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Brazilian asset management in focus, part 1 - Brazilian banking industry challenges - EY - United States

Brazilian asset management in focus, part 1

Brazilian asset management
industry challenges

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Brazil's wealth management and investment banking market grew by 15 percent in 2010 and is expected to remain one of the fastest-growing segments in the foreseeable future.

Brazil's tax burden is among the highest in the world.

Brazil's maze of legal obligations and tax payments

Brazil's combined corporate tax rate for 2011, for example, is 34 percent and even higher – 40 percent – for financial institutions. The tax system itself is a Byzantine puzzle of local, state and federal taxes complicated by a host of assessments and "contributions."

The system is also so cumbersome that that an average-size corporation in Brazil spends roughly 6,000 labor hours per year complying with all of its legal obligations and tax payments. In the United States, comparable firms spend roughly 200 hours annually on such matters.

There is a movement toward changing the tax system, but there have yet to be any substantial reforms.

Domestic banks dominate

Many credit Brazil's stringent banking laws with saving the national economy from the worst effects of the global financial crisis. The regulations perform as intended: they protect Brazilian banks and government control over those banks. Foreign asset managers also face strong competition from competent domestic wealth managers, many of whom have international links and enjoy home-field advantages.

The Brazilian financial system is dominated by six domestic banks, which control an overwhelming majority of banking assets. The state-owned banks in this group account for 43% of assets undermanagement (AUM), while private banks control 39%. Foreign-owned banks account for roughly 18% of AUM.

Brazil's securities market: heavy regulation and limited offerings

The Brazilian securities market is somewhat limited, the natural result of heavy regulation and limited product offerings. Many Brazilian investors have traditionally avoided domestic markets altogether in favor of foreign markets with a broader variety of opportunities.

The country's stellar economic growth has changed this dynamic somewhat, with Brazil's growing investor class seeking opportunities domestically. And, while high interest rates have slowed a movement toward alternative investments, many investors are embracing exchange-traded funds, real estate funds and hedge funds. According to Hedge Fund Research, in 2010, hedge fund assets devoted to Brazil rose 75 percent to US$21 billion.

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