Wealth Management and Private Banking

Wealth Management in India : Opportunities Galore

The wealthy Indian has just recently woken up to the concept of private banking. Until recently, wealth management for High Net Worth Individuals (HNWIs) was an almost unheard-of concept in India. A leading wealth management consultancy has found that the industry is now growing at nearly 15% in terms of Assets Under Management (AUM) figures. Indian HNWIs are beginning to explore investment opportunities beyond the traditional capital markets, migrating to newer asset classes such as art, real estate and overseas investment opportunities. The rising incomes and the unlocking of wealth from closely held businesses have created a whole new generation of individuals that constitutes a credible market opportunity for asset managers, private bankers, financial advisors and others. All in all, the reasons for this sudden spurt in wealth management business could be more than one. Strong economy The Indian economy has seen strong growth over the last 10 years with the lowest recorded real GDP in 2002 at 3.9%. On an average, over the last decade, the economy has grown at a rate of 6.4% driven by its continued development of the service industry within its economy and strong growth in the technology sector. There is no doubt the Indian economy is growing strongly, but it is also well-developed in comparison to many of its Asian neighbors. In comparison to China, with its economy still heavily reliant on labor-intensive manufacturing, India is better developed.

Rapidly growing HNWIs In 2006, accelerated growth was witnessed in terms of both GDP and market capitalization, the two key drivers of wealth creation. This growth led to an increase in the number of HNWIs around the world and an increase in the value of their assets. Globally, the HNWI population grew by 8.3% in 2006 to a total of 9.5 million individuals. Total HNWI wealth in 2006 grew by 11.4% over the previous year, to US$ 37.2 tn in financial assets, a significant gain over the 8.5% scored in 2005 and 7.8% growth in 2004. Total wealth accumulation of the ultra-HNWI group also grew last year by an impressive 16.8%, to US$13.1 tn, which is another sign that global wealth is rapidly consolidating among this ultra wealthy segment. The number of individuals with more than US$100,000 in liquid assets has grown at a rate of 17.7% averaged annually over the 2001-2005 period as per the Global Wealth Model. In 2001, there were just 416,000 individuals with more than US$100,000 in liquid assets and 11,000 with more than US$1 mn. The BRIC nations (Brazil, Russia, India and China) are playing increasingly important roles in the global economy which resulted in huge increase in the numbers of the HNWI populations. India and China, of these four countries, made their way on to the list of the 10 fastest-growing HNWI population in 2006. China's HNWI population, for example, grew by 7.8% in 2006, while India's expanded by 20.5%. According to Merrill Lynch and Capgemini's World Wealth Report, more millionaires joined HNWI group and also forecasted that global HNWI financial wealth will grow to US$51.6 tn by 2011, at an annual rate of 6.8%. Thus, the wealth management and private banking industry must offer their wealthy clients innovative and comprehensive strategies to effectively organize their investments.

Burgeoning liquid assets The Reserve Bank of India (RBI) has provided details on the value of savings deposits held by residents in each of the states. This data reveals that there are four states which stand out. These states are Maharashtra, Delhi, Karnataka and Tamil Nadu. Alongside, the growth in the value of total liquid wealth, total affluent wealth has grown considerably in the four states and there has been a sharp increase in both the number of affluent individuals and their liquid assets. This has made these states the primary focus for wealth managers and private bankers looking to target affluent clients in India.

