Euromoney I would like to start with a brief recap of the past 12 months for each of your organizations. João, last year you said that your target for Bradesco was going to be between 23% and 25% growth. Has that been achievable in the current market?
JAW, Bradesco In 2011 we grew assets under management by 28% and in the past 12 months, year to date, we grew 32.9%. Our forecast for 2012 is higher than we projected before, at roughly 30%. The first quarter was excellent but we believe activity is going to slow down a little bit in the second half of this year. So we think about 30% for the whole year, which is above what we expected at the beginning of the year.
Euromoney Rogerio, your growth forecast last year for BTG Pactual for the past 12 months was 35%. Has that been achievable?
RP, BTG Pactual No, unfortunately not. Our forecasts were based on a more aggressive market scenario. We grew a little below 30% during the past 12 months. Actually, 2011 and the past 12 months have been pretty similar, at around 28% to 30%. Like João, we have lowered our market-growth expectations a bit for the second semester based on a full-year growth projection for the domestic private banking market of about 22%.
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| EXECUTIVE SUMMARY
• Private banks’ assets under management are growing at rates over 20%
• With equity markets subdued, M&A has been a big source of AUM
• Private equity is another growth area
• Private banking business is growing fast beyond São Paulo and Rio
• Investors’ short-termism, based on previously high interest rates, needs to be overcome, with a focus on equities and longer-term fixed interest
• Clients are hesitant about equity investment, so good advice is crucial
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Euromoney Luiz, Itaú last year was forecasting 25% growth. How was your past 12 months?
LR, Itaú We grew around 20%, with greater focus on the offshore business. We agree with Rogerio that the market will grow by about 20% this year, and our expectation is to grow in line with it. We have higher concentration on equities than the market average, so when the stock market isn’t performing as well as expected, we grow less than the market.
Euromoney Celso, how about JPMorgan?
CP, JPMorgan JPMorgan has been growing on average about 20% a year for the past three years, but it is important to mention that in the domestic space we are growing much, much faster. We have had an average growth of 20% but we have grown by almost 40% in domestic assets under management.
Euromoney And Santander, how has your business been in the past 12 months and what are you forecasting for future growth rates?
VO, Santander In the past 12 months we grew a little bit less than 20%. We were focusing on our return-on-assets growth instead of growing our assets under management, but for the next 12 months and for 2012 most of all we are expecting AUM growth of a little bit more than 25%.
Euromoney Obviously the rate of growth has still been very healthy in the past 12 months despite equity market events being lower than expected. What has been the main driver?
JAW, Bradesco IPOs have been below expectations but, on the other hand, M&A is pretty hot. It is probably the number one source of new AUM.
We also continue to try to work the existing client base. We have a choice: we can go out and look for new clients or explore opportunities among existing clients, and we have been doing the latter very successfully. We really don’t aim to have a large number of new clients. Our priority is to serve the existing ones. We go after large deals, working with the investment bank, the corporate bank, and try to get the big transactions, the big deals and explore M&A, which has been blooming and continues to be very active. We have more than 20 M&A transactions – many of them were anticipated – on the table and that is a huge amount of money potentially to flow into our business.
CP, JPMorgan The latest PwC research found that we have had more than 700 M&As in Brazil in the past year. That emphasizes just how much private banking has been derived from M&A activity.
FS, Itaú Our case is very similar. The big-ticket deals basically came from M&A transactions. Our projection was to grow 25% but, mostly because of low IPO activity, we were below this number. Although the IPO activity was lower than predicted, the normal flow of new clients coming from different areas of the bank has remained at the same pace, which allowed us to achieve 20%.
LR, Itaú Even though IPO activity was below expectations, some clients took advantage of the increased value of the stock market in the beginning of the year, and we had a lot of activity on block trades, so it was also a good opportunity for us to capture wealth from clients.
RC, BTG Pactual M&A has been the main source of wealth creation. It is also important to highlight the private equity industry, which is pretty hot. We have several new participants who are investing in private equity in Brazil and that is the source of the deal flow in M&A, while the markets have been pretty tricky, especially the equity markets.
VO, Santander Most of our big deals also came from the M&A side, but we are seeing a lot of opportunities coming from other areas of the bank, mostly from the retail side, which has been a source of huge growth for us.
