| Private Banking and Wealth Management Survey 2011 |
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| Features |
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Brazil’s private banks compete head-on for risk-averse clients |
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Foreign and local banks battle for China’s golden generation |
| The Survey |
| Full results index |
| Methodology |
FEW NATIONS INSPIRE as much devotion mixed with confusion among private banks as India. It isn’t growing as fast as China but it is creating vast new wealth at an astounding rate – money increasingly concentrated in the hands of a few hundred billionaires, and a thousand times as many dollar millionaires.
So it is little wonder that Euromoney’s private banking and wealth management survey 2011 is such a tight-run thing in India, with local financial groups fighting fiercely with global houses for clients, territory and respectability.
As yet neither group has clear momentum. Kotak Mahindra and HDFC lead the local pack, with ICICI, India’s leading privately owned bank, still a surprising laggard. Among the foreigners, Merrill Lynch is a highly respected local presence, along with Citi, Deutsche Bank and HSBC, with Credit Suisse further back but gaining momentum.
Still, private banking remains a vague phenomenon in this vast country. In its World Wealth Report 2010, Capgemini estimated the number of Indian high-net-worth individuals at 127,000 in 2009, up more than 50% on the previous year, helping the country’s HNWI population overtake Russia’s for the first time.
Another consultancy, McKinsey, estimates the total pool of assets held by HNWIs in India at about $500 billion. Local wealth management specialists expect that figure to continue growing fast.
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“There is so much underestimated wealth out there – the asset base of high-net-worth individuals could be as much as $1 trillion” Pradeep Dokania, DSP Merrill Lynch |
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Pradeep Dokania, chairman, global wealth and investment management India at DSP Merrill Lynch, the US bank’s long-standing local joint venture, expects that asset base to grow annually by about 15% to 20% for the next three years at least, hitting $700 billion by the end of 2013. Dokania reckons between 10% and 12% of these assets are vested in various financial instruments through private banks and wealth managers, making the industry worth $60 billion to $70 billion and growing by about 15% each year.
That’s still, in relative terms, a drop in the ocean for many global private banking groups, but most see India – fast-growing, consumerist, wealth-conscious, relatively accessible – as a central player in their growth strategy.
Take Kotak Mahindra. The diversified Indian financial services house set up its private banking business 12 years ago. It has grown rapidly: by the end of 2010 the division boasted about 1,800 active clients and a total asset base of about Rs150 billion ($3.3 billion).
Ninety percent of Kotak clients are wholly onshore investors, with a handful of others shifting their assets and capital between various offshore destinations including Singapore and Switzerland.
Speaking to Euromoney from a temporary base in the dusty Mumbai district of Santacruz East, the affable C Jayaram, who oversees wealth management among several other financial products at Kotak, says private banking in India has grown “faster than he could have ever expected”.
Jayaram, a 21-year company veteran, sets out a few reasons why Kotak’s wealth management division has performed well. First, the bank focused on India’s core group of HNWIs early on, eschewing the rung below, occupied by several hundred thousand mass-affluent Indians.
Kotak also chose early on to channel client money into equities. India’s stock markets have been one of the past decade’s great (and, so far, sustainable) global growth stories. When Kotak made its first foray into private banking, rivals were focused overwhelmingly on fixed income. Kotak helped change that, creating portfolios that skilfully blended debt and equity instruments.
“We saw that niche early on,” he says. “Our whole pitch was to tell clients: ‘You may deal with the multinationals but at that time they did not offer equities.’ And it worked spectacularly well for us, and clients started to see us as the guys that made money for them.”
Investment portfolios differ from bank to bank, of course. Merrill Lynch is heavier on more standard-issue securities: equities and fixed income. Such banks as Citi and HSBC will likely seek in future to spread client wealth across their unrivalled distribution networks.
At Kotak, Jayaram says, a typical client’s portfolio is 50% fixed income, with a third skewed toward equities. A further 15% to 20% is channelled into alternative assets, notably real estate (individual projects as well as fund-based investments), private equity funds and, to a far lesser extent, foreign securities.
Wealth managers are now focusing on boosting headcount to cater to new clients. To secure a slice of the action, most private banking teams are hiring new staff. Dokania expects staffing numbers at Merrill to rise by 15% to 20% a year for at least the next three years. Kotak plans to boost headcount by about 10% in 2011.