Increasing investment options According to those in the wealth management market in India, the typical Indian affluent individual is not particularly sophisticated in terms of his investment needs. However, now a paradigm shift is taking place. Historically, high interest rates in India prevented demand for a wide range of investment products as investors could achieve a good return with low risk in a basic savings account. However, recent declines in interest rates, and the relatively low current rate, have prompted an accumulation of demand for nondeposit products as customers' returns have steadily dropped. This obviously presents an opportunity for potential wealth managers. Not only is the investment environment developing in a way that will give encouragement to those looking to build a wealth management business in the country, but it seems Indians themselves are warming to the idea of investing. In the recent times, when deposit rates began to drop, investors began looking to the other vehicles such as equities and debt. On the positive side, interest in investment products, such as mutual funds, is increasing. Simultaneously, new options for investing are emerging as well, including art, overseas investments and real estate venture funds. Booming private banking business Wealth management solutions are the core of the private banking offerings. Private banking provides a more personalized level of service than most individuals commonly find at a commercial bank. This involves helping HNWIs invest wisely, while avoiding risks that might reduce the value of their assets. Private bankers also offer tax planning and pension advice, help clients develop a strategy for philanthropy, and advise them on estate planning. In one subset of the private banking sector known as Family Offices, the bankers also perform tasks that range from screening solicitations for charitable contributions to making sure the clients' bills are paid on time. As the array of potential investment products widens, the job of a private banker is becoming increasingly complex. Private bankers need an understanding of financial products from basic stocks and bonds to financial derivatives, private equity and hedge funds. The wealthiest tier of people worldwide are getting richer, particularly over the course of recent bull markets for stocks and real estate and so, the private banking business is going strong. A study published in 2006 by the Scorpio Partnership, a London-based wealth management consulting firm, found assets managed by private banks have surpassed US$8.5 tn worldwide.

Along with many other banks, ICICI Bank, India's largest bank with respect to market capitalization, offers a range of general banking services including private banking. The bank's relationship manager acts as a financial doctor, diagnosing his client's financial goals before prescribing the appropriate investment advice, and at the same time ascertains his risk appetite for financial assets whose risk-return trade-offs vary across the spectrum of instruments. The most crucial aspect of any financial planning process is the monitoring and reviewing of the portfolio on a periodic basis. Wealth managers also spot opportunities in various asset classes and design customized products to suit client requirements. They aim to target all the five distinct risk profiles such as Risk Averse, Conservative, Balanced, Growth and Aggressive. This approach helps in creating the appropriate balance between safety, liquidity and potential for yield enhancement through a mix of different asset categories that includes Bank Fixed Deposits, Mutual Funds (both fixed income and equity) and Alternative Investments. The bank's investment research services are grouped into three broad categories: Country Research, Asset Class Research and Product Research. They provide independent research as well as support services, which facilitate and add value to the clients. Investment research process: Thriving challenges Maintaining profitability in an ever more competitive environment is recognized as an important challenge. Today, clients have become more demanding from their financial institutions and advisors. Indeed investors are no longer looking for order takers but for knowledgeable and trusted advisors, who can explain their investment choices in detail and support recommendations with fact-based analysis. In today's world, clients are expecting a greater personalization and better tax benefits. Private bankers should focus not just on selling their products but also on providing advice and highly personalized portfolio management services across multiple life cycle stage. This fundamental model shift is required to improve the client's retentions. In order to achieve this, banks should have a system in place to provide end-to-end integrated workflow and data consolidation system and services.

In the last few years, the criteria used by clients for choosing banks have changed. Though image and reputation continue to be the most important things in their mind while choosing a bank, surprisingly, things like service and reporting have moved up as key priorities in bank selection. Client experience has become a differentiator for success and requires a new generation of relationship managers who demonstrate not only competence but encourage trust and confidence. While the wealth management market is expanding, regulatory constraints prevent banks from offering a wide range of services.

With the background of positive macroeconomic factors expected in India over the next few years, the wealth of the Indian population is likely to continue to grow rapidly. The private banks will need to adopt the best practices and understand the clients' requirements in the highly competitive world of financial services to make the most from the current competitive market. Reference # 01M-2007-10-03-01.

