THE NUMBER OF high-net-worth individuals on the Iberian peninsula is increasing fast, so financial institutions are trying to establish themselves as the top choice for private-banking services. The domestic commercial banks and savings banks are developing private banking units, consultants are establishing new boutiques, foreign banks are re-focusing on private banking, and the specialist private banks are hiring. "Just about everyone is trying to get a piece of the market. I wouldn't be surprised if restaurants were next to open up their own private-banking units," says a Spanish banker.
In the past five years, the commercial and private-banking sector in Spain has grown 34% by assets and 14% by clients, helped by solid growth in GDP, a strong national savings rate, and low allocations to equities. Indeed, in 2003, Spain boasted the fastest growth rate in high-net-worth individuals in Europe. "Given that specialized private banking is increasing its market share, financial institutions are now having to develop private-banking units as part of a defensive strategy," says Jaime Hap, commercial manager at Beta Capital MeesPierson.
"Three years ago private banking was not considered a viable business in Spain, and some banks pulled out," says Luis Moreno, head of marketing for private bank Banif. "Now the market has turned a bit bullish, those who were thinking of leaving are now not, and those who were considering entering now are."
So far, in Spain, the commercial banks such as BBVA and Santander Central Hispano dominate. "The trust is there with the commercial banks. They were able to lend money to their clients during the bad times and have developed strong relationships so will always be the big players in the developing private-banking market," says Miguel Matossian, Iberian head of Credit Suisse Private Bank.
But they are of course competing with specialists. Banif, while owned 100% by Grupo Santander, considers itself to be a specialized private banking firm with its own profit and loss account, development skills, technology, branches, and work-force, unlike Santander Central Hispano Banca Privada, which is a private banking unit integrated in SCH's retail network. "Our own studies estimate that 70% of potential private-banking clients are within the commercial banks," says Moreno at Banif. "And while they hold most of Spain's private-banking clients' money, I would say that, generally, they are not really providing a private-banking service."
It is here where Banif, which was established as a private bank in Spain in 1963, hopes to differentiate itself. "Clients may be part of a private-banking unit of a commercial bank but sometimes the service can differ only by the nicer furniture in the nicer meeting room," says Moreno. "It's still the same approach as for a normal client – which is product driven. Their advisers haven't had specialist training, and don't offer a range of products."
The commercial banks are counting on high-net-worth clients' needs for full-service banking. BBVA integrated its specialist private bank into the main commercial bank in 2003. "The specialist private banks don't offer cheque book accounts or mortgages, so clients would need a second bank," says Daniel de Fernando, the bank's head of asset management and private banking.
New competition
The dominance of BBVA and Santander Central Hispano in Spain has not discouraged the foreign banks from entering the market. "Five to six years ago the local offerings of private banking were not very well-developed, and there was a perception among the foreign banks that they could bring in their skills and products and advice," explains Callum Dyce, analyst at research firm, Datamonitor. But now that the domestic firms have made private banking a priority, business will get tougher for the foreign banks.
It has not been an easy ride for those foreign banks that did brave the Spanish market. They have lacked a large captive customer base and have had to develop their own distribution networks. Strong competition and weak financial results have forced many to re-think their plans. "The market may seem easy from the outside but there is a higher concentration of Spanish banks, and in general banking services, the Spanish clients are satisfied," says BBVA's de Fernando.
"It's a very competitive market, margins have been substantially reduced, and it has been tough for everyone," agrees CSPB's Matossian. CSPB grew its private banking business from the commercial and corporate banking business established in Spain in 1990. After two acquisitions, it then branched into personal banking but was forced to withdraw in 2002. "It was just lousy timing with the markets, so we refocused on private banking, closed offices and reduced staff." Morgan Stanley also closed some of its retail banking offices in 2003, to refocus on private banking.
Although Spain's economy is now performing well, the foreign banks know that competition with the local commercial banks would be futile, and instead are using the advantages of a global presence to attract new clients. "It would be ridiculous to compete with the likes of Santander but the local commercial banks will never have the global approach that foreign banks can offer," says Matossian. CSPB in Spain caters for clients with at least e1 million, and Matossian believes the market is big enough for everyone.
Pablo Diaz, managing director of UBS Wealth Management in Madrid, agrees that it is difficult to compete with the large local banks. UBS WM, however, opened in Spain in 1999 and has suffered less than other foreign firms through the market downturn. "The years 2000 to 2003 were particularly difficult for the financial sector in Spain. But at the moment when our competitors were withholding their efforts or were downsizing, we were able to recruit good people from within the industry, and it enabled us to establish ourselves firmly," says Diaz. "UBS has managed to survive the last few years because it can afford to," says one consultant. "It can put up with low margins for longer, and it will pay whatever it needs to in order to attract new bankers."
As foreign banks shed experienced private-banking specialists, they inadvertently helped another group of competitors in the Spanish high-net-worth space – the boutiques. NMÁS 1, Atlas and Abante were all established by former Morgan Stanley employees. A similar trend towards boutiques is happening in Portugal.