Private banks say they see an immediate opportunity to deepen their penetration of Hong Kong’s high-net-worth community amid signs clients are becoming more open to an asset-allocation approach.
Estimates indicate that as little as 20% of the city’s wealth is being managed by private banks, amid competition from retail banks, mutual fund companies, individual asset managers and life insurers.
“It’s a fragmented business,” admits Jean-Claude Humair, regional market manager for Hong Kong at UBS Wealth Management, which had SFr190 billion in Asia-Pacific invested assets as of September 2012, 12% of its global figure.
Brand awareness is seen as key, particularly for boutique private banks that aim to provide discretionary wealth management services rather than rely on transactional business or providing credit.
But Humair sees scope to serve industrialists, particularly those operating outside the city's central business district, who have built up a vast store of wealth that is not being catered to by a private bank.
“There are a lot of hard-working industrialists and manufacturers in Hong Kong, most of whom have not been looked after by a wealth management business,” he says.
“Over the past 25 years, they have accumulated a lot of wealth but they are a bit below the radar screen of private banks. We believe there is an opportunity for us to do more active marketing in this area.”
Iggy Chong, head of Hong Kong for Coutts, holds a similar view. He notes there is a huge amount of money being held in local retail banks.
“Some of these people have over $10 million, so there’s a tremendous opportunity for foreign institutions to tap into that base,” he says. “The foreign players have not really penetrated as far as they can, in my view.”
At the end of 2011 Hong Kong had 83,600 HNW individuals with $1 million or more, and 2,560 ultra-HNWIs with at least $30 million, according to RBC Wealth Management/Capgemini and Wealth Insight, respectively.
But the city’s UHNW segment that private banks typically target is mature money, third-generation wealth that is already well catered for. Plus Hong Kong is seriously overbanked, with 22 licensed banks incorporated in the city and 133 incorporated outside.
While private banks see huge potential in serving mainland Chinese clients who do business in Hong Kong, this is first-generation wealth that is less concerned with wealth preservation than wealth creation.
In other words, a lot of this business tends to be more short-term orientated and transactional, and as such is limited in scope in annuity terms.
But Humair sees grounds for optimism. He notes that while Hong Kong clients are traditionally equity focused, last year the majority of business that UBS Wealth Management carried out was in fixed income.
He says the firm saw strong interest among high-net-worth clients for mutual funds focused on emerging market debt and US high-yield, as well as in dim-sum bonds and direct investment into individual bonds.
“For me this is a sign that the market [in Hong Kong] is gradually shifting,” he adds. “Until two or three years ago nobody wanted to hear about the bond market. But last year clients were attracted to a diversified bond offering.”
A move into mutual funds he sees as a promising sign that clients are becoming more willing to leave money management to professionals.
“Until 2008 Hong Kong clients were right to say property and the equity market were the best investments,” he adds. “But that is not the case now.
“We are investing a lot to develop an investment advisory business to convince clients that while trading is one way to grow money, 90% of performance is based on asset allocation.”
Chong agrees, and points to the education challenge. “The expectations of clients continue to evolve and they demand the full spectrum of services,” he says.
“We try to educate them to adopt a more holistic approach to preserve and grow their assets in a portfolio approach and plan for succession. We look to broaden their perspective to focus more on asset allocation.”
He is confident the medium-term growth opportunity for private banks is onshore in Hong Kong. “There is still a lot of opportunity for foreign institutions,” he says.
As at September 30 last year, Coutts had £29.5 billion ($46.5 billion) in assets under management globally. It does not break out its Asia numbers. Coutts is due to announce annual and fourth quarter results on February 28.