Published: January 01, 2000
Opportunities are plentiful for Latin America’s non-bank financial institution (NBFI) industry. Many of the sectors which are included under the NBFI umbrella have experienced significant growth in recent years and this is set to continue, with a number of institutions currently focusing on aggressive expansion plans. With a promising future ahead, how can NBFIs in Latin America position themselves most effectively for growth and how can banks best support them?
First of all let’s clarify what is meant by the term NBFI. NBFIs are simply financial institutions which are not classified as commercial banks. Examples include insurance companies, pension funds, credit card companies, factoring companies and broker dealers. These institutions have an interesting relationship with commercial banks: on the one hand NBFIs compete with them, but on the other they complement the products and services which commercial banks offer. On both counts, NBFIs have a role to play in driving innovation and efficiency within the financial industry as a whole.
Looking at NBFIs by sector, our own market analysis shows that insurance companies comprise almost a third of NBFIs in Latin America, while broker dealers represent 25% and pension funds 15%. Credit card companies make up 11% of the industry while factoring companies and hedge funds represent 8% each. Asset managers and clearing houses make up a smaller portion of the total, at 5% and 4% respectively.
These figures show the breakdown of NBFIs across Latin America as a whole, but at a country level the extent of maturity of different NBFI sectors varies considerably. Mexico and Brazil are Latin America’s biggest economies and they also have the most developed NBFI sectors, with a healthy number of insurance companies, broker dealers, factoring companies and hedge funds. NBFIs also play a strong role in Chile, Peru and Colombia, which tend to support three or four NBFI sectors, such as insurance companies, broker dealers, factoring companies and pension funds. Elsewhere in the region, countries like Argentina, Paraguay and Uruguay tend to maintain just two well established NBFI sectors, typically insurance companies and broker dealers.
While a number of different sectors are included under the umbrella of NBFI, each comes with its own challenges and opportunities. In turn, the nature and importance of these varies from country to country.
Insurance is the biggest NBFI sector in Latin America and the region’s insurance sector has remained strong despite adverse economic conditions in recent years. Prospects for the future are viewed as very positive. While the insurance industry is substantial in Brazil and Mexico, which are home to over half of the insurance policies in the region, the overall penetration rate is low with life insurance premiums representing 1.6% and 0.9% of GDP respectively. In Mexico, this figure has hardly changed since 2001. As such, there is significant potential for future growth, and NBFIs in the region are planning to take advantage of this. In particular, multinational insurance companies operating in Mexico and Brazil typically have aggressive expansion plans and many are developing across the region, either by acquiring local companies or by investing in their existing businesses.
Meanwhile, a number of regulatory changes are set to impact on Latin America’s insurance industry. Regulators are currently working to align their insurance solvency requirements with some of the more stringent international regulations, such as Solvency II, the new European capital requirements. But regulatory approaches vary across the region: whereas Mexico’s approach is based on Solvency II, for example, the approach taken in Brazil is more focused on gradualism.[[[PAGE]]]
Factoring companies and broker dealers are an important topic in Latin America because, in contrast to the insurance sector, which is largely dominated by European and US players, these companies tend to have a more domestic focus. Particularly in Brazil, there is a trend for local or regional banks to expand their presence in Latin America by acquiring local broker dealers, as illustrated by recent M&A activity by Brazilian banks in other countries across Latin America. Whereas factoring is currently very underdeveloped within the region, there are significant opportunities for growth in the next few years, and in the medium term, factoring is expected to become a key trade finance vehicle in Latin America.
Custody is another important theme for NBFIs in Latin America and has been for the last five years. There are two main aspects to this story. The first is the custody in local securities, which is an important market for a number of countries across the region, including Mexico, Brazil, Colombia, Dominican Republic and Panama. The second area of custody is international custody, mainly denominated in US dollar (USD) and euro for fixed income and equities, and this is also a major topic. In Chile, for example, pension funds represented 67% of GDP in 2010. In Mexico, by way of contrast, the figure was 12.6%. Projections have suggested that the value of Chile’s pension funds could be as much as $96bn by 2020. The area of custody is growing rapidly, particularly in Chile, Colombia and Peru, which merged their stock exchanges in 2011 to create Mercado Integrado Latinamericano (MILA), the region’s biggest exchange by number of issuers and second in market capitailisation.
Meanwhile, where hedge funds and asset managers are concerned, investment from BM&FBovespa, the Brazilian exchange group, has led to greater electronic flow in recent months. As a result, many hedge funds and asset managers are turning their attention to Brazil and are poised to begin offering their products and services within the country.
With the pace of development remaining high across the various sectors, NBFIs are becoming more demanding when it comes to banking products and solutions. Again, their exact requirements vary by sector, although there are some common themes.
Insurance companies are typically turning to Brazil and Mexico as their hubs for accounts payable. Many are aiming to concentrate their activities into a single country with one regional bank, particularly insurance names from Europe or the US. Their top priorities are typically state-of-the-art technology, strong banking relationships and high levels of customer service.
Broker dealers are likewise looking to benefit from more advanced technology, as illustrated by the growing levels of SWIFT connectivity across the region. As a result of this growing appetite, bank providers focusing on this area are becoming more proactive in improving their systems capabilities. Additionally there is a perception that customer service across the region is somewhat lacking, which is also leading to greater attention from banks. At the same time, broker dealers have become more sophisticated when it comes to their USD and euro mix. In the past, broker dealers in countries like Peru, Mexico and Colombia were primarily interested in fulfilling local requirements. Today, however, their demand for euro and USD cash management, FX and liquidity solutions is growing rapidly.
Finally, in terms of custody, there have been complaints in the market regarding a lack of automatic execution processes between some broker dealers and custody providers, which is prompting some providers to improve their systems capabilities.
Many banks across the region have NBFIs attached to their commercial bank, such as a factoring company or broker dealer company. During the last couple of years, these banks have been growing their NBFI businesses very actively, for example by hiring additional staff for their broker dealer or giving more credit to their factoring subsidiary. This trend provides opportunities for international banks with a strong presence in the region to work with the domestic banks and add value in areas such as cash management, trade, liquidity and FX.[[[PAGE]]]
In order to get the best out of their banking services providers, NBFIs are focusing on a number of areas. By consolidating their bank relationships with a single provider, they are able to reduce the number of bank accounts they are holding as well as concentrating cash balances, improving visibility and increasing the overall efficiency of their liquidity structures.
Technology is an important facilitator for NBFIs, and companies looking to improve efficiency are particularly interested in solutions which will optimise their accounts payable and accounts receivable processes. Given the growth opportunities that many NBFIs in the region are aiming to benefit from, it is important to ensure that the solutions employed are both flexible and scalable enough to accommodate future geographical expansion or growth in volume.
Finally, in order to position themselves most effectively for future growth, NBFIs should choose a bank which combines a regional overview and capabilities with local expertise, understands the local market’s priorities and objectives, and offers a consultative approach to doing business in Latin America.
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