Middle East debate: A bright future for the Gulf’s wealth managers

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Wealth management services are relatively underdeveloped in the Gulf region. But local and foreign private banks and family offices have broad opportunities to develop their business.

Delegate biographies: Learn more about the panelists 


Executive summary
• Clients are becoming more sophisticated
• Family office numbers will increase
• The Gulf region is well placed to recover from the crisis
SR, Euromoney
To start, let us describe the status of the private banking industry in this region. AK, NCB Private banking in the region is quite young. We at NCB started in 1993, creating a separate private banking division and at the beginning it was simply normal banking but with a red-carpet treatment. Clearly it has evolved significantly since then so that now we provide solutions across multiple areas and introduce our clients to new products such as private equity, real estate funds, family trusts and so on.

Fortunately the relative youth of the industry here meant that we did not get into selling the more complex and very risky products that have turned sour, and indeed the reputation of the Saudi banks has risen. This is because previously we were compared unfavourably with the international banks and this has now changed. Remember that it is estimated that around 75% of the Kingdom’s private individuals’ wealth is invested abroad, and previously our more sophisticated customers dealt directly with the foreign banks which they perceived correctly to be larger and to have more developed private banking offerings. But now we have really noticed clients coming back to us and saying: "You did not sell us the products others did, and your products, although conservative, have turned out to be the ones that suited us best based on our profile and risk aptitude."

SD, HSBC For the international institutions it is quite a developed market. The likes of HSBC and others first had clients in the region as far back as the late 1970s, so they have seen the same cycle as in other parts of the world. Clearly, since that time, there has been a growing local sophistication and awareness of products and that has spilled over into what the local banks have been providing. The other key point is that the absence of any local income taxes, and the regional commitment to freedom from exchange controls, creates a very open environment and one therefore which makes doing business here more straightforward than elsewhere.SS, NCB Private banks and family offices in the region are in transition. They are becoming more sophisticated, they are establishing professional boards, and in both cases the influences of families is being reduced in favour of these professionals.SR, Euromoney Tim, you have worked at a big international bank and are now working at a regional player. Do you see a difference in the approach and the benefits?TT, ENBD Western banks both in Europe and in the US felt that Gulf banks were somnolent for a long time – not just by being conservative, they had no products and no advisers – and this picture has certainly changed. The crisis has also moved things dramatically. When you look at the capital adequacy ratios, they are so much better nowadays in this region. And it is ironic that you are starting to see less government intervention and more deregulation of the banks growing here whereas in the US and Europe many banks are almost nationalized.SR, Euromoney Describe the present client base in the region.SD, HSBC I have been involved in this region for the past 20 years and I think people here have an aggressive investment approach in the sense that they are willing to invest in size in single transactions. However, they are very careful with regard to leverage.AK, NCB Certainly here customers are not as leveraged as they are perhaps in other parts of the world, but there are a percentage of the customers who felt very good about the markets and they were overexposed. Let’s not forget that the local markets fell dramatically and caused a lot of wealth destruction. Some private individuals have been really hurt and they lost trust in international private institutions and wealth managers and they have lost confidence. I think it is going to take some time to get us back on track. This has increased the credibility of the local banks and private bankers.AS, Al Subeaei Inv I agree with that and part of it is related to the culture of the region and by nature I think individuals are aggressive here, but they don’t really tend to do leverage and to do investments using credit lines and banks.PT, BNP What differentiates this region from other parts of the world is clients’ interest in more tangible investments. Black boxes do not appeal to investors here – it is a cultural thing – and this has protected them. We are also very impressed by the sophistication level of this region, knowing that the wealth creation is the story of one generation. In Europe we have had several generations accumulating this wealth and still you can feel that most clients that you are dealing with are not close to the level of sophistication that you find here with the next entrepreneurial generation, the guys in their 40s and their 30s. SA, Abraaj The level of sophistication in family businesses here is impressive. I have been covering the region for over 20 years and found that successful families are extremely sophisticated and don’t want to deal with just another suitcase private banker.SD, HSBC I think we should also point out that the client base is evolving and there is segmentation, and some of this has to do with a coming generational change that will bring with it a significant transfer of wealth.SA, Abraaj Exactly. In the Kingdom, the same 30 to 50 names have been on every banker’s "A" list for the past 20 or 30 years. That list is changing because the second generation have invested wisely and now the list is growing. But what happens with the third generation? That is where the opportunity lies today and the private banker needs to come in with new and innovative solutions to meet the challenges of the growing list of successful family businesses.