RP, BTG Pactual One interesting trend that has been identified by [Brazilian financial markets trade association] Anbima, and we have seen this in BTG, is the more aggressive rate of growth in the regions outside São Paulo and Rio. I think this is two-fold: first of all, a lot of companies and entrepreneurs have been targets of M&A activity in those areas. We have seen a lot in the south and the northeast of the country in the past 12 months, as well as in the central west of Brazil. There is also a growing sophistication by clients in these areas that, in theory, had long existing relationships with their local branch managers. They are now moving to private banking divisions, wealth management and so on. This is a trend that is going to continue in the coming months and years. At Anbima we see the growth rate in these regions. If the market is growing at 20%, São Paulo and Rio are at 17% to 18% and these regions are growing at 30% to 40%. It is a new frontier that the market has still to explore to its maximum.
JAW, Bradesco Another liquidity event that we have at Bradesco, which has not been the case in the past, is well-paid executives. Today executives are getting good bonuses, large bonuses on a biannual basis or an annual basis, and that is another source of liquidity for private banking that we didn’t see five years ago.
CP, JPMorgan I agree this is a new trend, and it feeds out of the intensive activity of M&As and, in recent years, IPOs. Executives at these companies are now receiving part of their remuneration through bonuses, stock compensation or other kinds of variable compensation. It is something that, more and more, we are seeing come to our private bank, and these executives are looking for sophisticated wealth management solutions and we need to reinvent the way that we approach these executives here in Brazil.
BA, JPMorgan Credit is one of the drivers for growth at JPMorgan private bank. Since we have a strong balance sheet we are able to provide clients with very low-cost loans. We are lending money at Libor plus 1% or Libor plus 2%, so clients have access to a more competitive rate when compared with CDI [Brazil’s money market rate] plus 1%, or CDI plus 2%. We are increasing our balance sheet and producing revenues and helping clients develop their businesses.
CE, Santander We have also seen real estate as a driver of wealth creation. Clients have organized real estate portfolios and they have ended up selling land in deals that are essentially small M&A transactions. It has been clear that appreciation in real estate valuations in the big cities has been substantial and clients have capitalized on that.
Euromoney M&A has been the big wealth event – is there any concern in this room about the new antitrust regulations and the new Cade [Brazilian antitrust and M&A regulator]?
FS, Itaú The increased volume of transactions in the last two weeks of May was a clear reaction to the change in M&A regulations. As with any new regulation, the deals that were in an advanced stage were closed before the new regulation became effective, and now we expect a slowdown in M&A activity in the next months until things become clearer. With M&A being the main driver of growth, as basically everyone said, and at the same time by not seeing a return of IPO activity to compensate for that, I think the second semester of this year will be challenging for the private banking industry. However, the situation with M&A is temporary, and I don’t think the market is going to dry up in the short term.
JAW, Bradesco M&A will eventually slow down in this new environment and we have to see how long it will take from now to submission until approval. It is a new experience for companies, for regulators, for everybody, and so I believe there will be a slowdown and private banking activity will suffer a little bit because there is a huge amount of new AUM that comes from M&A.
BA, JPMorgan I think all of our discussions with clients have been the same, which is about the real rates benchmark instead of the nominal rates benchmark that lasted for 20 years. This has been the conversation with our clients: whether to go for 110% of the CDI, 105% of the CDI... But now clients are lost. Low interest rates are probably here to stay. We are going to 7.75% and maybe lower than that and we know that the government is probably willing to keep those rates as low as possible for a long time so it is going to be a challenge for all the private banking industry. Two years ago clients could invest in a short-term inflation-linked bond with more than 5% real interest rates, so they could clip that 5% real return and that’s all they needed. Now you have to go longer, so the duration of the portfolios has to be longer, and clients are not used to that because that implies a lot of volatility. Clients don’t want volatility, as Renato mentioned, so how do you talk to clients? It is all about real interest rates, so tax-exempt products has been something that have been explored in Brazil. Our clients have more than doubled their exposure to tax-exempt products in the past two years, ranging from agribusiness-related securities to real estate opportunities. We are trying to find products with embedded credit that are tax-exempt. Ultra-high-net-worth clients, are sophisticated and are willing to take that risk and get 5%, 7% maybe 8% real interest rates in a longer-term, less liquid type of security. This is something that we never discussed five years ago, so this is a new trend in the industry.
The second wave could be the equity market but Brazilians are culturally not there yet, even though well-known stocks are paying 5% to 10% dividend yield. Itaú is now paying 4.2% dividend yield so some clients will buy the stock and hold it but other clients can’t stand the volatility. Even though we say to clients: “This is for your children because you are going to have this investment for five years, it makes a lot of sense”, many clients don’t really have the culture to hold equities for a long time.
Euromoney In Brazil, the private banking client base is becoming increasingly entrepreneurial. To what extent are these clients’ private and business/corporate banking needs interchangeable, and how do you respond to that?
