Finding a spot to lay a towel on the Brazilian beach of Copacabana in the height of summer is generally considered to be a fool’s errand. Equally busy—but perhaps slightly less glamorous—is the custody market, which boasts 3.827 billion assets held in Brazilian real.
Finding a spot to lay a towel on the Brazilian beach of Copacabana in the height of summer is generally considered to be a fool’s errand. Equally busy—but perhaps slightly less glamorous—is the custody market, which boasts 3.827 billion assets held in Brazilian real.
Itaú Unibanco is Brazil’s largest bank by market value, and one of the major players in the region. Reports have suggested that bank is about to close an offer for the retail banking unit of Citigroup in Uruguay—a transaction that would turn Itaú Unibanco into the country’s second-largest bank after the Spanish Banco Santander.
With 587 employees in Brazil, the bank’s custody business’s total assets under custody in Brazil are worth BRL 927 billion, with local custody at BRL 742 billion and sub-custody figures of BRL 185 billion.
The make-up of the country in terms of local and global custodians is fairly equal, with local players scooping up domestic investors and global players best poised to capture business in the sub-custody market.
Ricardo Soares, the director of custody at Itaú Unibanco, comments that the figures show a concentration of the custody market.
“Ninety-three percent of total assets under custody in Brazil (BRL 3.024 billion out of 3.827 billion) are held by four major players (Bradesco, Itaú Unibanco, Banco do Brasil and Citibank); of those, only Citibank is global. This characteristic creates a huge barrier for all newcomers to the market.”
“Also, there are 25 local players that provide custody services to 72 percent (BRL 2.767 billion out of 3.827 billion) of all assets in Brazil; while only 28 percent of the assets are held by eight international players (BRL 1.060 billion out of 3.827 billion)—figures which support the initial conclusion.”
One of the global players in the market is BNP Paribas Securities Services, which opened in São Paulo three years ago. Nelson Fernandes, head of BNP Paribas Securities Services in Brazil, says: “We set our BNP Paribas Securities Services flag in Brazil, Sao Paulo back in January 2010. However, the bank was offering local custody to local and foreign investors for more than a decade through its asset management arm.”
“We had lifted out those custody teams and related business back in 2009 and implemented our global system called AceTP running in several markets, connecting it to the Brazilian capital market.”
During the past three years, Fernandes says that the team has focused on growing their market share for the inbound custody flow, as well as selling offshore capabilities to Brazilian financial intermediaries and institutional investors.
But in the midst of migrating internal portfolios and picking up new clients, there lay obstacles.
“One of the main challenges on the Brazilian market is taxation as rules may be changed overnight,” says Fernandes. “We have overcome this with a strong internal tax advisory team working closely with our custody unit to accompany and implement those changes. In addition, this requires also flexible system to reflect them timely.”
Soares agrees, commenting that the regulatory environment is complex and constantly updated. “The Brazilian regulatory framework and the strong presence of the regulators overseeing day-to-day activities provide a secure environment for investments and to the investors, which has been proved during the last few years during the financial market crisis worldwide.”
“However, this complexity and the regular changes create a demanding and challenging business for the service providers, such as custodians and fund administrators, which are required to make huge investments in technology and in people, in order to comply in one hand with the new regulations, and in the other hand keeping the products and services meeting clients’ expectations.” This can only be rectified, he stresses, by an intense lobbying effort, which allows a custodian to anticipate the new updates and potentially influence the market for the better.