Innovative solutions

SD, HSBC Many billions of dollars are going to change hands in this part of the world and one of the big challenges is how to keep the family business together, yet respect and recognize everybody’s individual share of that, especially under Shariah law. We have come up with some innovative solutions, both that are easier for the offshore world and for the family businesses. It is clearly a vital issue. SR, Euromoney What have been the key effects of the crisis on the private banking market in the region?PT, BNP The market in this region shrank at the end of last year and will probably shrink by the end of 2009 again, but it is far less than what we have seen in other areas. For example, in Russia private banks’ clients and especially the "billionaires" segment, lost something like 75% of their wealth in 18 months; we have seen nothing like this here. We have distress cases with entrepreneurs who were most exposed to the construction sector, but apart from that it is a region where people don’t put all their eggs in the same basket and are far less leveraged than other areas. The world has learnt from this crisis that you don’t get rich by getting into debts, and that is why this area is doing better than others.SR, Euromoney What about repatriation or changes in the balance between local and foreign banks?TT, ENBD Well, there are two different types of repatriation. First there is the flow of money out of foreign markets into the local market driven by a fear of the foreign banking system; or more prosaically the interest rate environment. Secondly, there is a forced repatriation of assets to cope with the problems in a domestic business or portfolio.

We have certainly seen the latter. I don’t mean to say that all of a sudden all of the private banking money is coming out of Switzerland to enter this region, but there is money moving away – from what was considered patrimony – into businesses that need to be recapitalized. Our challenge is, especially in the Emirates, where we are paying higher deposit rates than the other Gulf countries, will we be able to build private banking relationships on those in-flows and retain the business? We at Emirates NBD have had 11% asset growth in the last year, mainly due to better rates. The question is, can we keep it?

AS, Al Subeaei Inv The more conservative, more traditional bankers did better in this crisis. So yes, clients are now shifting in favour of local banks. Of course being close physically and building trust is also very powerful.PT, BNP We have to admit as foreign players that, because of the interest rate situation, as well as the global banking crisis, there has been a huge move to cash in the past few months to the benefit of the local players. In this kind of environment the added value of the foreign players is not so obvious to the client.SR, Euromoney Stewart, you work at a bank that has been affected by the crisis. What impact has that had on your private banking business, if any?SD, HSBC We have been fortunate among the larger, international banks and have been the recipient of funds from other institutions. Between the regional banks and the large international banks, it goes without saying there is room for both. A lot comes down to good advice, trust and faith in your banker and hopefully comfort in the institution, which HSBC seems to have achieved. PT, BNP We are also quite fortunate to have had the same experience as HSBC. BNP Paribas has also been benefiting from the flight to quality.SR, Euromoney You have seen net inflows?PT, BNP We had net inflows of several billion euros last year and this flow continues. As we have a local presence in every major GCC market, we have been able to hold on to our local-currency deposits, even where we are less competitive in terms of rates than the local banks. Of course, like every other player, we are suffering from the fact that our clients’ assets are less profitable because they are more into cash.