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Though Switzerland has so far been the global wealth management hub, the majority of the private bankers in Europe believe that Singapore will overtake Switzerland within two years as the world's most important growth center of private banking and wealth management. In fact, it is not only Singapore with its congenial financial ambience, but the entire Asia now poses a tempting business opportunity for the global private bankers like never before. A sizeable 8.6% growth rate of the HNWI (High Net Worth Investors, defined as those with a minimum net worth of US$1 mn) population in the Asia-Pacific region in 2006, along with a healthy growth rate of 10.5% of the region's overall wealth during the same period have led to an unprecedented rush among private banking service providers to cash in on the trend. Backed by low taxes, buoyant equity markets, confidence in banking, strong legal system, professional workforce and better regulatory environment, Singapore and Hong Kong surely lead the show. Closely following their

example are nations such as Indonesia and Taiwan, which achieved double digit growth rates in HNWIs in 2006. Soaring stock markets in China, India and South Korea have seen new millionaires, thereby boosting the growth rate of HNWIs in the region. In Gulf countries, high oil prices continued to benefit the Gulf Cooperation Council (GCC) countries (Baharin, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) which led to persistent wealth creation throughout the region. Barring notable exceptions of Japan and Australia, the Asia-Pacific markets remained particularly strong in 2006. Most notably, the Dow-Jones China/Shanghai Index returned a whopping 130.6%. Even smaller Asian economies of Indonesia and the Philippines fared exceptionally well where Dow Jones Indexes fetched 62.0% and 49.5% respectively, on the back of strong fundamentals. In a nutshell, local markets in Asia have witnessed a strong recovery and Asian customers are willing to move out of cash and into more adventurous investments such as property and equity, derivatives and currencies, which eventually is leading to a rapid surge of private banking and wealth management activity there. Moreover, unlike the European HNWIs, whose wealth is mainly inherited, these new-age young HNWIs of Asia have amassed wealth mainly through their entrepreneurial talent and therefore obviously more adventurous and keen to park their assets in more esoteric avenues. Whatsoever, these unprecedented and bountiful opportunities in the Asian region have lured the global as well as the local private bankers to set up shops here. But with the surge of more and more players into Asia, competition has also intensified and Asia's private banking space suddenly looks overcrowded. Overcrowding Private banking is now the fastest growing among all the financial services and is the means of managing private clients' money by providing various services such as efficient wealth management, savings, inheritance and tax planning. These banks promise to maximize returns and minimize risk along with the tax burden of the clients through careful allocation of their money. It is anticipated that private banking revenue in the Asia-Pacific region would grow at an annual average rate of 37% up to 2009. An astounding figure indeed, compared to a growth rate of 30% in the US and Latin America and 22% in Europe, the Middle East and Africa. The top three private banks in Asia by assets under management are UBS with $100 bn, followed by Citigroup and HSBC. The industry's other big players such as Credit Suisse and Merrill Lynch are also eyeing a bigger pie. Citigroup Private Bank, a division of the US financial-services giant Citigroup, says it has already captured half of Asia's approximately 88 billionaires as clients, even as it launches operations in the relatively untapped markets of China and India and has been unanimously judged as the best private banker in Asia. UBS, which is already the world's largest wealth manager, had just 153 private bankers in Asia-Pacific six years ago; earlier this year that number reached 600, most of them working in Hong Kong and Singapore. "By 2015, we expect the Asia-Pacific market to be bigger than the European market", says Kathryn Shih, the Hong Kong-based Head of UBS' wealthmanagement operation in Asia-Pacific. Niche players like Pictet & Cie, one of the oldest Swiss banks, have also expanded their private banking operations in Singapore. ABN Amro has operated a private banking service in the region for more than 15 years. The bank's regional head of private banking for Asia-Pacific, Urs Brutsch, based in