RP, BTG Pactual The environment in Brazil over the past five to 10 years has been tremendously fruitful for entrepreneurial activity, and the industry and the companies have changed sizes in Brazil. I am talking about companies that have revenues over R$1 billion [$492 million]. We go to visit these companies, which are still private companies that have not even accessed the market, and the shape of the market has transformed itself tremendously. This has allowed the market to develop this whole M&A activity that we have seen in the past that also has tight links to private equity deals in Brazil. Last year the number of private equity deals in Brazil was second only to China; we are ahead of the other Bric countries.
Cross-selling, at least at BTG Pactual, has always been a very strong selling point. We did a lot of cross-selling last year, especially with the private equity team, and that creates a lot of opportunities. A lot of entrepreneurs who created liquidity in the past couple of years are looking to go back into the market with different opportunities and different ventures. Sometimes they cannot compete with their previous line of business but they want to go into other areas of economic activity, and that creates huge opportunities for co-investing with clients. That private equity angle is going to be one of the strong themes in future. The clients are looking at us as partners in their investments; helping them out in establishing future partnerships, future businesses and co-investing with them.
CP, JPMorgan This is the beauty of the business because we are not only offering products but we are also offering solutions to help clients bring some new and innovative ideas and solutions to the market.
Euromoney In private banking, have you noticed any changes in the fundamental approach to risk with regards to portfolio management in the past year?
JAW, Bradesco We have seen shifting behaviour mostly by the ultra-high-net-worth segment. Those are the clients that usually push banks for new products and services. They are the challengers, which is positive for the whole industry, they push for innovation, among other enhancements. They usually adjust faster to structural changes. They behave in a more pragmatic manner and are more likely to accept changes. Most likely we are talking about successful entrepreneurs. They have been investing in corporate opportunities abroad; they have been buying real estate in the US especially. I recently saw an ultra-high [net worth] client selling in Brazil, which is pretty expensive, and buying commercial real estate in Manhattan and New Jersey. He expects huge returns in a couple of years. So ultra-high clients behave differently, but other segments have remained pretty much the same, at least in our experience. They are investing in Brazil, but eventually this too will change.
Euromoney Is it still largely a Brazil-based issue at the moment from within private banking?
RP, BTG Pactual Yes, money is being kept onshore and the approach to risk is tremendously conservative. Anbima tracks the industry and in the past three years, while the market has been growing there hasn’t been, with a few exceptions, a shift between asset classes. It is still a very fixed income-oriented market.
Nominal rates in Brazil are going below 8%, and then consider what the stock market is doing these days because of the whole European situation. If you take a look at the overall market in Brazil in terms of equity funds it is between 2% and 3%. If you take a look at equity held directly by clients or in managed accounts, it is about 15% of the portfolio, but it has been stable at between 15% and 18% for the past three or four years. So a lot of people are trying to protect themselves against rising inflation by looking more into foreign real estate investments as a whole, not only to address opportunities abroad but because it has become so expensive here in Brazil, and because of the threat of large inflation domestically.
Inflation fears were a theme last year and investors have really looked into that market as well, investing directly or through inflation-linked securities. Over the past two years, even though people were not really going to the public equity space, a lot of clients were really going for different opportunities in the private equity space, including infrastructure and real estate.
CP, JPMorgan High interest rates and, in the old days, inflation created a culture of a very high participation of fixed-income instruments in our market activity. But there is a new interest rate environment in Brazil. Brazil is experiencing the lowest interest rates in its recent history. This new environment requires that we make this passive fixed-income money work better – it’s common sense that the stock market could be the right place to be. However, before we see flows into equities, Brazilians must change their short-term mentality.
We still see clients looking for the same fixed-income instruments but as we seek to find premiums to this kind of CDI indexation – if I can use that investment term – we are looking for longer-term bonds And since you only find premium if you invest in longer-term products, this is an important concept to understand in order to change the mind set before we can move clients to a more risky portfolio.
Our stock market is not very representative of the real economy. When looking at it the first thing that comes to people’s minds is that we are a commodity-based economy, because that is what is represented at BM&FBovespa [Brazil’s stock exchange]. But more than 50% of the real economy is made up of service industries. These companies are very important, but they are not well represented in the Brazil stock exchange so there should be investment opportunities through IPOs of these companies. Again,though, the issue is clients being willing to take more risk.