Capital inflows

SR, Euromoney Hazim, have you seen capital inflows? Are you benefiting from the problems seen in some of your international competitors?HZ, NCB Not terribly, to be honest. We have heard that people are bringing their money out of the west, but we haven’t seen substantial movement to the local banks.AK, NCB In Saudi Arabia we have not seen much repatriation. People are not bringing back their money, but perhaps they are not transferring more abroad. Here, in the Kingdom, there is less distinction between clients’ private wealth and their business as most of the wealthy individuals are business owners as well. The Kingdom’s economy was much more resilient during this crisis and businesses generally have not been impacted as much. Subsequently, the source of creating wealth is still available.SR, Euromoney As well as perhaps benefiting from flows back into the region, local banks are also taking advantage of clients’ post-crisis views to begin competing with the foreign banks in their own backyards. PT, BNP Yes. The moment has never been so good for a domestic bank to try to gain a stronger foothold offshore, perhaps not by implementing a fully fledged, private bank in Switzerland, because that would be very costly and cumbersome. But if you have a small structure with three or four good advisers in Geneva, then you can aggregate what your clients here have in various Swiss banks, where they have lost a lot of money and where they don’t trust the advice completely anymore. You may propose that they leave the custody where it is, but you help them reshape their asset allocation and negotiate their fees and commission. In that way you have positioned yourself as an adviser of the client and, later on, you might feel it appropriate to set up a fully-fledged bank on this basis. AK, NCB Our whole idea was to do this, to act as an adviser, out of this entity that was acquired by NCB Capital, our investment arm. But I wonder how would a Saudi bank be perceived if it opened a private bank in Switzerland? Would it be able to capture some of the wealth that is kept abroad? SR, Euromoney Arab Bank has been in Switzerland since the early 1960s. SD, HSBC Though Samba shut their office in Geneva about five years ago.

TT, ENBD We don’t have a Swiss bank. We have looked at buying a Swiss bank at Emirates NBD. We have not found the correct fit as of yet. National Bank of Abu Dhabi does have a branch there which has collected assets from Middle East clients However, I am amazed at the amount of Swiss bankers calling all of us here and saying: "I am not so sure I am confident in the domicile of Switzerland any more." Gulf clients in Switzerland are increasingly trying to repatriate to what is possibly a safer domicile. We have a platform in Singapore as an alternative that is both in terms of confidentiality as well as financial and political stability becoming more attractive. That is one of our solutions. However, clients are looking for a variety of custodians to diversify their risks.

The fundamental question is: where do you keep your assets? Clients are more and more cautious about custodians and they want to diversify domiciles. As the G20 becomes more aggressive on tax, more and more countries require local banks to provide local solutions, and want local regulators to be able to both collect taxes and make sure that their populace is investing in the right instruments. That conflicts with most wealthy individuals who want to move their assets where they have the least amount of tax and where the legal architecture allows them to give their wealth to their beneficiaries in the way that they wish.

SR, Euromoney Stewart, you are based in Geneva; perhaps it is a good time to come to you and ask you if Switzerland is losing its dominance.SD, HSBC It is a wake-up call for the Swiss. They have realized for some time you can’t base a business proposition on secrecy and that performance and service and price are important factors. However, I believe the Swiss are very capable of meeting the challenge of proving that a premium centre can justify premium fees.

Market share

SR, Euromoney Do you perceive that Switzerland is specifically losing market share to this region?SD, HSBC No, as Hazim said earlier, I haven’t seen assets flee from Switzerland into the region. However, there is repositioning within Switzerland from one Swiss bank to another bank, perhaps located in Switzerland.PT, BNP The domestic banks still do not realize the potential they have if they could capture a little bit more of this international exposure of their clients. Today most of the revenues from this industry are still captured by the big international Swiss and sometimes US and UK banks, so there is a huge potential for a domestic bank with the right approach to try to capture this business. It is the right moment to do so and it will benefit the market as a whole.SR, Euromoney Has the crisis affected return expectations?TT, ENBD Return expectations are definitely changing. People are becoming more realistic and that is a good thing. Clients as well as banks have had a very cold bath with the rapid meltdown of a lot of financial assets, as a result they want to have shorter-term investments, more liquidity and lower risk. For those of us in private banking that is an issue as we’ve been paid to sell longer-term, higher-risk products. So we are going to have to figure out how to make a good return for our shareholders without taking undue risk for our clients.SR, Euromoney Patrick, how do you resolve that conundrum?PT, BNP All players have to revise their expectations in terms of profitability for this industry over the next few years. Still, the fact that we are working in somewhat irrational markets does offer possibilities that are attractive to the clients and generate commissions for the bank. For example, we are doing a lot of "hedged bonds" transactions: we take a normal corporate bond, and use credit default swaps to put the guarantee of BNP Paribas on it. The client has a BNP Paribas guarantee on this bond investment and can still get a return of Libor plus 240 basis points over the next three to four years. We can naturally leverage these hedged bonds – and this is smart leverage because you have the certainty of the return and of the capital – to create returns of Libor plus 6% or 7% per cent over the next four years. Such opportunities were not available 12 months ago, and might not be possible six months down the line, but are here today due to very volatile market conditions. Of course, you have to be very quick in taking them and distributing them to clients.