Singapore, is keen to expand his customer base in Hong Kong. Standard Chartered, which sold its private banking business in 1996, relaunched a global private banking business in Singapore this year, with an eye on Asia's 2.6 million HNWIs who had $8.4 tn of assets at end 2006. In addition to Dubai and Singapore, the London-based Standard Chartered Bank is planning to operate in 10 markets including Hong Kong, Shanghai, and Beijing. HSBC, which has refocused itself on emerging markets, plans to open private-banking offices in China and push growth in India and the Middle East to harness the growing demand from wealthy customers. Merrill Lynch, the No. 3 securities firm, plans to double its network of financial advisers and its business in India this year to help it compete with overseas rivals. Crédit Agricole SA (CASA), the largest banking group in France, is planning a private banking thrust into Asia's fast-growing marketplaces. Credit Agricole's private banking division said it wants to invest in China, Vietnam and India over the next five years as it expects Asian assets to expand by as much as 30% a year going forward. The French bank plans to hire more private bankers over the next three to five years as it boosts its business in Asia. The group is also looking for opportunities in private banking, asset management and even retail and is considering both acquisitions and partnerships in China, India and Vietnam. Currently, Credit Agricole has 110 private bankers based in Singapore and Hong Kong, by doubling the 55 it had three years ago. Moreover, niche bankers such as Zurich-based Julius Baer and Fortis, a financial services company, based in Belgium and the Netherlands, have opened shops in Singapore and Hong Kong—two of Asia's key private banking hubs.

Private banking clients in Asia are predominantly entrepreneurs who have built up successful multimillion dollar businesses. How do you see the private banking landscape in Asia? Do you think it will continue to grow at the same pace as it did earlier? According to the Merrill Lynch Cap Gemini Report 2006 and 2007, Asia-Pacific High Net Worth Individual (HNWI) wealth grew by 8% in 2005 and 10.5% in 2006. Looking ahead, Asia-Pacific HNWI wealth is projected to total $10.6 tn, growing at a rate of 6.7% (based on the 2006 report). There is enormous potential in the wealth management landscape with 5 out of the 10 fastest growing wealth markets in the world from Asia (Singapore, India, Indonesia, Hong Kong and Korea). In the case of India, we think the country's wealth management market will grow faster than the Asian average, probably at a rate in the 15-30% range. In 2006, for example, there were 55 millionaires created every day while in the most recent Forbes listing of Asian billionaires, India outranked China and Japan for the largest number of billionaires. This is an unprecedented achievement and indicative of India's rising affluence. Globalization, economic liberalization and regulatory reform are driving economic growth and wealth creation across India and many other Asian markets.

This growth is further driven by a strong entrepreneurial culture, continued modernization of the financial sector, a young and talented population, strong work ethics, high savings rate and a growing middle-class. Private banking clients in Asia are predominantly entrepreneurs who have built up successful multimillion dollar businesses. This entrepreneurial culture will continue enlarging the affluent class as they seek opportunities and advice on how to grow personal and business wealth in line with the booming economy. What is your view on the growing competition in private banking in Asia? Citi Private Bank serves clients with a minimum net worth of $10 mn (approx. Rs. 50 cr). Our bankers act as trusted advisors to help clients not only in wealth generation but also in wealth creation by leveraging both sides of the balance sheet —assets and liabilities. We deliver a holistic proposition that gives clients access to innovative and customized opportunities in areas including private equity, real estate, structured products and co-investment which are not available to the mass affluent segment. The current private banking industry in the region is a fragmented one so there are huge opportunities for private banks to grow their business. As clients become more sophisticated and demanding, to remain competitive, their wealth management needs must be met in a holistic manner encompassing both their personal and business wealth. Citi Private Bank's `private investment banking' model couples our traditional private banking services with a degree of investment banking discipline that helps our clients expand their businesses regionally and globally throughout the wealth creation process. We also leverage on the knowledge and resources of our vast network to give clients unmatched access to capabilities in other Citi businesses such as the expertise of our corporate and investment banking colleagues. With more clients looking to invest in their home markets, it is critical to build a robust onshore platform in markets like India. To be a market leader, we must be able to compete effectively on the local currency platform demonstrated with local talent, local research and intellectual capabilities. Citi has invested heavily especially in India with the expansion of our private banking business and the launch of Citi Smith Barney, a new wealth management proposition offering financial planning and investment services via a retail brokerage platform. Citi Smith Barney targets high net worth individuals whose net worth ranges between $1 to 10 mn (approx. Rs. 5-50 cr ). What kind of challenges is it likely to face in the future? Talent is the bedrock of our business and, perhaps, the single largest factor in constraining the growth of the wealth management industry in Asia and also in India. We expect strong double-digit growth for our business in the short to medium-term. To match such growth, we need double-digit growth in our talent base. The current demand for wealth management talent exceeds supply and this has made Asia a battleground for qualified and experienced wealth managers. Currently, the demand for wealth management talent exceeds supply. This shortfall has

