Cut from a Different cloth
Private banking takes on an Asian face as new millionaires make their mark around the world
TRADITIONAL private banks are falling behind new competitors who have raised their game to provide what their clients need. A group of banks are now able to provide global servicing for clients seeking to diversify out of their domestic markets; while others are able to offer specialized service in specific asset classes and markets.
Private bank clients in Asia are growing richer faster than their counterparts elsewhere in the world. In 2017, assets of high net worth individuals (HNWIs) in Asia Pacific jumped 15% to US$21.6 trillion, according to the Cap Gemini World Wealth Report.
The ultra-rich, or ultra HNWI – those with a minimum US$5-10 million in investable assets depending on their home market – are reinvesting their wealth in other specialized areas. These investments on property and other asset classes have created new requirements for the mobility of money and on-the-ground servicing.
A Hong Kong-based UHNWI, for example, is diversifying his portfolio by investing in real estate in Asian markets outside of Hong Kong. To do this, he needs a private bank with a regional presence in Asia Pacific but also has strong capability in real estate investment.
An Australian private equity investor with a global portfolio of US$50-100 million that also includes assets in Australia, Geneva, Hong Kong, New York, and Singapore needs a private bank that has the capability to service his requirements in all of these markets at the same time. These requirements could be as varied as securities trading in Geneva, mutual fund administration in Singapore, private equity fund administration in Hong Kong, or real estate investment in New York.
The global, always-on nature of business is another challenge. Investors need their private bank to service their accounts across time zones.
“I would prefer if I can just call my banker in Singapore and he can make the arrangements with their trading desk in London quickly since we only have an overlap of four hours,” says a private equity investor based in Singapore.
While private banking clients are expanding their requirements, the bankers themselves have been hamstrung by rising regulatory pressures and the need for cost savings. Many of the traditional private banks have restructured operations to retreat from a supermarket model to service offerings focused on their core competencies.
BNP Paribas and Julius Baer are strong in Europe but have limited capability in servicing US market requirements. Deutsche Bank does not have private bank servicing capabilities in the US for Asian clients. UBS and Credit Suisse remain strong in Asia, but mainly for their investment banking capabilities.
On the other hand, J.P. Morgan Private Bank has raised its minimum to US$10 million in assets for new clients with a special focus on the US market. Regional private banks such as DBS and CIMB have also been emerging to service clients on a more regional basis.
Citi Private Bank has been cited by Asian clients as the preferred bank for servicing the requirements of multi-jurisdictional portfolios by virtue of its global network and flexibility in dealing with client requirements.
Finding a private bank that can do it all is half the challenge. The other is getting one’s banker to champion one’s account to get the job done.
An Asian private bank client, who recently moved his domicile from Asia to Geneva, found not all private banks have the capability to service his assets that are in Asia, the US and Switzerland at the same time.
“It really comes down to the relationship manager looking after your account…When you need to get something done that’s not the everyday thing. You need to have a champion who can find a way to get it done for you,” says the client.
The rise of China’s private banks
It makes sense that China’s new money would spawn the new breed of private banks. Chinese wealth managers and private banks are adopting unique expansion strategies to secure a slice of the action. The industry has evolved over the past decade and is now at a market size of over US$22 trillion.
The first Chinese private bank dates back to 2007, when Bank of China set up its private banking department. In 2017, three Chinese banks, China Merchants Bank (CMB), Industrial and Commercial Bank of China (ICBC) and Bank of China, took their places in the league table of the top 25 private banks across the globe, according to a report from Scorpio.
“The private banking business is still in its early days and has yet to reach its upper limit,” says a head of the private banking department of a state-owned private bank in an interview with The Asset. “There is not much competition in the private banking space,” he adds.
One key feature that distinguishes Chinese private banks and wealth managers is that they often act as both wealth advisors and product providers simultaneously, whereas traditional private wealth managers focus primarily on advisory and transaction services.
For instance, the private banking department of ICBC also owns an asset management license which allows it to offer wealth management products to its clients. Insurance and asset management companies also own wealth management entities or have teams that perform these functions.
Other Chinese private banks have a “manager-of-manager model”, where they appoint third-party asset managers to create products or solutions for their clients, manage their investment portfolios, or do a combination of both. This multi-manager model allows the private banks to offer a comprehensive product suite that covers various markets, asset classes and durations.
China’s wealth management industry also benefits from the active participation of corporates, which are traditionally serviced by corporate and institutional banking departments. In most Chinese banks, wealth management products, such as structured deposits and structured investment products, are not only distributed to retail clients but also to corporate clients.
In the more sophisticated financial markets like Hong Kong and Singapore, the treasury and cash management solutions for corporates are mostly provided by transaction banks and asset managers.
Aside from tapping growing wealth in the domestic market, Chinese wealth managers are also expanding globally. This trend is in line with the flourishing of overseas listed Chinese companies that have created massive offshore wealth over the past decade. UBS estimates that the growth of Chinese offshore wealth has been twice as fast as the region as a whole since 2012.
China Merchants Bank grew its overseas private banking business through its wholly-owned subsidiary Wing Lung Bank, CMB International and CMB Hong Kong branch. ICBC has launched its private banking business in 21 jurisdictions. On top of traditional players, third-party wealth managers, such as Noah Wealth Management, are also extending their overseas network, thanks to their private equity investment capability.
“Many of our customers originated from the mainland and secured a permanent address in Hong Kong or became chairman of a Hong Kong-listed company. Their business could still be based in the mainland,” says a CEO of a Hong Kong-based Chinese private bank in an interview with The Asset.
“Our expansion now is based on China, especially those individuals of senior management level or founders of the TMT (technology, media and telecommunications) companies,” he adds.
However, when compared with well-established global players, Chinese wealth managers still lack knowledge of overseas products and are less flexible due to strict onshore regulations. A large part of the offshore wealth of Chinese HNWIs, as a result, is still managed by global banks and wealth managers.
“Chinese banks are not familiar with overseas financial products. For products like precious metal, we cannot do trading onshore,” a Chinese HNWI and CEO at a large UK-based technology company tells The Asset.
“My main consideration is whether they can manage the money well.”
India’s evolving market
As one of the best performing economies in Asia, India is set apart from other fast-developing markets by its sustained growth. The wealth management market, in particular, is showing momentum with total assets under management from the top 20 wealth managers hitting US$169.3 billion in 2017. That is a significant 63.3% growth from the previous year.
In the early days, India’s wealth management market was dominated by the giant private sector banks like HDFC Bank and ICICI Bank. Around 2007, foreign private banks such as BNP Paribas, Morgan Stanley, Credit Suisse and HSBC started building their market share.
In the beginning, the focus was mostly on providing investment products, services, and advice to high net worth clients. With more investment choices available today, investors are now looking for advice beyond investment. That development has prompted the evolution of wealth management into a separate business space, giving rise to independent private bankers and wealth managers such as IIFL, Edelweiss, Motilal and Waterfield.
In recent years, especially after 2016, the market has seen a shift from physical savings to financial assets, a trend that has been referred to as “financialization.” With increased allocation to capital market instruments, traditional bank savings are moving towards other financial instruments for long-term value creation.
In addition, the Indian market is quickly evolving with household financial assets expected to grow fourfold to US$1 trillion by 2025.
Private banks and wealth managers in India now serve clients ranging from family offices and entrepreneurs to professional investors and traders. They aim to offer products and services beyond conventional wealth management through specialists, financial advisors, and digital platforms.
With the numbers of ultra-rich expected to rise in India over the next seven to 10 years, there is untapped opportunity for wealth managers, particularly those with clients aiming to preserve their wealth for the next generation.