Family offices

SR, Euromoney How do you see developments in family offices?PT, BNP In the past few years we have seen the professionalization of the family offices. The larger ones are becoming fully fledged asset management companies and the post-crisis situation is a very good moment for them to sell on their track record and their experience.SD, HSBC There will certainly be an increase in the number of family offices, as families get more sophisticated and want more clarity; they want to employ people more directly who are going to ask questions of the sell side. In what I do – putting legal structures together – I am often met initially with some suspicion by the employees of the family office who ask: "What are you as trustees going to do that we are not doing? Are you coming to take my role away from me?" The answer is: "No, far from it. I am going to help you preserve your job, because one of your roles is to set out a long-term investment path for the family." And at the end of the day they still need a custody platform; they need a balance sheet that can lend; they need the services of a bank to work alongside them.HMS, McKinsey Many of the family offices in the region are not at the same stage as the more established European offices. But that is simply a reflection of the fact that the wealth was created much more recently and is still, in many cases, in the hands of the original entrepreneur. You do have someone who will be called the investment manager, but often this person is a gatekeeper; he does advise the principal and will work through the documentation, but a lot of the decision-making will still be made by the principal himself. That is also why providers that are product driven are quite successful here in the region, because they have access to principals and they have deals to sell.

That will change as the family business is handed on to succeeding generations that also contain family members not involved in that business. Then you need a professionally managed family office and a growing number are going to come to that stage in the next few years.

Then questions arise over the scope and job of the family office. Is it primarily an entity that evaluates third-party managers and negotiates on fees? Or should it use its local expertise directly to evaluate opportunities in equities, real estate and private equity in the region? Many do the latter and are effectively private equity firms with other third-party mandates bolted on.

TT, ENBD The value-adds of the family office manager, many times, is that he negotiates a better fee. He says: "we don’t have to pay a 1% management fee, I have obtained 50 basis points and we have saved some money". That is a part of his value proposition to the family – to negotiate smaller and smaller fees for the services that we are selling.PT, BNP One issue is defining the mandate of the family office. Some are built for wealth preservation, others are basically companies that are buying tangible assets like hotels and other real estate projects, some are highly leveraged while others are not. We spend a lot of time trying to understand what the mandate is, so that we can position our offering. And, of course, if the initial mandate is not clear, then that makes the move from a single family to a multi-family office very difficult.AK, NCB With a few exceptions, family offices are still in their infancy here. Currently the owners and entrepreneur him/herself are still calling the shots, with the office handling administrative functions. Regarding the multi-family office business in the region, I believed that confidentiality issues would be a big problem. But in fact I have been amazed at the amount of information that people are willing to share and I believe that the multi-family office business is something to watch in the region.SR, Euromoney To what extent is trying to achieve economies of scale a big issue facing family offices – and so how will the development of multi-family offices move forward?HMS, McKinsey Clearly families have to decide what level of capability they want to build in their offices. Once the principal is no longer the sole decision maker, which is the prevalent model today, you then need to build a team. If it’s a half billion dollar office, then really the office’s main function is accounting and administration. The problem comes because it’s easy to end up with 25 people running an office which isn’t really big enough to justify that infrastructure. And at that point the question becomes: "What about multi-family offices?" Our impression is that that is quite a big step. There are problems of confidentiality and conflicts of objectives and so on. Interestingly, some offices that find they have got too big but have actually developed a successful specialization in – say – regional equities can make the infrastructure make sense by offering that one product externally and we have seen that.

Confidentiality

TT, ENBD Going back to the issue of confidentiality, I agree that perhaps there has been an oversensitivity on certain issues – confidentiality, hiring of UAE citizens and so on. The biggest issue with multi-family offices from a management point of view is not confidentiality as much as a trusted relationship. If every time the multi-family office loses one of the families some money, then that family can call up and ask to be made good, then that isn’t really a multi-family office. Multi-family offices will have to be more autonomous and separate from the billionaires that would traditionally run them.

