Local Latin American banks seize chance as turmoil engulfs region

Latin American wealth management is going through radical changes, due to economic, political and regulatory issues.

The crash in commodity prices, mainly due to China’s reduced imports of raw materials, greatly impacted LatAm markets and led to huge local currency devaluations. Economic and political turmoil in Brazil, the region’s largest economy, caused massive equity market declines. 

As a result, in 2015 Latin America recorded a drop in high net worth population of 2.2 per cent and wealth of 3.7 per cent, which constrained global wealth expansion, according to CapGemini’s World Wealth Report 2016.

Latin America’s struggles have affected the ultra-wealthy, in particular, both in the region and globally, as Latin Americans hold 30 per cent of global ultra-HNW wealth, the most of any region. 

The competitive landscape is also evolving. For decades, wealth management in the region was dominated by international banks, managing offshore money for rich Latin American clients, but in the past 15 to 20 years strong local and regional players have emerged and local financial markets have deepened. These factors, coupled with relative economic and political stabilisation, rebalanced clients’ portfolios towards onshore investments, although the pendulum swings in both directions, depending on economic and political factors.  

Lack of scale and costs associated with regulatory compliance have forced global banks to rethink their strategy and international footprint, eventually leading them to retreat to home markets or focus on core area of expertise, giving space to local players. 

Several foreign banks have decreased focus or completely exited Latin America, including HSBC, which recently sold its business to Bradesco, and Barclays, as well as European banks RBS and Credit Suisse.

There are two reasons why European banks are reducing presence in Latin America, explains Gerard Aquilina, an independent family office adviser, who held senior management positions at global banks, including in Latin America.

“From an operational standpoint, it may be more profitable or less expensive to run the business from one or two money centres, rather than having offices throughout Latin America. Also, many of the banks and clients are linked to undeclared accounts.”

The end of private banking secrecy, with regulations such as Fatca in the US, and Common Reporting Stardards (CRS) by the OECD coming into force next year, as well as tax amnesty programmes being implemented across the region, are putting an end to the offshore business linked to hiding assets and avoiding taxes.

“For banks who want to have a meaningful Latin American client base, the landscape has become very complex, as the regulatory environment is extremely complicated,” says Mr Aquilina.

Those Latin American clients banking with Swiss banks to hide their assets did not care about performance or fees. In a new world of tax transparency, banks need to focus on performance of portfolios and advisory services, and employ staff to pay attention to regulation, factors which greatly affect the economic profitability of running a Latin American book.

“This is a great opportunity for local players, who have acquired a lot of muscle,” says Mr Aquilina, in particular praising Brazilian bank Itaú, “the best capitalised bank in Brazil, and a top player in technology, products, and advisory services”. 

But international banks do offer a global reach and better understanding of international markets. 

JP Morgan has been particularly successful in serving UHNWIs from the US and has an edge over competition, says Mr Aquilina, thanks to its ability to lever its balance sheet and meet business owners’ credit requirements.

But economic and political aspects, specific to each country, continue to be a key factor in clients’ decisions on whether they should keep their assets onshore or offshore.

The offshore segment will continue to be the larger part of clients’ financial wealth, according to Jose Ernesto Fuentes, head of wealth management for Latin America at Citi Private Bank. From its offices in Switzerland, the UK and US as well as Mexico City and São Paulo, the institution manages mainly offshore money for LatAM families with a net worth of at least $50m. 

The private bank sources $50bn from the region, with Mexico and Brazil the largest markets. 

“During the past six or seven decades, Latin American families have been placing money offshore for security and diversification, to avoid major political and financial crises in the region,” says Mr Fuentes. 

“Currently wealthy families are diversifying portfolios by investing in developed countries, in order to avoid internal economic and political crises as well as currency devaluations, which hit them very hard during the past two years.”  

More and more assets have flown into private equity, both domestically and outside the region, including the UK, Spain and the US, rather than in traditional financial markets, says Mr Fuentes. “More clients are adopting a barbell strategy, where part of their money is invested into low risk, low return dollar-based investments and part in private equity.”

Citigroup is selling its retail banking and credit card operations in Brazil, Argentina and Colombia for profitability reasons, but is committed to keeping financial group Banamex, which has strong presence in Mexico. 

