October 5, 2010 / 2:04 PM / 9 years ago

Spain's rich eye high yield deposits

GENEVA (Reuters) - As Spain limps out of a deep recession amid concerns it could still face a Greek-style debt crisis, many of its rich are betting on high yield domestic bank deposits to preserve their capital base.

In the last few months, the large Spanish SICAVS — the investment vehicles tailor-made for the wealthy — have increased to 16 percent from 6 percent the allocation for these deposits in their portfolios, according to end-June data from stock market regulator CNMV.

Spain’s biggest bank Santander (SAN.MC) was first out of the starting gate in the race to capture deposits in January, offering interest rates of up to 4 percent.

This compares with ordinary deposit rates more like 1 to 2 percent, depending on the bank, while Spanish treasury bills are yielding not much more than 2 percent.

Rivals BBVA (BBVA.MC) and Popular POP.MC quickly followed suit as raising funds in the interbank market became more difficult for the Spanish banks.

“Yields on Spanish fixed income instruments have been quite low so high yield deposits are attractive. Between 5 and 15 billion euros have been transferred from fixed income funds into these kind of deposits so far this year,” said Rafael Ciruelos, Director of Private Banking products at Banca March.

Several of Spain’s high net worth individuals, including infrastructure giant Ferrovial’s FER1.MC owners the del Pino family have opted for top paying deposits and clothing retailer Inditex (ITX.MC) founder Amancio Ortega increased his investment in these products by nearly 25 percent between April and June.

But this flight to bank deposits has not been so beneficial for the private banking industry’s margins, the chief investment officer at BBVA’s fund management arm said on Tuesday.

“We have not seen any real recovery in margins this year because of the attraction of the high yield bank deposits. The best margins are obtained with risky products,” Enrique Marazuela told the Reuters Private Banking Summit.

CASH ANOTHER OPTION

To a lesser extent, some of the country’s super rich have chosen to increase their cash position in recent months, ready to take advantage of investment opportunities such as prime real estate, Banco Banif managing director Jose Manuel Garcia de Sola Arriaga said.

So far this year, 79 sicavs have been liquidated compared with 87 in all of 2009, according to CNMV data.

“The very wealthy are in cash at the moment because they want to be well positioned in the coming months. The real estate they are looking at (in Spain) is still very expensive, but these clients are definitely more interested in property than they were a year ago,” said Garcia de Sola

The Spanish wealth market has expanded strongly in the last few years and entrepreneurs account for about 75 percent of the market now compared to 25 percent in the early 1990s when the country last faced a serious economic downturn.

A decade-long property boom was the main wealth driver, but many investors were then hit badly when the bubble burst just over two years ago.

“The very wealthy who bought real estate in the boom times have held on to their properties as they did not have to sell. Now they are looking to slowly increase their property portfolios,” Garcia de Sola said.

But he flagged that for the “second-division” rich — those clients with between 300,000 and 400,000 euros of assets under management — property is not on their buy list, as many who over extended themselves with loans in the bonanza years have had to deleverage due to the sector crisis.

Spain was ranked no. 12 in the world for the number of super wealthy with 12.5 percent more millionaires in 2009 from a year ago, compared to a 17 percent rise worldwide, according to a July report from Merrill Lynch &Co Capgemini SA.

But between 2007 and 2009, the number of people with fortunes of over 300,000 euros declined between 20 and 22 percent in Spain, in large part because of real estate losses, Garcia de Sola said.

Reporting by Judy MacInnes; Editing by Hans Peters

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