China's private banking for rich 'faces golden era'

Wealth managers face a massive learning curve but great potential

In February 2008, when Wang Lu, a 24-year-old graduate, received a job offer from a Beijing-based bank, she was proud of herself. The job was private banking account manager and she stood out among thousands of qualified applications, all of whom held at least a postgraduate degree from world-renowned universities.

As one of the first professionals in the private banking sector in China, Wang can still recall her first days.

"I sat in a spacious room. It was sunny and well decorated and it had a library covering various topics from antiques to the zodiac," said Wang.

She sat in that office alone for almost two months with no clients.

"I lost five kilogrammes in weight by walking around in my office and reading a dozen Chinese medicine books. Otherwise I'd have been bored to death," said Wang.

Today Wang has 18 clients who put a total of 500 million yuan (US$79 million) in their accounts. However, she said she does not take it as a "permanent achievement".

"The pressure is great because clients may shift their money to other banks at any time, just like they shifted their money to my place," said Wang.

It has been only five years since the first private banking services started in China, many of which were offered by foreign-funded banks, including Citi and HSBC Holdings Ltd.

By 2012, China became Asia's most important high-net-worth (HNW) market [defined as individuals with more than US$1 million in investable assets], contributing to more than 50 per cent of the region's growth by 2015 [excluding Japan], according to a recent report jointly released by China Minsheng Banking Corp and McKinsey &Company.

According to the report, China is driving most of the growth of Asia's high net worth individuals market. The country is estimated to contribute more than 50 per cent of the growth in Asia. Revenues from private banking are expected to grow from 23.3 billion yuan in 2010 to 46.8 billion yuan by 2015, more than half of which will be from first- and second-tier cities.

In terms of the number of HNW individuals today, 40 per cent are located in the Pearl River Delta, 31 per cent in the Yangtze River Delta, while another 11 are in the Bohai region.

China's rich have multiple private banking relationships and they value asset growth over asset preservation. China's HNW individual segment is comprised mostly of males between the ages of 40 and 60. Today, on average, 60 per cent of Chinese HNW individuals have one or more private banking relationships. The number of private banking relationships increases significantly with increases in wealth: More than 90 per cent of Chinese HNW individuals with investable assets of at least 100 million yuan have one or more private banking relationships.

By the end of 2012, more than a dozen domestic banks, including State-owned lenders, city commercial banks and shareholding banks, had started offering private banking services to their clients.

In Wuhan, capital city of Hubei province, the wealthy are applauding the newly opened private banking service offices around the town.

"It's much easier visiting the offices in town than flying to Beijing or Shanghai - I used to fly to Beijing twice a week for a month to find a reliable wealth manager. Now I don't need to bother with that," said Qin Weiguo, a garment wholesaler.

Qin, 52, declined to reveal how much money he put in his private banking account at a State-owned bank. However, he said it was a seven-digit number.

He said before 2012, he was rejected by several banks when he applied to become a client of their private banking services.

"They politely told me that my money was not enough because the entry level of wealth was 10 million yuan," said Qin.

The situation changed on January 1, when regulators set a national standard for domestic private banking services of commercial banks providing to individuals with a wealth of 6 million yuan or more.

"The benefits of having private banking services are multiple, among which I like the seminars most," said Qin.

The seminars Qin mentioned are not only about investment strategies.

"The experts my manager invites me to may talk about tea tasting, calligraphy, stamp collections and antique appreciation, most of which are very interesting," said Qin.

Second-tier cities in China already represent more than 30 per cent of the country's HNW individual wealth, compared with about 20 per cent for first-tier cities. Second-tier cities in the Yangtze River Delta Region [including cities such as Wuxi, Nanjing and Hangzhou] and the Pearl River Delta Region [with cities such as Dongguan, Guangzhou and Foshan] represent about 70 per cent of China's HNW individual wealth. Second- and lower-tier cities will continue to grow in share, said the Minsheng and McKinsey survey.

The survey, which polled 700 interviewees with investable assets of more than 6.5 million yuan in 29 cities, also discovered the average Chinese HNW individual is still not aware of private banking services. As many as 45 per cent of those interviewed say they have only a basic understanding or less of private banking services.

"I think private banking services are no different from retail services. It is just the same bank offering the same products to different people. If you have more money, they will give you more benefits, such as an expensive ticket to a concert," said Chang Li, a 42-year-old restaurant owner in Ningbo, in East China's Zhejiang province.

"I think the VIP banking services are enough for me and I don't need anything extra, or a free gift during Spring Festival," said Chang.

Some others said they are reluctant to deal with private banking managers because "they talk about things I don't understand".

Shao Xincheng, a jade dealer in Guangzhou, said he was once terrified by a manager who tried to explain to him how a portfolio may bring a 30 per cent annual yield to his investment.

"My manager talked about so many cases in which my yield may vary from 2 per cent to 30 per cent. He talked for about 30 minutes but I found it was too difficult for me to understand," said Shao.

"To be honest, I am not particularly well educated and I don't want to risk my hard-earned money on something I don't understand. My manager said if unlucky things happen I might lose 10 per cent of my 700 million yuan capital," he added.

After that frustrating experience, Shao decided to stick to his old business dealing in jade. He also put some money into real estate, invested some in gold and put the rest in his deposit account to save for his retirement and an overseas education for his son.

"I feel more secure when I can see and touch the thing I bought with my money," said Shao.

The same or similar products and services for VIP clients and private banking clients are found in many banks, said Chen Zhi, a Beijing-based professional investor.

With a master's degree in finance and nine years of working experience in a shareholding bank in Beijing, Chen said he prefers to build up his own portfolio.

"Compared with some foreign banks that have a century of experience in offering private banking services, domestic banks are especially weak in offering structured financing suggestions and building up a tailored portfolio for clients," said Chen.

"My observation is that currently it is rare to find innovative products. What tends to be on offer is just another mutual fund. It partly explains why many wealthy people choose offshore investments or put the money in the real estate market, or even in illegal channels such as the usury market," said Chen.

Wang, the Beijing-based wealth manager, said it takes a long time to understand the market for China's HNW individuals, which is just in its infancy compared with that in many developed countries.

"For we professionals in this sector, every day is a new challenge. The demands of clients change rapidly and there is not a textbook that we can just follow," said Wang.

Wang said she herself has seen the changes in the sector in her five-year hands-on experience.

"In the early days we were told to maintain a good relationship by sending text messages during holidays and booking the best restaurants to treat them. Now we focus more on developing services that can really help clients' wealth to grow in a healthy way," said Wang.

The number of HNW individuals is expected to grow about 20 per cent annually from 2012 to 2015, reaching around 2 million, and the number of ultra-high net worth individuals [individuals with investable assets of more than 100 million yuan] will grow to 130,000 individuals, according to the Minsheng and McKinsey report.

According to a recent report by the Hurun Research Institute, between 2009 and 2011 some 50 per cent of HNW individuals' wealth was in cash or deposit accounts.

People in the private banking sector need to delve into the demands and dire needs of China's rich. Although the current situation may not be very satisfying, the market is full of promise and is wide open, said Pan Yingli, professor of finance with Shanghai Jiao Tong University.

For many, it is the start of a golden era.

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