led to aggressive hiring practices and in some cases, poaching, which we view as an unhealthy short-term solution for both clients and the organization. Citi's commitment to India and the rest of Asia has spanned over 105 years and we have invested heavily in our strong institutional platform enabling us to hire the best and render extensive training to our people. In every strategic move or decision that we make, people are a primary consideration, which is why we invest substantially in training, recognizing and rewarding our people, and in creating opportunities for their career development. At Citi Private Bank, we have long recognized the fact that in an industry like ours, building a pipeline of talent is critical to our business and we have our own recruitment and development program to ensure this. - Ajay Sondhi Managing Director Region Head, Global India Citi Global Wealth Management This unforeseen proliferation of private banking activities in Asia has suddenly turned the business more competitive and hawkish. Private bankers here have virtually engaged in a war-like situation by offering more exotic investment options to the Asian HNWIs so as to grab a larger pie of this lucrative business. The acute talent crunch has led to widespread poaching of experienced bankers from rival groups. According to banking sources, the Deutsche Bank has hired 18 from Citigroup and UBS lost eight bankers to Goldman Sachs. "Poaching remains the primary recruitment strategy for private banks," commented Justin Ong, a partner at PricewaterhouseCoopers (PwC). A PwC survey revealed that 15% of the banks are worried that more than 30% of the bankers may move over to rival groups. Ong added that Asia's rapid growth and the shortage of trained bankers have triggered a talent war among the private banks but it is believed that this may come to an end over the next three years as more training schools are opening in key wealth centers such as Singapore. However, he also warns that the next three years would be really tough. "The estimates are that you need another 5,000-8,000 CRMs (Client Relationship Managers) in the next three years," he said, adding that the demand is higher than the number of new recruits entering the industry from training institutes and inhouse schools of banks such as UBS and Credit Suisse. More warnings Since 2003, stock markets in Asia, excluding Japan, have been rallying and are up by 23% so far, this year. But the specter of slowdown is looming large amidst problems in the US subprime mortgage sector. Many policy-makers in Asia have also warned of an asset bubble, particularly in China and have pinpointed the risks from an economic downturn in the US, the biggest export market for some of the Asian exporters. Moreover, "the total cost of doing private banking is enormous—real estate is skyrocketing, the fixed cost of being in line of all regulations is high, and that's why the barriers to entry are getting higher and higher," opined Michel Longhini, BNP's Chief Executive for Asian private banking. But only banks with a larger retail presence or with a wider geographical reach like that of UBS or Citigroup can withstand the harsh reality of the market and expand operations in the long run. But mid-sized banks that have

recently started building up private banking operations in Asia could be forced to withdraw because of cost difficulties and intensified competition. Longhini added, "In Asia, we are at a time when everybody believes that because the market is growing so fast, you should have a presence… That is certainly not the right strategy. It will certainly force some banks to reconsider." Experts even warn that the increased competition, escalating cost of private banking business and an increasing fear of a slowdown in Asian economies will inevitably lead to consolidation in the industry similar to that in Europe and North America, as mid-sized bankers have started realizing that otherwise they can't compete with biggies such as UBS and Citigroup who enjoy huge economies of scale. Reference # 01M-2007-09-08-01.

- Amit Singh Sisodiya and Sanjay De