In the UAE, the multi-family offices tend to be bankers that have previously been wealth managers or asset managers who form their own practices, or in some cases lawyers specializing in trust structuring. Private banking in some ways is going to be competing with multi-family offices because they can say: "Give me your money because I am not trying to sell you a product, I am trying to sell you an advisory service and this is our track record."

SD, HSBC One problem with multi-family offices is that some have been too enthusiastic vis-à-vis the banks. They offer as a core service negotiating with the banks on fees and they try to pare fees down to such an extent that no bank wants to work with them just to be a back office. SR, Euromoney Sari, do you think one of the big advantages for family offices, certainly multi-family offices, is that they can focus exclusively on solutions and match client needs more directly than the big private banks?SA, Abraaj If the family office is catering to the primary family, yes. If, as Dr Hans-Martin said, they are going to accept other families’ money, then they will have to specialize and focus. The issue of families opening their books to each other will remain a highly sensitive issue because none of the families wants to show how wealthy they are or how indebted they are. So I think private banks are going to complement the family offices; I think individual family offices will grow; but I’m not so sure about the prospects for the multi-family offices.HMS, McKinsey There have definitely been families facing the question of whether to become multi-family offices and in a number of cases they decide instead to create a subsidiary that is a specialist asset manager. It makes sense when you consider that this region is opaque and those who know the opportunities because they are part of the fabric have opportunities to offer third parties that the latter cannot access.PT, BNP You need to improve your governance if you open up to other families. Eventually, the founding family becomes simply one client – albeit with some control – of what is then a more independent asset management firm. For the banks it is an opportunity. We are already in discussions with a few clients that are going to spin off part of the family office to create a kind of asset management company and open it to a few selected families sharing similar values. These clients may turn out to be the "Rockefellers" of this region in a few years’ time. We do have an interest, from the bank’s side, in incorporating their asset management capabilities for the GCC because of their superior track record. And they need us for other things, mostly all investments that are not related to their core market. SA, Abraaj And it’s not simply the creation of family offices, it’s more the corporatization of the business empires. If they have a holding company with a diverse set of subsidiaries, they may need to introduce professional management, corporate governance and a structure that enables family members to manage and grow their core businesses and possibly divest some non-core trophy assets.HMS, McKinsey Exactly. We are at a transition stage where the family office is just one element of the professionalization of the holding company: setting up a holding company, creating a CFO position, creating corporate governance, maybe a family council, defining shareholder rights vis-à-vis the family council and who runs the company and so on.

Future holdings

SR, Euromoney And what are the prospects for the business both in terms of the macro economy as well as the specific business of private banking?AK, NCB We feel there is a huge potential for the local private and investment banks to play a bigger role in terms of providing wealth management and advice for our clients. Private banking is still young in the region. We continue to invest in the private banking business and believe that we need to continue to provide our customers with inventive solutions and we need to provide our relationship managers with the right tools and support to be able to find the right solutions for our clients.

Local banks have gained a lot of credibility during the last few years and I think our clients view us more positively, which of course puts more pressure on us to deliver more. As for the region, we still continue to be optimistic, despite the short-term challenges on the economical side.

SS, NCB The economic situation is good for the business in the long term. For 2009, the GCC economies will generate positive growth in real terms, probably between 1.5% and 2%.

The pressure is now on governments to stimulate growth and Saudi Arabia and other Gulf countries are committing huge amounts in infrastructure financing to achieve this. We will see IPOs and there will be increased issuance of bonds, especially sukuk, both of which will bring opportunities.

Obviously people are keeping their money back, waiting for the world economy to recover. From my perspective I don’t think we will see it before the second half of 2010.

JK, NCB I am basically optimistic about this part of the world because these countries, unlike their counterparts in the west, where people talk about Keynesianism, have actually practised it during the extraordinary boom – they have saved up a lot of money for the proverbial rainy day and now they are in a position to mobilize that. At the same time, governance standards have improved significantly and, yes, if we look at, for instance, this country and the performance of the regulators, the very cautious, conservative stance of recent years is now vindicated.

