Private banking services challenge to sustain

(Ecns.cn) -- As their investable assets soared in recent years, private banking services started cropping up in China and foreign banks lead the pack, said China Economic Weekly. Translating the potential into profit will be tough for foreign as well as Chinese banks, however.

Temptation fuels the demand side, since the number of high net-worth people in China topped 1.185 million in 2011, up from 361,000 in 2006, and it is expected to climb to 2.193 million by 2015, according to a latest report jointly released by China Citic Bank and the Central University of Finance and Economics in Beijing.

However, on the supply side, private wealth management services are new to the country, so providers still have to adapt themselves to the Chinese market, and they also need time to nurture qualified customer managers that know how to cater to the rich.

Targeting the rich

In western countries, banks usually classify individual clients into four categories based on their financial assets, and accordingly provide them with different kinds of services, said China Economic Weekly.

The first category is public banking, which is available without a qualifying base of assets. The second is VIP banking, which serves clients with assets exceeding US$100,000. The third is private banking, aimed at clients with investable assets exceeding US$1 million, and the fourth is the family office, providing services to clients with assets exceeding US$30 million.

An insider at a Chinese joint-stock commercial bank revealed that his place of work also classifies clients into four similar categories, but the wealth thresholds of the latter three categories are a little lower.

In recent years, more and more domestic banks have started to categorize their clients, mainly because the number of high net-worth individuals is surging in China.

The report released by China Citic Bank and the Central University of Finance and Economics showed that the total investable assets of these high net-worth people jumped to 30 trillion yuan (US4.7 trillion) in 2010, up from 2006's 10.4 trillion yuan (US$1.6 trillion), and is expected to reach 77.2 trillion yuan (US$12.1 trillion) by 2015.

By observing trends, it can be reasonably surmised that managing the funds of affluent private clients is a lucrative specialty, but the expansion of this business line seems to be facing many challenges in China.

Constrained by policy

Only several years back, foreign banks were the first to provide private wealth management services in China, according China Economic Weekly.

In September 2005, the Swiss AIG Private Bank Ltd opened a representative office in Shanghai, which became the first foreign private bank in China. In March 2006, Citigroup started private banking in China, focusing on wealthy Chinese with a net worth of at least US$10 million.

In terms of a population of high-end customers who comprise the targets of private banks, China ranked the second in Asia during those years, and more and more foreign banks eyed the potential profits. By the end of 2010, 37 percent of the foreign banks with legally registered operations in China had established private banking options.

Although the prospects for private banking are theoretically bright in China, foreign banks face tough hurdles too, because private banking services are constrained to a limited number of financial tools at present.

For instance, Citigroup's global private banking clients have access to a wide range of risk management and hedging instruments, but many such derivatives are not available in China's financial market.

Foreign banks are also advised to spend time understanding Chinese culture, and following any shifts in policy.

In 2006, Chinese banks started to follow suit and provide private banking services as well, which have lured some customers away from the foreign banks, as the wealth thresholds are much lower and they have gasp of the Chinese environment.

Growth unleashed

Chinese private banks are in fact quite different from western private banks, because their wealth management services are atypical of services offered around the globe. China's Law of Commercial Banks does not extend to them the authority to do trust and securities businesses, and they cannot invest directly in industrial and commercial enterprises.

With relatively limited outlets, Chinese private banks are unable to offer a wide variety of investment choices, so they have to cooperate with other non-banking financial institutions.

In this process, the role that customer managers play in marketing private banking services is vital, but it seems they are, for the most part, failing to satisfy high-end customers, said China Economic Weekly.

A customer manager of a private banking department admitted that he wants to improve his performance at work, but he only earns about 10,000 yuan a month, able to afford a lifestyle falling so far short of his bank's rich Chinese clients, and he cannot understand a life of luxury at all.

Moreover, the report said 71.6 percent of high net-worth people are owners of private enterprises, and most of them only hope to invest in their own business to create added value. It is very difficult for the banks' customer managers to persuade them that private banking services are worthwhile.

This is the reality, as Chinese banks do not have mature professional development programs for those that mind newly-developed business areas like this. Staff are at a loss to figure out how to do it better.