GROWTH OF LOCAL FIRMS CHALLENGES OLD ORDER

The Asian wealth management arena, currently the world’s fastest growing private banking market, is witnessing a growth in the presence and importance of local financial institutions. This is a significant development in a market that has for long been dominated by global players. A 2008 private banking league table ranking the major players in terms of assets in non-Japan Asia, managed out of Singapore and Hong Kong, for instance, only had three local Asian banks among the top 20. The top five places were bagged by global players UBS, Citi, HSBC, Credit Suisse and Merrill Lynch. Compiled by consultancy firm, Calamander Group, the league table placed DBS Bank, the largest of the big-three local banks in Singapore at the sixth spot while the other two Singapore banks, UOB (United Overseas Bank) and OCBC (Overseas-Chinese Banking Corp) Bank trailed at the 17th and 19th spots respectively. “Traditionally, global players have had a stronghold in servicing high net worth individuals (HNW) that have an investible surplus of over $1m while local and national players have a strong presence in the mass and mass affluent segments of the market,” observes Ravi Nawal, an analyst at research firm Celent, commenting on the Asian wealth management space. “Multinational players have had an advantage in providing advice-based services and in products such as Islamic banking, real estate products and structured products. In general, this knowhow has been lacking among their local counterparts.” The mass market The real advantage for regional and local firms is in the retail and mass-affluent markets, not in wealth management, states Ramaswamy Vaidyanath, head of financial services consulting for India at Capgemini. The financial crisis has however altered the existing power-balance away from global players, many of which are still reeling from massive losses in their home markets, where they have also faced questions about their investment policies and procedures. A case in point is that of the beleaguered Swiss private banking giant, UBS. Amongst the biggest casualties of the credit crisis, the bank was also involved in a bitter dispute with the US IRS (Internal Revenue Service) for allegedly assisting US citizens in evading tax. To further add to its woes, the bank was recently fined £8m ($13m) by the British Financial Services Authority for “systems and controls failures” during the period 2006-07, which enabled employees to carry out unauthorised transactions involving customer money. This is said to be part of a larger probe into the past management of Indian private banking accounts at the Swiss bank’s London-based wealth management unit. In the meantime, India’s Enforcement Directorate is also investigating alleged violation of norms in use of funds held in the UBS accounts of two companies of Indian tycoon Anil Ambani’s group. All this has seriously dented UBS’ credibility in the region. “Brand plays a very important role in wealth management,” remarks Robin Roy, Associate Director (Financial Services), at PricewaterhouseCoopers in India. The recent market turmoil has compelled clients to look at their wealth managers, who now realize that they cannot take their brand for granted any longer. “The fallout of such events are more in terms of perception in the local market, but limited in terms of number of clients since there aren’t many HNWs that currently have shown a deep interest or have the wherewithal (risk appetite) to make overseas investments,” he says. “The financial crisis weakend the trust of HNWs in international firms, whose reputation was built on complex products and distant markets,” states Mr Vaidyanath of Capgemini. Many HNWs, he says, sought solace in firms with roots in their home country or region. These firms were deemed just as capable, if not more so, of handling the reallocation of HNW assets to more conservative and home region investments. New offerings Against this backdrop, several Asian banks are boosting their wealth management offerings. Most of China’s leading banks have entered the wealth management domain in recent years. China Merchants Bank (CMB), the country’s sixth-largest lender by assets and one of the first Chinese lenders to service HNWs, plans to open at least five new private banking business centres in addition to its existing eight branches. The country’s fifth largest lender, Bank of Communications, has also announced plans to expand its wealth management services currently offered in key cities including Beijing and Shanghai, into second tier Chinese cities. In India, Kotak Mahindra Bank, one of the leading wealth management players in the country and also the largest local bank in this space, announced in April a strategic shift away from a conventional transactional based approach to an advisory based approach “to provide differentiated and relevant value added services to its customers”. Commenting on the impact of the financial crisis on HNWs, C. Jayaram, executive director at Kotak Mahindra Bank, says: “Given the financial crisis, there are definitely concerns among clients about the level of commitment of foreign entities. In recent months certain international banks have cut down their presence in India leading to apprehensions among customers about