So even though we are looking at a situation where, with oil prices down, there is a reasonable prospect of a recession here, this is a region that is in a fairly good position to bounce back. We are less likely here to have to worry about whether it will be a U-shaped or an L-shaped downturn: things will probably return to trend as of 2010.

SA, Abraaj Things are certainly not rosy out there. The west always criticized central banks in this part of the world for being too conservative and now local banks are looking healthier than their western counterparts. We believe our region will emerge out of this downturn sooner than the rest of the world. We are certainly not decoupled by any stretch of the imagination. However, private banking will benefit from the sheer weight of repatriation of funds from the west.

Demographically, Saudi Arabia is one of the most attractive markets in the world. If you take our region as the MENASA, so including South Asia, behind China we are the second-largest and fastest-growing region in the world. The opportunities here are abundant and demand outstrips supply in almost every sector, from food to education to healthcare. That creates great opportunities for private equity players like ourselves. It all bodes well for us in Saudi and the region at large. It is not going to be a sharp V-curve recovery, nor perhaps a U-shaped recovery, but the world will recover and this region will recover sooner than the rest of the world. After all we are sitting on the world’s largest untapped hydrocarbon reserves, and there is a positive government reform agenda and favourable demographics.

TT, ENBD Our economists see a recovery in the latter half of this year and the beginning of next year in the region. The Emirates NBD strategy in 2009 focused on building a private bank first by acquiring very good bankers, secondly by acquiring clients through good deposit rates and solid, basic products. We think in 2010 we will be able to implement that further, by which time investors have more confidence in the region.

Shariah-compliant products will continue to grow and I am very happy that we have an Islamic bank that will help deliver those solutions. I think we may be surprised at the upside of the region in terms of how developed assets will start to come back in through good private equity programmes, like Abraaj has, in the region.

PT, BNP As we mentioned before, we all know that the market as a whole will shrink in 2009, because the valuations are down and the wealth creation has dried out. But we also know that the fundamentals in the GCC indicate that wealth creation will resume sooner in this region than anywhere else. In this context, we will see consolidation, as critical mass is becoming, in this region and more globally, an issue for private banks and financial institutions.

In addition, the domestic banks are in a unique position to increase their market share. Governance may still be an issue, but we have seen a lot of progress on this side. The only threat to this trend is political stability.

SD, HSBC There is clearly huge potential in Saudi Arabia, Kuwait, Abu Dhabi – the obvious locations. I agree with Patrick on consolidation. I recently met a gentleman I have known for many years who will be typical of the trend. He has ended up with banking relationships with, say, a dozen different institutions and has realized that now is the time to step back and reallocate. He sees an opportunity with some of the smaller boutiques because he likes what he perceives as cutting-edge advice and he likes the big, solid balance sheets of certain other institutions. So he has hired someone who he has known for many years as well to help him with this reallocation service. That summarizes what we have been talking about: he is not quite a family office, but it is someone who he trusts, who he has known for a long time, he has known me for a long time and he wants to consolidate and organize himself.

States of flux

SR, Euromoney Do you think the industry is in a greater state of flux today than for many years in terms of the potential for movement of money and clients?SD, HSBC That is right. There was certainly plenty of talk about it post 9/11, but it is now happening.

HZ, NCB And there is geographical growth. For example, we in NCB have extended our private banking service to Mecca, to Medina and to Qasim where the wealth is. We have transparent prices for private banking, we have shared those prices with the wealth managers and the relationship managers. The potential is there and in these areas we don’t have international competitors.HMS, McKinsey In the private banking sector, in normal times, revenues grow simply from inflows from existing clients because clients get richer faster than the economy grows and assets typically appreciate around 4% to 5% per year. Now assets under management are shrinking because of a repricing of financial assets globally and lower inflows due to negative economic growth. The local private banks are somewhat protected against this, because in one part deposits are rising as clients are looking for a safe haven for their wealth. One of the key trends that we could see in the region is that more of this wealth is less likely to be based offshore, but will remain in the region and be used for investments here. This offers significant opportunities for asset managers to intermediate that wealth. Finally, if you look at the transition to the next generation, then you are looking at a huge increase in the number of potential clients as the next generation comes to you for advice. They will need advice from professionals in a private bank, and not just be locked up in the family office.

