Chinese private banks are growing quicker than their foreign peers on the back of domestic inflows and are expected to continue to do so given their strong local foothold and the swift growth of mainland wealth. 

Three Chinese firms now feature in the list of the 25 biggest private banks by assets globally, and China Merchants Bank recorded the fastest expansion of all 25 last year (see table below), according to London-based research firm Scorpio Partnership. 

Well positioned

Chinese private banks will continue to expand faster than their peers for various reasons, said Keith Pogson, senior partner for Asia-Pacific financial services at consultancy EY.

For one thing, wealth is expanding particularly quickly in China. It is the biggest and fastest expanding market of high-net-worth individuals in Asia, according to the latest Capgemini World Wealth Report. The country's population of HNWIs grew 16.2% to 1.03 million in 2015, and their wealth swelled by 16.9% to $5.3 trillion. That compares to average Asia-Pacific HNWI population and wealth growth rates of 9.4% and 9.9%, respectively, and global figures of 4.9% and 4.0%.

Moreover, Pogson said, foreign banks operating there are not able to move capital freely out of the country and so cannot take full advantage of their stronger overseas investment capabilities. Nor can they provide a full range of onshore products to match those of the local firms because of licensing restrictions, he told AsianInvestor.

In short, Chinese private banks are in a protected market and have a stronger market position than their foreign rivals, he said. 

Chen Shujin, head of H-share financial sector equity research at Hong Kong-based Huatai Securities, agreed that wealth was accumulating fast in the mainland and there was ample liquidity last year, leading to another good year for private banks there. 

This trend looks set to continue, she noted, as investors rely on wealth managers to help them find opportunities. “There is the so-called asset shortage, and people don’t know what assets to invest in,” added Chen.

Private banks ranked globally by AUM (click for larger view) 

Mainland firms are clearly taking advantage. CMB saw its private banking assets under management (AUM) swell 24% to $239 billion in 2016, lifting it five places to 15th in Scorpio's latest Global Private Banking Benchmark, published this week. 

The other Chinese banks in the top 25 are ICBC and Bank of China, managing AUM of $174.23 billion and $143.99 billion, respectively, after posting 6.34% and 15.36% growth. The two banks ranked 22nd and 24th respectively.

BOC entered the ranking for the first time this year, while CMB and ICBC broke into the list the year before, the first Chinese players to do so. 

CMB stood out as a result of “enhanced customer acquisition efforts and upgraded private banking proposition”, Scorpio Partnership in a release, without elaborating further.

The bank has been particularly successful because it started to develop its private banking business earlier than its domestic peers, said Huatai's Chen.

CMB did not respond to an emailed request for comment by press time.

While CMB rose five places, Deutsche Bank dropped the same number in the other direction on the back of a 28.29% drop in AUM to $227.24 billion, ranking 16th after CMB. This was the biggest drop among all the banks, followed by HSBC, whose AUM fell by 14.94% and moving it three places down the ranking.

Cost control

Scorpio’s results, based on publicly available information from around 200 financial institutions, indicated that cost-to-income ratios fell below 80% for the first time since 2012, reflecting wealth managers’ efforts to reduce costs as compliance rules become more stringent.

Firms will be able to trim costs as technology continues to reshape the wealth management industry, so the challenge will be boosting revenue, said Caroline Burkart, director at Scorpio Partnership.

“These firms are experiencing pricing pressure, driven by regulations, the trend for passive investing and the wave of lower-fee competitor models entering the market,” she said. Firms will need to improve their advisory capabilities and client experience, added Burkart.