LR, Itaú I believe we have a different situation. We have been talking to our clients about the importance of asset allocation, and investing in different asset classes. For example, in our portfolio CDI investment dropped 10% last year. In the past two years, the decrease was above 25%, so we have been recommending that our clients invest in different strategies. We have more than doubled our share in credit and, regarding fixed income, we have been advising our clients towards what really matters: the real interest rates, as opposed to nominal rates. We took advantage not only of the NTN-Bs [inflation-linked treasuries], but also other products such as CRIs [mortgage-linked securities], in which we have a huge percentage of the market, by working very closely with our investment bank, but also with other independent players. So when we now look to our portfolio we still have a strong share in equities. We have almost 20% of our AUM in equities, which is more than the market average, according to Anbima’s data, but we have also increased a lot in credit and alternative investments and those investments, such as private equity and real estate, presuming very good returns to our clients.
We can already see those real estate returns coming back to our clients. We are still on the disinvestment cycle in private equity, but valuations show there are opportunities to sell and we are sure these products perform better than the CDI. In this new environment of lower interest rates we have a good opportunity to offer sophisticated products. Before the drop in the CDI, when a client had liquidity they would talk to all the banks asking for an exclusive price or how much they would be willing to pay for an essentially commoditized product. Today clients are overlooking CDI to obtain higher returns by investing in different asset classes – in the past two to three years CDI has not been the best return on investments. So, I would say, this new macroeconomic scenario allows clients to notice the value that a specialized private bank can offer them.
Euromoney Are clients willing to take longer-term investments – it’s just that they don’t see equity as that long-term investment at the moment?
LR, Itaú We are surely facing a slow change in investment mindset. Clients are overlooking liquidity in order to have higher return ratios, not just in fixed income but in private equity, real estate, and also in inflation-linked investments, which have five- to 1- year terms.
Clients don’t want to put all their assets into such long-term investments yet, but in the past they wanted to have almost 100% of their portfolio liquid. Now our clients have around 30% to 40% of their portfolios in investments with five- to 10-year terms.
RC, BTG Pactual It is not that the clients are not willing to take more risk, because they are; it is that they are not willing to take more volatility. So you see clients, especially the entrepreneurs who have recently sold their companies, who understand the market and who want to participate in the growth of the economy and the growth of GDP and so they are more willing to invest in real estate, in private equity but maybe not in the equity market itself. Equity funds mean daily volatility but if you invest in private equity, even if you invest in real estate, it is a different component of risk or credit; it is not volatility risk but a different type of risk. So clients are willing to take different asset classes, different types of risks and probably more risks and more long-term within those asset classes I mentioned. Entrepreneurs are also very willing to hear about specific opportunities that you show to them – co-investments and things like that – so I believe in that sense the market is changing a little bit from the CDI-linked investments.
VO, Santander We also see a trend of moving from the fixed-income market. We had a slight growth on the equity side but most of the clients are moving to the real economy; they are looking for opportunities in private equity and I also believe that credit will make a huge part of the portfolio that clients want, so we are looking for opportunities there. I also think tax-exempt products such as LCIs, LCAs and CRIs are going to make up a big part of customers’ portfolios.
JAW, Bradesco Rates are a very important element of clients’ past experience, as is high inflation. These created a short-term mentality, and we have good reasons to keep that because, at least with what my generation went through, it is unbelievable. So it is an education process, and we are going to go through a turnaround and start a new type of thinking. We have to re-educate ourselves and the clients. You have to talk to the clients and convince them by showing them that these days we have to restart our business, redo the way we worked before. We hope that high inflation and high interest rates are over, and then we’ll need to convince clients to give up liquidity. We have been successful at least with the ultra-high-net-worth individuals, and the companies. Large clients are giving us an absolute-return mandate – they don’t look at CDI anymore – and that is the way it should go.
Today we have clients who come to us and ask for returns they used to have in their business. They’ll say “I have a 15% return on my business” and this is what they expect from the bank and they are coming in, after these large M&As, and they still have in their minds what they used to pay for the banks and there is a new reality now with interest rates dropping. Who knows where the Selic [the central bank overnight rate] will bottom out? It is probably going to be 7% to 7.5% in the near future and so a new education process is needed for everybody, and I believe that’s good. The cost of funds will be lower, which is good for doing more business, and as you do more business eventually you will have more opportunities for private banking as well. We are finally entering a virtuous circle.
Euromoney To what extent do people think lower interest rates are a short-term phenomenon? Do your clients think it might be short-term and that inflation might come back and with it interest rates will start to rise?
JAW, Bradesco It is a huge concern. We don’t know exactly where we are going to be tomorrow, whether or not interest rates will go back up. Thankfully in the last couple of weeks there is a sign of inflation slowing down and we hope that it will really slow down. Clients are starting to realize they need to think in the long term and that is leading them to consider private equity and other type of investments, but it is hard to just walk away from the old days of just fixed income. It is a turnaround, it is a turning point and we all will be re-educated in this. It is a new way of doing private banking in Brazil. We never before managed portfolios, with local interest rates at this level. It is a real challenge, because this is not a short-term phenomenon.