Regulatory environment

SR, Euromoney Sheikh Al Subiea, how would you characterize the regulatory environment here?

AS, Al Subeaei Inv One of the winners in this crisis has been the regulators in the region, especially in Saudi. They have been criticized for being late decision makers, for not having encouraged innovation, but they have been vindicated. However, this is, to some extent, sad because it sends the wrong message to the markets. It is not right to be less innovative and less encouraging, especially in this market; there are lots of opportunities and we need to come up with solutions.

SD, HSBC True, but I do think that the region has benefited from not being as innovative and deregulated as elsewhere.


TT, ENBD That said I have been very pleasantly surprised at the regulators’ sophistication and how tenaciously they make sure that the Saudi populace is protected from inappropriate investments.

SR, Euromoney Alsharif, do you think the regulatory environment is too conservative?

AK, NCB We need to proactively engage the regulators more. There is a tendency here to wait for them to come to us and impose regulation. The Saudi regulators have been prudent in many aspects especially when it comes to protecting the customers from mis-selling.

PT, BNP Yes, engaging them is needed and regulators in this part of the world are very open to such initiatives. Their approach is pragmatic and the objective is clear: to prevent any investor being abused by his bank.

JK, NCB The regulators here should remain more conservative than regulators elsewhere because the macroeconomic reality is that, in spite of the very impressive diversification of recent years, this region remains very heavily dependent on one commodity for its economic fortunes. The regulatory caution that we have seen is in part due to cultural factors but in part it stems from the very painful experiences of the 1980s and 1990s when a protracted period of low oil prices wrecked economies and fostered an attitude of "never again". Given economic cyclicality, this has been a responsible attitude.

AS, Al Subeaei Inv Can I just add something here? Regulators also have to differentiate between individuals and corporates. They have done very well at protecting individuals but they need to be careful not to stifle the institutional side. There are a lot of infrastructure projects that need to be financed, and we need an environment in which the financing structures are available and which is attractive to sophisticated investors. Here is where they need to be more focused I think.

Charging for advice

SR, Euromoney Is the provision of paid-for advice another way around the problem? Is purely advisory service scalable, do you think?

TT, ENBD There is a bit of a conflict of interest in the industry: we don’t get paid for advice, we get paid to deliver a product. Until people have enough confidence to pay you for the advice the way they do lawyers and other professionals, the revenue stream continues to come by the placement of some sort of product solution. The best bankers and the best-regulated bankers tend to do it within a profile that is appropriate for the client and that is how they can gain more assets and more clients.

HZ, NCB Let me share with you the current regulated environment here in the country. We, in private banking are not allowed to give advice to the client. NCB Capital, our investment partner, is authorized by the CMA to do this.

AK, NCB We have an arrangement with NCBC where we have a wealth manager that covers every team in the private bank. In a meeting where advice is needed, a certified wealth management person must be present to provide the advice. To the question of scalability, the issue is that here, as elsewhere, people are used to getting advice for free. You can only charge for advice when you have valuable advice to sell. So a lot of companies are currently working on research and on providing value-added information. As of now, if you get the business you are paid; if you don’t get the business, then you are giving free advice.

TT, ENBD Here in the Kingdom our wealth advisers are regulated by the CMA because we want to give advice. We think that is the added value in a wealth management proposition. We need to distinguish ourselves as good advisers, so CMA has our main licence when we are doing wealth management. We do have the retail bank and deposits and credit cards and they are regulated under the SAMA licence. We are doing both types of banking, but at the NCB model whereby a specific, technically trained individual teams up with your bankers is very interesting. One thing to point out to is how good the local advisers have become. That has certainly changed – not just in NCB, but in the region. That is why suitcase bankers find it more and more difficult because good advice can be provided locally.

SD, HSBC Obviously we have always earned our living by giving advice on structuring and even more so now with structuring the family businesses.