whether they view India as a long term market.” Moving on up “Domestic players are now trying to move into the next league,” observes Mr Roy of PwC. A number of state-owned public sector banks in India, he says, are making serious efforts to enter the wealth management space as they realize the “stickiness” benefit of offering specialized products to HNW against commoditised banking. “These market related ambitions, need to be suitably tempered with a good understanding of regulations and the implications of a much stronger KYC and related compliances,” he adds. Ramnath Krishnan, managing director and head of private banking at HSBC, India states: “Given the financial crisis and the overall shakeup in the financial services industry globally, it is but natural that the wealth management sector in Asia which has a tremendous growth potential, should be attracting players that might have not have demonstrated as much interest earlier.” “The wealth management market is very attractive because it is still under-penetrated and domestic players now probably have bigger aspirations,” adds Vishal Kapoor, head of wealth management at Standard Chartered Bank, India. The opportunities offered by the wealth management sector were always there, he notes, but the openness of customers to other service providers is much higher now. “The old order has been tossed up. Customers are now open to trying new relationships and hence the pecking order will be shuffled around.” Apart from domestic firms, Mr Kapoor points out that international firms such as Standard Chartered that have managed to remain stable during the financial crisis, have benefited as well. “We have been able to attract clients, assets and talent during the period of turmoil because we are regarded as a safe and stable player. Our growth momentum is very strong across Asia.” Continuing trends He says over the past year the bank has been able to grow assets by 60 per cent in India, increased the number of relationship managers by nearly 30 per cent and has acquired clients “at a steady pace.” The 2009 Asia-Pacific Wealth Report by Merrill Lynch and Capgemini also highlights this trend. “Large players and boutique firms that have continued to expand during the crisis have bolstered their reputations around innovative and tailored client offerings and service, which puts them in a strong position to capture market share in key markets going forward,” says the report. A major development that underlines the trend of local players expanding their wealth management presence is the purchase of the Asian private banking assets of the troubled Dutch financial services firm ING by Singapore’s OCBC (Overseas-Chinese Banking Corp) Bank, which was able to successfully beat competition from bigger players in the region such as HSBC and DBS Bank. OCBC Bank was able to take advantage of its strong balance sheet and capital position to acquire this high-quality, Singapore-based franchise, managed largely by Asians, to build a leading Asian private bank. With this deal, OCBC’s private banking business is expected to more than triple its private client assets under management to $23bn, in the process catapulting it into the ten largest private banks in Asia. “There is a fair bit of consolidation taking place in the wealth management space especially at the upper end of the value chain, which will somewhat alter the landscape,” remarks Mr Nawal of Celent. Mr Roy of PwC notes that consolidation makes imminent business sense in the fragmented Indian wealth management space. Research by PwC has revealed that to be sustainable in the Indian market, a wealth management business needs to have AuM of over $1bn. “Scale matters. Firms need to offer a diverse product portfolio, hire and train relationship managers and over the long-term it can be difficult to sustain a small wealth management outfit. Hence consolidation is inevitable,” says Mr Roy. PwC’s recent research has highlighted three main reasons why clients select a wealth management firm – brand, referrals and quality of advice. Mr Krishnan of HSBC agrees. “The two key requirements that clients have from their wealth management service provider are service and quality of relationship manager,” he says. As such, explains Mr Krishnan, clients do not distinguish between domestic and foreign banks. “The credibility of the brand, credibility of the franchise and solidity of advice are the main characteristics that clients ask for.” Turning point The global financial crisis represents a turning point for the wealth management industry in the Asia-Pacific region, says Mr Vaidyanath of Capgemini. “Our research shows both global and regional/local players were impacted by the global financial crisis,” he says. “All now need to adapt to changing client needs and enhance advisor models, as well as realign business and operating models. Firms will also need to deal with wholesale shifts in the operating environment, in particular changes in the competitive landscape and new regulatory barriers that directly affect market potential.” The challenges are not insignificant, he notes, but points out that the crisis actually offers firms a prime opportunity to reposition their capabilities and strategies to better serve HNW clients and capture market-share growth in the future.