Banamex Banca Privada, which operates onshore, is a good source of client referrals for Citi Private Bank, for the offshore side. “That is a good marriage, which works perfectly fine,” explains Mr Fuentes. Referrals also come from existing clients and Citi Corporate, which has extensive and long-standing presence in the region. 

The private bank currently serves 1800 families, a number which has been growing by five per cent per year, over the past three years. 

Offshore model

Morgan Stanley too is totally committed to the offshore model, with a dedicated division, Morgan Stanley International Wealth Management, serving non-resident US clients through 400 international client advisers (ICAs), who represent a quarter of the bank’s total 1600 financial advisers.

The US firm has benefited from the retrenching of competition, having acquired the Credit Suisse business earlier this year, with approximately $13bn in AuM and around 40 advisers, serving LatAm clients from the US.

Morgan Stanley, which does not have onshore offices and is not planning to build local presence, is on a recruitment spree. In addition to hiring 30 individuals in the product, risk, operations, legal and compliance area in the last six months, the bank brought in 125 new ICAs over the past couple of years, sourced from competitors such as UBS, Merrill Lynch and other firms that have left the US market place, as well as incorporating Credit Suisse’s advisers. It is expecting to hire 25 more by the end of this year. 

Approximately 70 per cent of the bank’s international client advisers focus on serving Latin American wealthy clients. 

“Due to proximity to the US, Latin America is a key market for us,” says James Jesse, head of Morgan Stanley’s International Wealth Management team. Although the bank’s fastest growing market is China, the two largest remain Brazil and Mexico.

 “Many clients, especially in Latin America, look for geopolitical stability and diversification away from unstable local markets,” which the US offers, says Mr Jesse. 

Of the $9.2tn in global offshore wealth, around $1.4tn of total assets are managed and administered from the US, the world’s third largest international wealth management centre, after Switzerland ($2tn) and the UK ($1.7tn), according to a study from Deloitte Consulting. Since 2008, the US has attracted assets flowing out of  struggling Panama and the Caribbean region, ranking second in terms of relative assets growth (+28 per cent) after Hong Kong (+142 per cent).

Moreover, the US is a strong destination to invest in, says Mr Jesse, with many clients engaging in alternative investments, such as hedge funds of funds, private equity and venture capital, while fixed income is a major source of investment for Latin American families seeking yield and principal protection.

However, according to critics, the US has become one of the largest offshore centres not always for the right reasons. American banks serving LatAm clients are not playing on a level playing field, having a “different understanding of the concept of fiscal transparency”, and adopting the same model they have much criticised the Swiss banks for, says the head of LatAm at a Swiss bank. 

Because the US have not signed the OECD’s CRS – leading to automatic exchange of information between governments to combat tax evasion – people are placing more money in the US than Switzerland or Europe, which are CRS signatories, explains a senior manager at an American bank. 

However, unlike financial centres such as Hong Kong and Dubai, where it is easy to open accounts and accept ‘dirty’ money, US institutions have to prove the source of wealth and carry out strict ‘Know your Customer’ due diligence.

Julius Baer has adopted a different strategy, by acquiring onshore presence in the Latin American region, buying 30 per cent of the largest independent wealth manager GPS in Brazil six years ago, now fully owned by the Swiss bank, and last year acquiring 40 per cent stake in independent financial advisory firm NSC Asesores in Mexico. The latest move aimed to gain access to the market considered a “cornerstone” of the bank’s Latin America strategy, but only time will tell if this partnership will develop into a “fully-fledged acquisition”, explains Gustavo Raitzin, head LatAm and Israel at Julius Baer. 

 “We have shifted from the old onshore/offshore paradigm to a fully integrated wealth management model, as we recognise clients have both domestic and international requirements, and we want to meet their needs,” says Mr Raitzin.

This model, applied at global level, has enabled the bank to expand in emerging markets, which 10 years ago accounted for just 20 per cent of the bank’s total client assets. Today around 50 per cent of assets are sourced from Asia, considered the bank’s “second home”, Latin America and Middle East. 

“We are looking at opportunities to either consolidate our presence in Mexico and Brazil or expand this model in other countries in Latin America,” says Mr Raitzin. Chile and Argentina, where the bank is looking for partnership opportunities, are promising. 

Julius Baer currently caters to the Argentinian market from Uruguay, where acquisition of the international wealth management arm of Merrill Lynch has given the bank an onshore presence, as well as from Switzerland. 

