Outpacing Europe, Asia is expected to be home to 55,740 individuals with more than $50 million in assets by 2022, according to Knight Frank estimates.
What’s more, Capgemini data shows that Asia’s private banking clients hold more than 50% of their wealth in their home markets, making a clear case for tapping onshore wealth.
That’s exactly what private banks are doing. In the first quarter of 2018 alone, Credit Suisse was awarded a representative office licence in the Philippines, Julius Baer entered Thailand through a joint venture and Pictet strengthened its onshore business in Singapore with a wholesale banking licence.
Exploring the options
As some banks exit the region, those that remain are venturing beyond the familiar onshore territories of Singapore and Hong Kong, which are also Asia’s biggest offshore centres.
They are overcoming costs, operational complexity, regulations and local competition to make a foray into China, India, Indonesia and Thailand in search of growth, often through joint ventures and partnerships.
‘The growth has been focused onshore in Singapore and Hong Kong, but a number of private banks are also now considering moving onshore to regional markets to better service clients and grow their business,’ says Mark Wightman, Asean wealth and asset management leader at Ernst & Young.
The Foreign Account Tax Compliance Act, the Common Reporting Standards, the Base Erosion and Profit Shifting policy frameworks and a series of tax amnesties have driven flows back home, he adds.
The Indonesian tax amnesty of 2017, for instance, is thought to have driven flows of 84.52 trillion rupiah ($6 billion) out of Singapore.
In fact, Wightman says that Indonesia ticks all the boxes for an addressable and accessible onshore market, especially for those banks that already have a retail presence.
Indeed, BNP Paribas soft launched an onshore wealth management business in Indonesia late last year, leveraging its existing asset management and corporate banking capabilities in the region.
According to David Wilson, Capgemini’s head of Asia wealth management, Thailand and Indonesia offer the most compelling onshore prospects in Asia because they are large, underserved markets with an increasing focus on onshore wealth. Both markets have sizeable young populations and strong potential for growth in high net worth (HNW) wealth, he notes.
Knight Frank figures show that there were 12,330 individuals with more than $5 million in Thailand last year and 19,010 such people in Indonesia. Thailand further liberalised its mutual fund industry environment in 2017, removing certain restrictions on asset types and investment limits. Credit Suisse, Lombard Odier and Julius Baer have all made plays for the market in the past two years.
Vaulting the Great Wall
With 207,350 Chinese and 47,720 Indian HNW individuals up for grabs and growth rates of more than 6% on offer, you might expect wealth managers to be flocking to these markets. In fact, late last year, UBS became the first foreign wealth manager to establish a presence in China’s Qianhai free trade zone.
The problem has been some relatively high barriers to entry. As much as the private banks want to tap China’s $12 billion onshore revenue pool, penetrating an insular market dominated by local players is no mean feat. Licences are difficult to win, the talent pool exposed to international products is limited, and local private banks maintain strong legacy positions.
‘It is a well-known fact that no foreign onshore setup in China makes any money,’ says Claude Haberer, Asia CEO at Pictet Wealth Management. ‘So why do you do that? Because like in other industries, a number of people think you have to invest long term in China. It is worth it because the market is big and one day it will be profitable.’
Haberer adds that onshore China can be part of a big universal bank’s overall strategy, as long as it wants to roll out an entire portfolio of services onshore and is comfortable with losing money in some businesses.
India is another complex market for foreign wealth managers. Several foreign private banks exited India in the first half of the decade and only a handful now remain. ‘To the extent that local factors were at play, you often hear that an inability to achieve
sufficient scale and profitability was a driver,’ explains Shiv Gupta, CEO of Sanctum Wealth Management.
Private bank strategies did not reflect the depth and breadth of local products and lacked the necessary decision making agility, he adds.
Pictet has no plans to go onshore in China and India for now, Haberer says, and is content to stick with its onshore presence in the traditional international financial centres of Singapore and Hong Kong.
Haberer explains that both offer unparalleled freedom of investments and ease of doing business in Asia. There is also room for growth, with Ernst & Young estimating private banking asset growth of between 7% and 8% over the next five years.
Having this local setup is key to going onshore in Asia, as clients tend to have a cost-intensive home bias, Haberer explains. Singaporeans want to book in Singapore and Hongkongers want to book in Hong Kong, he says.
‘Any significant private bank in the region has two booking centres, which is why the entry ticket is so high in Asia,’ he says.
This article appeared in the June issue of the Citywire Private Wealth magazine.