PT, BNP It is true that people are not used to paying for advice. However, we have achieved this for the direct investment advisory business that we provide for some of our larger and most active clients. We tell them: "You keep your relationship manager and we will provide you with additional advice in a format that you define." Some clients want to be called every day and some want, say, a quarterly review, but they all have a dedicated investment adviser. During the first six months we do not charge. Over that period the client has had lower transactional fees; they have had more of an institutional pricing and they have had the advice. After six months, in 80% of the cases, the client chooses to stick to this direct investment advisory mandate.

AK, NCB It is such an interesting concept. To be able to be in that position you would have to be supported with a lot of research, a lot of added value. I know that banks are building the capabilities to do this, but I don’t think that locally many are there yet.

PT, BNP I would just add one thing. The crisis will change people’s behaviour for a long time. The disassociation between advice and execution will become stronger as clients demand impartial advice and as bankers find they cannot be remunerated by the old product-driven structures. Perhaps more senior private bankers will leave their existing institutions and set up their own advisory shops, working with two or three different banks to provide the full scope of possibilities for their clients. So the concept of remuneration for advisory will grow.

Product developments

SR, Euromoney On the product side, where are the interesting developments? Are we seeing Islamic products, for instance, to the fore?

TT, ENBD Yes, definitely. Islamic products are increasing in the region. We have Emirates Islamic bank so we can offer conventional solutions or Islamic products. But the key is that right now Shariah-compliant products are seen as more conservative and therefore in this environment the demand for them is increasing.

HZ, NCB I’d make a slightly different point. At the moment I would say that clients are much more interested in wealth preservation than wealth creation and so they are not so interested in products, whether new or not, so much as what a private banker can do to help them with their existing portfolios given their new risk profile.

On the product development side we have our investment arm, NCB Capital, working on this right now and yes, clients are always interested in the Shariah-compliant sector. However, at this moment, most people are focusing on whatever products are most suitable for their specific situation, rather than on this particular issue.

TT, ENBD That’s certainly true. When you see low-volatility products that all of a sudden lose 60% of their principal, you say: "Wait a minute, I thought this was a capital preservation product." In the industry we have to rebuild the clients’ confidence and redefine what risk we take before necessarily focusing on any specific product type.

AS, Al Subeaei Inv I also agree with Hazim. People need advice on what to do and how to act and to make available to them the information and have them take their decision on a solid base rather than imposing a product or a certain decision on it.

SR, Euromoney What is your view on Islamic products?

AS, Al Subeaei Inv There is a big shift. Even institutional investors now tend to be Shariah-compliant. It is a trend. I think if it is not today, it is tomorrow. There are no limitations on Islamic products and we could have an Islamic alternative for every product – and there are solutions. These may need some investment from the institutions to develop, but solutions are out there. You need to take some more risk at the beginning, but the first camels will be the winners.

SR, Euromoney Sari, has the private equity product been affected by the crisis?

SA, Abraaj Private equity as an asset class has constituted a very small portion of people’s investments and the global crisis has certainly affected banker’s ability to raise funds. We were fortunate to have raised money in a tough period – between June and September 2008 – which we are now looking to deploy today in growth businesses in the region, the families that we are talking to are essentially private equity firms in their own right, some understand the merits of the asset class, but their number one priority is to reinvest and grow their own businesses.

We do face the challenge of educating people in what private equity can do for them, especially with the lack of IPOs and bank funding. Their businesses can either grow organically or exponentially; to do the later they will need private equity. Then managing expectations on valuation becomes an issue. Valuations in the private markets have not caught up with those in the public domain. In addition, private equity as an asset class means a longer-term horizon than what investors have been accustomed to in this part of the world. Changing the short-term investment mentality is challenging. We have achieved historical returns of over 70% IRR since inception in 2002 yet this is arguably the best time to invest in private equity.

HMS, McKinsey The regional private banks need to be careful when they expand their product range to riskier wealth management products. First, they should make sure that they have sufficient skills in house for screening and evaluating third-party products. Second, they need to make sure that they really understand the risk profile and, more important, the expectations customers have when dealing with them. The fact that many customers invest in similar products with international providers does not mean that they are willing to do the same with their local bank. In fact, most customers still expect from their local bank low-risk and highly liquid investments. The local banks need to be aware of this because they enjoy very high levels of trust with their customers and need to be very careful not to lose or damage this great asset.