Scale of the bank in Latin America has increased 10 fold in the last 10 years, says Mr Raitzin

Scale

Today’s regulatory environment has raised the bar to a level which forces banks to continuously assess the minimum scale they need, in order to operate in a specific market, says Flavio Souza, CEO at Itaú Wealth Management Services. This has benefited local players. 

Despite the challenging political and economic environment, Itaú enjoyed record net new money last year – BRL18bn ($5.7bn) – which brought total client assets to around BRL270bn. 

“The repositioning of some international players gave us the opportunity to serve new clients,” says Mr Souza. Also, he says, in very uncertain times in Brazil, “Itaú is perceived as a safe haven in the region and also has a very well defined strategy, as well as strong ability to generate new clients, leveraging all business areas of the bank.”

Far from being only one market, Latin America houses 20 to 25 different ones, with unique characteristics, making it unsustainable for a player to acquire a compelling strategy and compete in them all, says Mr Souza. 

Developing an onshore presence is essential. But growing the business organically is a big challenge in countries such as Brazil, especially for foreign players, where the top five wealth managers, of which only Santander is a foreign bank, represent more than 70 per cent of market share. 

“Buying local assets, such a small player or eventually a multi-family office, is the only remaining alternative in the region for some international banks,” he says. In addition to Julius Baer, which has acquired local assets, UBS is also believed to be looking to acquire domestic firms in Brazil.

To be a relevant player, it is  important to have a well defined strategy for at least one of the two key LatAm markets, Brazil and Mexico, which represent respectively 40 per cent and 30 per cent of  wealth management business in the region. 

Itaú is market leader in Brazil with almost 28 per cent of market share, but does not have a presence in Mexico yet. Through the merger with CorpBanca in 2014, the Brazilian bank has become the fourth largest player in Chile and fifth in Colombia, countries which represent a key focus for the bank’s wealth management growth.

Argentina also looks interesting, given improving economic prospects, says Mr Souza. Its friendly tax amnesty project could be a powerful stimulus for clients to repatriate assets. 

But if local regional players want to compete with international banks, it is important they offer clients a global platform of products and services and  ability to book assets offshore. 

With a bank in the UK, an operation in Miami, the hub for LatAm clients who invest offshore, Itaú also has a full bank in Switzerland. 

EXPANSION PLANS

BTG Pactual’s aggressive expansion plans in the region, mainly to grow investment banking business, saw the firm acquire Celfin Capital in Chile and Bolsa Y Renta in Colombia four years ago. Colombia and Chile, together with Brazil, are the key focus of the bank’s onshore growth plans. 

For clients’ offshore needs, BTG Pactual has a booking centre in Cayman and a full service broker dealer in the US, where clients are served from Miami and New York. 

It is also developing a partnership with EFG/BSI in Switzerland/Europe, after selling Swiss bank BSI to EFG just a few months after acquiring it. The sale was driven by the need to raise cash and restore investor confidence, following the arrest of its former CEO last November. BTG Pactual will own about 20 percent of EFG as a result of the transaction and have representation on its board. 

The bank acted quickly following the arrest, honouring all the redemptions of funds and deposits in due time, explains BTG Pactual’s head of wealth management Rogerio Pessoa, and in the first half of this year has seen inflows into both asset and wealth management.

In Chile, investment bank and wealth manager Larrainvial is expanding, in areas outside Santiago and is looking at the possibility of setting up an office in Miami. 

“Having international platforms is vital for this business, though we do not see a regional physical presence, or branches, as that necessary, since most LatAm customers are investing a higher percentage of assets abroad,” states Gonzalo Córdova, head of wealth management at LarrainVial. “Local markets are not offering many alternatives, and some are illiquid and inefficient.”

Offering an onshore and offshore platform for different client segments is a key growth driver of wealth management in the region, he says. All clients should have the opportunity to invest locally or abroad in a flexible way. Offering a wide range of products in all asset classes in an open architecture approach and having a strategy and products for alternative assets is also key. It is also necessary to provide tax-efficient products, he says, given recent tax reforms in Chile. 

In addition to international competition, the industry has seen the consolidation of regional players, including Brazilian, Peruvian and Colombian banks, which have expanded in the region through mergers or acquisitions. “Wealth managers need to be more efficient, have economies of scale and gain access to more sophisticated products,” says Mr Córdova.