable degree of capital flight. Indeed, equity markets fell by 17 percent in 2014, which RBC and Capgemini cited as being the main contributor to a 6.4-percent decline in Brazil’s HNWI population, as well as a 1.4-percent fall in total HNWI wealth during the year, as stated in their 2015 World Wealth Report.
Currency depreciation and regulatory changes spurring offshore investment
As far as the effects on Brazil’s private banking is concerned, perhaps the most concerning factor has been the weakening of its currency. Over the last year, the real has fallen by more than 40 percent against the US dollar, hitting a 12-year low on March 20:
Source: OTC Interbank | Trading Economics
The currency decline has induced much fear among Brazil’s wealthy on the expectation that further depreciation will continue to reduce the value of their wealth in the context of a global marketplace. Thus, they are now seeking safe havens abroad. Rogerio Pessoa, co-head of wealth management at BTG Pactual, believes that the current situation is similar to what was experienced in the 1980s and 1990s, when poor growth and high inflation led to an exodus of funds from the country. At that time, 20 to 30 percent of Brazilians’ wealth was invested in dollars, according to Pessoa, who believes that Brazil is “seeing a return to those kinds of levels now. It’s a process of normalisation”.
Indeed, the disastrous growth record in recent years has forced many of Brazil’s private banks to join their wealthy clients in concentrating on safer markets overseas. Few destinations have been more sought after for this purpose than Miami. While it has long been a destination-of-choice for Brazil’s wealthy, only recently have Brazil’s banks been attracted to the US city. Itau Unibanco Holding, Brazil’s biggest private-wealth manager, which manages approximately one-third of Brazil’s private-banking market, is planning to increase its AUM there by 9 percent to $12 billion. The lender currently has approximately $20 billion AUM in total outside of Brazil and recently consolidated its private-banking operation in Luxembourg to Switzerland and Miami, a clear sign of its adaptation to clients’ increasing desires for overseas investment opportunities. Grupo BTG Pactual, one of Itau’s main private-banking competitors, is also opening an asset-management division in Miami, while investment firm XP Investimentos CCTVM SA is expanding operations and adding employees to its Miami office. Even Goldman Sachs is reportedly moving wealth-management employees from its São Paulo office to Miami.
From a regulatory standpoint, offshore investment is also expected to be bolstered by new rules adopted by Brazil’s chief financial regulator, Comissão de Valores Mobiliários, that will allow affluent investors to apportion greater amounts in overseas investments. Coming into effect in July, the rules remove restrictions requiring a minimum investment of 1 million reais per investor in a single offshore fund, thus allowing fund managers to decide the minimum qualifications. Several thousands of clients are expected to benefit from the new criteria.
Domestic market impacted
The shift in focus towards foreign markets has slowed the rate of growth in Brazil’s domestic private-banking market. In the two years to the end of 2014, the AUM growth rate slowed to 10.5 percent, bringing the total AUM amount to 645 billion reais by the end of last year. While not expanding at the 22-percent rate experienced in 2010-12, industry growth is still sufficient enough to attract considerable private-banking interest from overseas that, in turn, has led to structural changes in the industry over the last year or so. In March 2014, for example, Swiss private-banking major Julius Baer increased its holdings in Brazil’s largest independent wealth-management company, GPS Investimentos Financeiros e Participações (15 billion reais AUM), from 30 to 80 percent; while in February this year, Italy’s leading independent asset manager Azimut Holding completed a 50-percent acquisition of LFI Investimos, a wealth-management company with 500 million reais AUM based in São Paulo. Credit Suisse also plans to open new offices in Brazil, while UBS is reportedly planning to set up offices for its wealth-management business in Rio de Janeiro and Belo Horizonte.
To maintain competition on the domestic front and counter Brazil’s increasingly challenging economic conditions, local wealth managers have been improving their market efforts over the last couple of years. By mid-2013, Itau’s head of private banking, Flavio Souza, was highlighting the anxiety that investors within Brazil were feeling, particularly due to the lower interest-rate environment that was prevailing at the time, stating that clients were “seeking diversification and more sophisticated products”. Itau responded to the slowdown by increasing the range of its product offerings and extending loans for luxury purchases. It also created a new department called the Investor Communication Area that keeps its clients abreast of the latest media articles and provides them with regular investment newsletters. Bradesco Asset Management is also now holding evening meetings and giving presentations every quarter on its range of funds, in an attempt to attract more investment from wealthy Brazilians.
The focus on product diversification has helped Brazil’s private banks remain resilient so far this year. Ratings agency Fitch observed that Brazil’s largest private banks Itau, Bradesco, Santander, Safra and BTG were able to resist the pressure of declining asset quality across the banking sector through insurance and other fee-based services. Indeed, Itau Unibanco posted a profit of $1.8 billion for the first quarter, the highest in Brazilian history for a first quarter. The more recent higher interest-rate environment has also helped; wealthy investors choosing to remain focused on Brazil have managed to prosper from fixed-income products offering considerable rates of return, including tax-exempt bonds, agribusiness credit bills and real estate credit bills. Itau’s Souza has noticed that even sophisticated investors are investing in such products, but despite the mouth-watering rates, “they still want to invest overseas because of the challenging local scenario, and to protect against currency devaluation”.
In its Global Markets 2015: Key Insights into a Dynamic Landscape report, Cerulli Associates estimated that assets under management in the global investment-management industry will reach $96.5 trillion by 2019. The report stresses that Brazil’s market will continue to be increasingly exposed to cross-border fund management, which will spur further demand for global products. WealthInsight’s Brazil 2014 Wealth Book, moreover, expects the number of Brazilian HNWIs to expand by 17 percent to reach 233,837 by 2018, and HNWI wealth is expected to grow by 27 percent to reach US$1.32 trillion by 2018. This suggests that Brazil’s private-banking market should continue to see healthy growth rates over the next few years, but the important question that remains is how much of this growth can be captured by the domestic market. If the trend over the last couple of years is an accurate guide, then onshore markets will continue to make up a smaller portion of wealthy Brazilians’ investment portfolios in the future.