FS, Itaú There is a conflict between generations. Those who have been in the market for more than 20 years have seen situations where money was blocked in client accounts and the monthly inflation rate was 80%. The new generation, who came into the market almost 20 years after the launch of the Plano Real stability plan, has a different background than the older generations, so they are more willing to search for opportunities that are not related to the CDI.
But this “inflation ghost” will remain an issue at least for another, I would say, 10 years. We need to re-educate ourselves, and it takes time. That is why I think the game [of private banking] is really starting now in Brazil. For many years we had liquidity, high returns and very low risk, now this scenario is changing.
CE, Santander The big legacy of the crisis that began in 2008/09 is that it made clients much more product-driven in the sense of looking at the track records of performance as the basis of making choices. The legacy was this focus and they required a more advisory type of service. We tried to sell the concept of an all-weather portfolio that, in any kind of situation, doesn’t necessarily provide the best return but it is not going to be the worst – it is going to surf the waves, with a reasonable return.
The low interest rate environment is here to stay. If you look back, we might have some cycles, but over the past 12 years we have tested some new low points and we never went back to the high points. We have been tracing lower, and so maybe we will go to 7.5% and when interest rates rise again there might have to be some tactical adjustments. However, we probably won’t see them rise back to 12.5%. Then it will move lower again, so I think we all need to adapt.
RP, BTG Pactual Clients are moving away from the CDI into new asset classes – and the CDI has definitely not been the best-performing investment during the 12 months – but what hasn’t really been said here is about the multimarket funds. The local hedge fund industry in Brazil has performed tremendously well in the past two years. We encouraged clients last year to invest in that asset class and that has performed very strongly. A number of different names performed well. Offshore it is a different story in terms of the fund-of-funds industry, which has been dismal, and in terms of hedge funds it hasn’t really mostly been accretive to clients’ portfolios in the past two or three years with a few exceptions.
But in the equity space in Brazil, by which I mean the public equity space, equity funds and long-only funds, clients haven’t really changed the proportion that they are willing to put in but there are a number of names out there that have been really good at giving back alpha to clients in the past two years. We have funds that are yielding 25% to 30% on top of the Bovespa and even in tough situations like this they are performing well above the CDI – and it’s not just our asset management division; there are other names out there as well, so again, do your job right in terms of due diligence of managers and you can add value to client’s portfolios.
CP, JPMorgan It is important to emphasize that for the first time we are seeing the dividend yield of Bovespa, and not just for some specific portfolio, equalling our interest rate. It is amazing and is something that could attract a lot of people in the short term to this kind of asset because they are trying to find out about equities with protection, and at the same time you can get some very good returns.
This is really important and, as a result, dividend funds during the past 12 months have really attracted a lot of new money.
RP, BTG Pactual This is an important point, and it is not just happening in the Brazilian domestic market, but also in global markets.
RC, BTG Pactual Just one quick comment on Celso’s remarks: he mentioned that the dividend yield is now close to interest rates and he said that it is amazing. I think it is normal! What was amazing was the past 20 years when interest rates paid 10% over dividend yields! It is amazing that Brazil is finally getting much closer to international financial market norms. Dividend yields are close to real interest rates, and that’s reasonable. They should be. Yields on corporate real estate are a little bit above real interest rates, and that’s also reasonable. They were lower and that was not reasonable. So Brazil is normalizing, and clients – and everybody – are adapting. This is a very good sign for the future of the market.
Euromoney On equities, people here are saying that the allocation hasn’t moved towards equities particularly because of volatility. If the volatility goes down, do you think you will see more interest, albeit some are already producing alpha?
RC, BTG Pactual It is not just volatility but the fact is that we have been in a crisis since 2008. You say 2009 was a recovery year, and 2010 was mixed, but we have not been out of a crisis globally since 2008 and clients need more confidence that the markets will perform a little bit better. It is the combination of volatility without a clear direction of how we are going to move out of this crisis globally, especially in regards to Europe. This is what is keeping clients out of the equity market, because everybody agrees that with nominal interest rates and real interest rates at the level they are now more clients should have moved into the equity markets. So if we have a clear sign of a direction on the global markets, clients will move into equities.
