Itau Unibanco Holding SA, the biggest wealth manager in Brazil, said growth in that industry will cool to 15 percent this year from 21 percent in 2012 as the nation’s economic rebound falls short of forecasts.
“Banks are already starting to fight for the same clients,” Flavio Souza, 43, head of private banking at Itau, said at the firm’s headquarters in Sao Paulo. “We still will see a sound expansion of people’s fortunes in Brazil this year as real estate prices in Sao Paulo and Rio keep rising and private-equity activity brings new money to firm owners.”
Private wealth managers such as Itau, which handles about a third of Brazil’s 527.3 billion reais ($262 billion) private-banking market, are responding to slowing growth and lower benchmark interest rates by offering clients a broader mix of investment options and extending loans for luxury purchases. Zurich-based Credit Suisse Group AG said it’s creating a private-equity fund of about 500 million reais to invest in real estate projects that may offer higher returns.
Goldman Sachs Group Inc. President Gary Cohn said last month the firm would add 50 people in Brazil, including “aggressively” hiring for the New York-based bank’s private-wealth business there. HSBC Holdings Plc, Europe’s largest bank by market value, said last month it expects revenue from retail banking and wealth management in Brazil to climb about 10 percent this year after an 11 percent increase in 2012.
Itau doesn’t disclose how much revenue or profit the business generates. Local banks including Banco Bradesco SA, Grupo BTG Pactual and Banco do Brasil SA are the main private-wealth competitors in Brazil, as is Credit Suisse, according to Souza.
Brazil’s economic expansion slowed to 0.9 percent in 2012 after annual growth averaged 3.8 percent from the end of 2003 through last year. Private-wealth managers benefited in the past decade as real average income rose 19 percent, according to IBGE, the nation’s statistics agency.
In addition to a cooling economy, interest rates close to record lows will put a brake on gains in private wealth by shrinking returns, Souza said. The central bank kept its benchmark Selic rate at an all-time low of 7.25 percent from October until last month, when policy makers raised the level to 7.50 percent. It was 12.5 percent in July 2011.
Last year’s growth in the private-banking business followed a jump of almost 22 percent in 2011, according to Anbima, Brazil’s capital-markets association. Since 2009, private wealth has grown 82 percent in Brazil, the world’s second-biggest emerging market behind China.
Bradesco, based in Osasco, has also been gaining market share with assets under management increasing almost 27 percent last year, according to Joao Albino Winkelmann, the company’s private-banking director.
“Strong merger-and-acquisition activity is creating a lot of liquidity for company owners, and more and more top executives are becoming millionaires amid a considerable wage rise in the country,” Winkelmann said in an interview by telephone from Sao Paulo.
Bradesco expects growth in its private-banking business to slow to about 23 percent from 27 percent last year because interest rates remain low, according to Winkelmann.
The nation’s benchmark interest rate, known as CDI, grew 1.61 percent in the first quarter while the inflation rate measured by IPCA, the central bank’s inflation index, increased 1.94 percent.
“Investors are anxious, uncomfortable, with the unusually low interest rates in Brazil and are seeking diversification and more sophisticated products,” Souza at Itau said.
Fixed-income and floating interest-rate linked funds and assets represent the biggest share of total assets outstanding, even after falling to 44 percent in 2012 from about 49 percent in December 2011, according to Anbima. So-called multi-market funds, the Brazilian equivalent of hedge funds, have grown to 26 percent of private-banking investments from less than 23 percent.
Investors are also swapping short-term investments for longer-term ones in search of higher returns, according to Bradesco’s Winkelmann.
Credit Suisse, which focuses on creating real estate, private-equity and other types of structured funds, has benefited as those sectors expanded almost 60 percent last year. The bank’s assets under management grew 40 percent in 2012, to 57 billion reais, according to Marco Abrahao, head of private banking at Credit Suisse Hedging-Griffo, the bank’s Brazilian asset and wealth-management company.
Return on assets under management for banks will grow from 60 basis points, or 0.6 percentage point, a year on average now in Brazil to 80 basis points, closer to the international level of about 100 basis points, as clients seek more sophisticated alternatives, Souza said.
“Only if the banks succeed in giving clients a greater return will they manage to obtain better fees,” Abrahao said, adding that investors with more than 50 million reais pay about 50 basis points a year, a level closer to the international standard for those customers.
Lending to wealthy clients is accelerating as well, Itau’s Souza said, as low interest rates drive clients to take on credit to buy executive jets, small planes, boats and real estate properties and to invest in their own businesses.
Total credit for wealthy clients grew 51 percent to 14.5 billion reais in 2012 from a year earlier, according to Anbima. Credit for agriculture-related businesses represented 45 percent of the total outstanding.
“Clients can use their investment as guarantees and obtain credit with very attractive interest rates,” said Winkelmann, adding that Bradesco started to provide credit to its private-banking clients about six months ago.
The practice of lending to invest in stocks or bonds, common in international markets, doesn’t exist in Brazil because interest rates are too high, according to Renato Cohen, partner and co-head of wealth management at Grupo BTG Pactual. “Most of the private-banking clients take credit only to invest in their business and pay a lower interest rate than their company would,” he said.
BTG, which has 50 billion reais under management for wealthy clients in Brazil, sees the market growing about 20 percent this year, according to Rogerio Pessoa, partner and co-head of wealth management.
“Private banking in Brazil will keep the same pace of growth of the last few years as bigger returns from more structured products compensate for lower interest rates,” he said.
The biggest share of assets under management still comes from Sao Paulo, with 56 percent of the total outstanding, according to Anbima. The Northeast and Central-West regions have grown faster, 29 percent and 27 percent last year, respectively, compared with 19 percent in Sao Paulo.
“The rebound of agribusiness in the Central-West and the boom of the new middle-class consumption in the Northeast are creating a lot of wealth for company owners in those regions,” Cohen said.