Most wealth managers are quietly betting that the HNWI sector is larger than is widely credited. DSP Merrill’s Dokania is at the forefront of this thinking, noting: “There is so much underestimated wealth out there – the asset base of high-net-worth individuals could be as much as $1 trillion.” Jayaram at Kotak is among those who cast doubt on the Capgemini figures: his estimate of the number of Indian dollar millionaires is double those, at closer to 250,000.
Three further questions arise about the future of private banking. First, into which products will wealth managers increasingly choose to channel client capital. Second, which banking institutions, three or five years from now, will be at the forefront of Indian private banking. Finally, where will industry growth come from – which industries, which sectors, which people will develop the future wealth that private banks covet.
Competition is tight
As the market grows, India’s cautious and pragmatic regulators will be forced to allow local residents to invest their capital into a broader range of financial instruments. Private banking in India remains geared toward fixed income and equities but alternative asset classes will become an increasingly important slice of any portfolio, notably commodity, real estate and infrastructure funds.
As for future market leaders, the jury is still out. The competition is tight, as shown in this year’s Euromoney survey. As the next decade unfolds some leading players will be sidelined while new entrants will bustle into the market.
Kotak’s Jayaram expects big global wealth management banks with a strong local presence – notably such firms as Citi and HSBC, which have so far tended to focus on mass affluent customers rather than HNWIs – to become strong future rivals.
Beyond that, however, he wonders how much space there will be for foreign players, most of which see India as a key target market. He says: “My suspicion is that a lot of [banks] have thrown their hat into the ring, saying: ‘India is a big market with 8%-plus economic growth, so we have to be there’. But I suspect that if we look back, three or four years down the line, we will see that many of these international players will not be making any money.”
Competition is rising, further eating into current and future fees. Dokania at Merrill expects competition to continue to intensify, eating further into profits and margins, which he describes as challenging. He says: “In the next five years there will be over 50 private banking divisions, foreign and local, in wealth management. And maybe over the next few years the standalone private banks will come as well.”
Domestic financial groups, for their part, are hoping to leverage the strength of their local brand. Kotak’s Jayaram believes the events of 2008 and 2009, when the financial crisis, born in the US and raised in Europe, nearly brought the global economy to its knees, has helped such firms as Kotak. “What happened there helped us given that so many foreign players were in such serious trouble,” he says. “Post-crisis, there is a nagging feeling [here] that it is better to deal with an Indian bank you can trust as opposed to a foreign bank that may have future problems elsewhere.”
India’s new wealth is being created in two main ways: money created at home, and money pouring into the country as nonresident Indians (NRIs) who made or inherited their wealth overseas return home to participate in the country’s compelling growth story.
Merrill’s Dokania says: “In recent years, you have seen a lot of NRIs moving back to India, bringing some of the wealth they have made abroad. They need a bank able to provide Indian clients with a full range of onshore and offshore private banking services, and we can do that.”
He adds: “Onshore business will become our primary business. And this will have global connotations. Onshore business is becoming more relevant as wealth rises in India, and wealth management services become more commonplace.”
Income is being created in India in all manner of ways, old and new. Entrepreneurs are selling out of their companies or listing their vehicles, at home and overseas. New industrialists are pushing into new technologies such as seed production, pharmaceuticals, bioscience and information technology.
Yearning for the good life
Another huge chunk of new wealth is actually as old as it gets: local families tied to the pre-1991 licence-Raj era selling old industrial land that was once home to Indian spinning and weaving operations. This is happening everywhere: cities such as Mumbai and Kolkata are peppered with family groups selling prime city property at top dollar and seeking reliable ways to manage their wealth in the long term.
Many of these families have long since lost their collective entrepreneurial spirit but not their communal yearning for the good life, and they increasingly approach wealth managers in search of solid advice. Having sold their textile firms to the next generation of lean, hungry entrepreneurs, none of these families want to lose their shirts.
It is to these family groups and a million like them that the gaze of dozens of high-end wealth managers, from HDFC, Kotak and Axis bank to foreign players such as Merrill Lynch, Citi, HSBC and Standard Chartered, are now turning. The competition for pre-eminence in India’s fast-growing private banking industry has only just begun.