BA, JPMorgan It is also about information and education because clients used to buy only Vale, Petrobras and the banks. All these names are now under pressure due to the introduction of various regulations. Clients are surprised to find out how well consumer companies have performed in the past 12 months, or how some very high yield dividend paying companies have performed, so when we sit down with clients we try to show that it is not about the Bovespa Index. There are many new companies, which are obviously less liquid, but that have good management, good prospects and are good investment opportunities. So it is a challenge for the industry. Clients will first move to equity dividend funds and then begin to do some sort of stock picking, moving away from the Bovespa benchmark. This is what we are seeing.
JAW, Bradesco There has been too much volatility to advise the client to go straight into the equity market. For clients who have never invested in equities, going straight from the comfortable environment of fixed income straight to equity is probably a big step for them.
Every day clients ask us questions about equities because, as we’ve said, the environment they’ve known – with high interest rate, high liquidity, high returns and no risk – is gone. They’re looking to do things differently and there is no way you can do a different allocation without going through equities. It is clear to us that as soon as we have a clear sign of more stable markets we will see a move to equities; and by the way it is not just uncertainty from Europe that is the problem – there is uncertainty with China, with the US, everywhere. But for the moment you cannot really see a clear picture, and because the world is so globalized it’s impossible to say that Brazil will stay out of this turmoil. Clients are advised to do a transition in equity funds prior to moving from fixed income directly to equity. After all we have the responsibility to preserve the family’s wealth for the next generation.
CE, Santander The biggest challenge is that clients understand that the lower rates should be good for equities but it is not tangible to them. Despite lower interest rates they haven’t seen any rise to the Bovespa – on the contrary it’s been falling – and so our challenge is to get clients to take small exposure to a value equity fund or a dividend fund, or a fund of equity funds, and as the client sees returns from those investments he gets more confident and he will raise those positions. It is a learning process; there is no other way.
Euromoney What’s been the demand for tax-free products, specifically in light of the potential emergence of tax-free corporate bonds related to infrastructure?
BA, JPMorgan The first company was close to issuing a long-term tax-exempt corporate bond related to infrastructure but it didn’t happen due to some complications with that company’s structure, but this type of instrument will certainly attract client interest. Without interest rates like we’ve had before, tax savings encourage investors to take advantage and invest considerable sums in these products, despite the longer duration.
Euromoney Are you working on the origination side as well as supply to try to become an active issuer of these bonds?
BA, JPMorgan Yes, JPMorgan is becoming more proactive, but there are other issues to consider. It’s not as if there is pent-up supply waiting for an opportunity to tap the domestic market. As has been pointed out the equity premium is now close to interest rates but if you look at the credit market in Brazil the spreads are very tight. If you compare these spreads to US or European high yield it is common to find bonds paying 400bp to 800bp over investment grade for some decent high yield credits. In Brazil, the same equivalent type of risk is paying just 200bp or 300bp over the local benchmark. There is a reason for that; there is currently more demand than supply for local debt, and the corporations have not tapped the market as strongly as they could; this market has to be developed. Obviously the local costs from the issuer’s perspective must be considered as well. There is already over-demand for credit from private banking clients.
FS, Itaú Any product that offers a tax benefit of any kind is going to attract the attention of investors, especially after the new 12431 regulation. But we still have some time to go before they take off. This is not going to become a big opportunity in the short term – there will be some issues. However, I am optimistic that early next year these opportunities can start becoming relevant for investors. Having said that, all products that offer tax benefits are growing extremely fast.
JAW, Bradesco This product is already a very hot topic, and it is going to be quite difficult to grow AUM in private banking without having it. All the clients know the benefit. It is almost like going back to the old days. You have the best of all features: liquidity, security, high interest rate and high return.
We have seen a lot of these; almost every day there are new transactions on the street that are tax exempt and the clients are willing to allocate part of their investments in those types of products even if they are structured with very long-term tenors – some are up to 16 years. However, the clients are willing to take that in their portfolios because of the high return they offer.
Euromoney Are there any other asset classes that are interesting to clients?
CE, Santander Real estate funds offer opportunities but you have to be very careful. Clients have to be careful about their expectations of future returns because recent performance has been greatly benefited by the recent interest rate cuts and by the large appreciation of the real estate market. So while we are still moderately optimistic regarding these products, the past is not a great reference.
We have done a couple of things with commodities – we did a few products with gold in the past. Gold was an interesting story and was in line with the diversification story and it sold quite well.
RC, BTG Pactual We haven’t seen a trend of investing either in gold or commodities but we see that clients are interested in special opportunities. When you show a story, a note or a different idea of a product that has a very good investment thesis, clients are very willing to invest. We ourselves had a pretty interesting story where we invested in some contracts with the reinsurance market and clients understood the risk and the type of investments. It is a completely different type of exposure from the normal financial type of investment clients are usually shown and they wanted to participate.
We also had some deals in real estate that were not real estate funds but specific deals that we offered clients to join with us and co-invest with the bank. So these type of things, special stories, special situations, attract interest from the ultra-high network of clients.
FS, Itaú We see pretty much the same situation; the gold and silver markets in Brazil are not as developed as they are internationally, so clients who want to have exposure to these products normally do this by using offshore instruments.
However, art is an interesting area for our clients and the art market in Brazil is booming. Prices are at an all-time high but I am not aware of any player that has really structured an art product for clients in an active way. We recently saw a new fund that came to market investing in emerging artists, but it is does not have a relevant size in the industry. We have also seen some art advisory services – but this is still something to be developed in the industry.
One trend we have seen that is not really new in terms of innovation but is becoming more and more demanded by ultra-high-net-worth clients are retirement funds. This service was something that in the past we saw more as a retail-oriented product, and now is a large part of the wealth planning of the ultra-high-net-worth families. In our case, the demand for retirement funds doubled in the past year.
Euromoney As private bank clients look for more sophisticated products will there be an opportunity for you to rebuild margins around those new services?
LR, Itaú Yes, and we have already seen that this year. The worst case for us is to sell indexed products. In a market where the CDI is no longer the best option we have a good opportunity to sell alternatives, such as hedge funds, which have recently performed quite well. Or equity funds, alternative funds – all of which have a better margin because they aren’t just about the management fee – there is also the performance fee. We like to have our economic interest aligned to that of clients, so that when we have good products with good returns we have higher revenues and better margins.
FS, Itaú When we look at the key performance indicators in the international markets it is amazing to see that Brazil, despite the high interest rates, has had lower returns on assets than more developed markets. This is one of the distortions that we still have in our market, but it is getting less prominent, and that is why we strongly believe that nowadays we have an opportunity for better returns – for our clients and for us.
RP, BTG Pactual With interest rates going below 8% credit is becoming a more important part of our business, which we are going to considerably grow. Credit will include more leverage, which carries a better margin than just selling CDIs, LCAs and LCIs and things like that. Of course you have to manage the credit portfolio responsibly but that will be definitely a trend and a function of having lower rates in Brazil for good.
BA, JPMorgan The challenge is to offer suitable products to suitable clients because most clients don’t have the risk profile to go out long in duration for credit, structured products, private equity and so on. So educating the client about the pros and cons of a product is key. We are trying to explain to clients about the new opportunities. There is a risk in diversification of the portfolio – if they invest in multimarket funds, private equity, structured products, credit exposure – that if it doesn’t suit the client they will blame us later if the performance isn’t in line with expectations. If we are adding volatility, and we are adding risk to clients’ portfolios, we have to do it in a very smooth way, educating clients about risk/return and following several suitability requirements. But in the end margins will definitely be higher.
Euromoney And as you are adding more sophisticated products, are there issues around transparency of fees – what is fixed, what is performance and so on?
BA, JPMorgan Yes, for example last year we raised almost $2 billion for Gávea [Gávea Investimentos was acquired by Highbridge Capital Management in 2010, which is in turn owned by JPMorgan Asset Management] and we were very careful about disclosing all the fees, setting up a feeder fund locally and charging the same kind of placement fees that we charge offshore. Sometimes you have embedded fees in structured products so what we try to do is to disclose them all to clients. For example the brokerage fees that we charge are crystal clear to clients.
Euromoney Has fee transparency broadly been an issue, or is it developing just at the moment?
LR, Itaú Transparency, not just in the onshore market but also in the offshore market, is very important. Suitability is important too – we like to offer different products to different clients but we are very worried about suitability and the risk that clients are willing to take. The full disclosure of the fees and ensuring clients have the right product is really important.
JAW, Bradesco Disclosure of fees is a matter of transparency but also ethics. Sooner or later the client will find out if they are being overcharged – or charged out of line with expectations – and at that point the relationship has gone for ever.
Our margins are stable. We still feel that what we call the sweet spot for us is the client with between R$3 million and R$10 million. The ultra-high-net-worth clients usually have a relationship with two or three banks, which they should, but it makes it tougher to retain margins. In general, this new low interest rate environment has given us an opportunity to sell new products with higher margins, but there is still a price war. Volumes have been growing so fees have been growing significantly, but the margin – the percentage of AUM we can charge – has been stable in our case.
RC, BTG Pactual Fees are very competitive. The market is very competitive so scale is very important and that is why we have seen a couple of the new entrants that came in the past three years leave in the past 12 months. It demands huge time and investment for a bank to have a worthwhile market share in this sector. Banks also need to attain large scale in order to be profitable. And I am not just talking about traditional competition from banks – the multifamily offices don’t have the same structure and therefore cost structure of a bank, so they can be more competitive. So multifamily offices are also a sort of competition as well as being sometimes a client.
BA, JPMorgan Another threat to the industry is that the established players are competing among themselves for the same clients. For example, when they have an M&A deal, all the banks around this table are hunting the same client and sometimes this pushes down the fees. Sometimes an independent asset management firm or a multifamily office will offer to provide the same products for almost zero, and this is a threat to the industry as well. We have seen more aggressive pitches and we have independent advisers coming in and lowering fees.
We were close to one client for more than a year when he was selling a business. When he sold it he said: ‘I received 25 phone calls’. He put a list of those who had called him in front of us and asked: ‘Do you know this guy? Because I want to split my money and give 50% to you and 50% to other banks, so who do you recommend?’ And there were names on that list that we had never heard of. He then showed us a cost list, and said: ‘I want to pay this. I want to be exempt for this. I don’t want to pay management fees on my fund’. We want to provide the best level of service, but we have to charge for it, otherwise we have a problem.
Euromoney But how, as an industry, can you achieve some sort of basic pricing structures? Is it achievable as an industry or is it just going to have to work itself out over time?
CP, JPMorgan I don’t know. The multifamily offices are a very important player in the market, but it is not only multifamily offices; there are independent fund managers as well who can open a small new company with no barriers to entry and try to work in this market.
The competitive advantage for us here today is in the whole palette of solutions and products that we offer because we can be considered as one-stop shops. In other words, clients can come to us and we can provide them with a very broad range of solutions. I don’t see this in these family offices or even in some independent asset managers.
JAW, Bradesco Private banking is one of the most expensive structures of all the banks’ activities. You need professionals who really know what they are doing to offer the best solution, the services. And so a private bank is a very costly structure but at the same time we are facing a price war. We are in the middle of this war. You can be close to a potential client for a year – you can take him out for wherever he likes, but today it all comes down to pricing. One can say that it is the survival of the fittest. However, we believe what you really need is an added-value proposition, with a strong brand name, proactive approach, top-notch open architecture products and services, and a well-trained and motivated team. If you have that, you can charge a fair price.
Euromoney Is loyalty breaking down? Are clients more price sensitive than in the past?
JAW, Bradesco Yes. Clients are more sensitive to price than in the past. It is part of the game of efficiency and a result of lower interest rates in our market. More than ever before we have seen clients discussing fees we charge, and it is normal. The cost of capital allocation is a big issue today. But it is up to us to decide whether we are willing to work at a lower level of remuneration or not. Sometimes you can go low on pricing, as an investment, expecting that later on you will add other business – for example insurance, credit cards, loans, pension plan and maybe when they go back to business the investment bank or some other area from the bank will benefit from you holding the relationship. So we support the client at a low return to the private segment, to keep the client and later on try get some pay-back for what you are doing almost for free.
Loyalty still exists and we receive proof of that all the time. Just the other day, a large company that was acquired decided to place all the cash from the deal with Bradesco. We supported them in the 1982 crisis. It is rewarding to see that the trust we placed with a family was paid back three decades later. We are a bank that believes in long-term relationships, not in a single transaction.
RP, BTG Pactual The bad news is that this tough price competition environment is due to stay for at least a while. I don’t really see any changes in this trend for the next 12 months or even longer, as it is a very aggressive market. We all want to increase our market share but clients have understood how bidding for a client works, and clients have become more sophisticated, so they are playing the game. As Celso said, they go to 15 different banks and they get a feel for the structures and offers and then they come to us with some really indecent proposals. And I agree with what everybody else is saying here that there is a limit on how low you can charge. In some cases we have opted to just let the client go and in a lot of the cases they have come back willing to pay a little bit more and get a better service. They might have sold their company and gone to a small independent wealth manager and then they see they don’t have enough scale; they don’t have the full cross-selling opportunities that they can have with other areas of the bank and they see us in terms of aggregating value rather than increasing cost.
FS, Itaú Pricing in any industry is one of the elements of strategy and there is nothing wrong per se with aggressive pricing. The only thing that I question is when the only piece in a bank’s strategy is pricing. Then those players – and we have players in Brazil subsidizing low private banking fees through their commercial operations – are ultimately going to struggle. They don’t develop a strategy to retain those clients, so the moment that their commercial side doesn’t subsidize private banking any more they will lose most of their portfolio to the market. So pricing is perfectly fine, but at the end of the day a strategy that is centred in pricing is going to be temporary.
