Tsuneaki Hirao, head of private banking, Japan, at Credit Suisse Private Banking Asia Pacific, tells Citywire Asia what it takes to succeed in a country simultaneously steeped in tradition and at the forefront of technological progress.
Q: Describe your private bank’s set-up for Japan
A: Credit Suisse’s onshore private banking business in Japan was first established in 2009. After our acquisition of HSBC’s private banking business in Japan in 2012, we were able to further scale and enhance our wealth management capabilities in Japan and clients were able to benefit from the expanded coverage provided through additional offices in Osaka and Nagoya, geographically capturing more than 80% of wealth pool in Japan.
We have significantly expanded the business in the past two years. 2017 was a record year for us: our net new assets was up more than 400% and our assets under management and revenues also grew by 30% and 40%, respectively, year-on-year.
Q: How has the Japanese private banking landscape changed in the past five years?
A: Over the years, the competitive landscape for international banks has evolved significantly with much consolidation. There are only two major foreign banks in Japan that can provide full-service platforms for private banking clients. Recently, we have seen foreign banks announce strategic alliances with Japanese institutions.
Although major Japanese banks or securities brokers have wealth management units, few have a strategy focused on wealth management, while the business set-up is also hampered by the continuing separation between the banking and securities businesses.
Q: What are the challenges of conducting private banking business in Japan?
A: Regulatory requirements for private banking businesses globally have been increasing significantly, including in Japan. For Credit Suisse, our focus is on putting the interests of our clients first, and we operate our business to the highest standards.
On the investment side, the level of interest rate in Japan is extremely low. In such an environment, it is critical for Credit Suisse to closely engage with our clients to help them navigate these markets with investment solutions that can generate attractive risk-adjusted returns.
As a leading global bank, our competitive edge is leveraging our global platform to provide diversified solutions across asset classes and geographies including in foreign currencies that can drive attractive investment returns.
Q: What is your growth strategy for the market?
A: Credit Suisse has clear growth ambitions for private banking in Japan. We believe our global platform and integrated banking model, meaning we can offer our clients the strength of our private banking and investment banking expertise, will be a key growth driver.
Our bankers are known to be able to bring the full breadth and depth of knowledge of the bank to our clients – whether this to help them build businesses through financing, expand their corporate footprint through capital market activities, realise their ambitions for global expansion, monetise and diversify their assets, preserve wealth for themselves and their families, establish philanthropic foundations, or support in the process of smoothly transferring their business and wealth to the next generation.
On the products front, we will look to come up with new and innovative solutions to enhance our products offering such as private discretionary mandates.
Q: How competitive is the Japanese private banking industry? How are you differentiating yourself from local competitors?
A: The wealth management market in Japan is fragmented. With our private banking services provided through the Credit Suisse AG, Tokyo branch and local securities company, Credit Suisse Securities (Japan) Limited, we offer a holistic service covering all major product classes, which sets us apart from traditional players who tend to focus on banking or securities products only.
Credit Suisse’s global network offers us access to services including unique alternative investment products that are popular among private banking clients globally. In addition, we could even provide value-added services such information on and introduction to top-tier Swiss educational institutes for the clients’ next generation or exclusive thematic overseas events for business networking, as well as services relating to philanthropy.
Q: How does the average Japanese high-net worth individual (HNWI) plan their wealth?
A: The typical Japanese HNWI’s wealth consists of real estate, equity shareholdings of their companies, financial assets and others.
Among these, shareholdings of their owned corporations usually form the majority of their net worth, but it is illiquid in nature. Our clients typically wish to retain control over the corporations they own but at the same time they also wish to monetise their shareholdings into liquid financial assets.
Clients also typically prefer to hold assets with low volatility and risk exposure.
Q: How is succession planning typically done in UHNW Japanese families?
A: UHNW Japanese families use a variety of different solutions – ranging from investing in real estate to establishing foundations or family offices – or get private investment corporations to manage their personal wealth.
Their main concerns include business succession, equitable distribution of business assets among the family members, and preservation of control over the family-owned company.
Based on strong demand for succession solutions with an ageing society and complex inheritance taxes, we also provide a number of complementary asset management services to Japanese clients such as M&A advice, wealth structuring options for company owners and so on.
Our private banking specialists are experienced in being able to offer suitable wealth planning solutions which are tailored to match our client’s individual requirements.
Q: What are domestic HNWIs investing in this year? What are some new asset classes investors are looking at?
A: Hybrid capital notes issued by reputable financial institutions were popular over the past several years as they provide capital gains. These capital notes are denominated in US dollars and other currencies, and have been well received in an environment where the Japanese yen has been depreciating.
Taking advantage of relatively high volatility in global equity markets, equity-price-indexed and fixed income structured notes indexed to two or three issuer names are also popular. Another type of structured note called a ‘repackaged bond’, which takes issuer corporates’ credit risk with a moderate risk/return profile, was also popular.
Q: Real estate has been a huge part of Japanese portfolios. Are they diversifying?
A: At the moment, real estate investments are mostly clustered to high-quality commercial buildings in major cities such as Tokyo and Osaka. Even in big cities like Tokyo, demand for investment properties is fairly concentrated in high-quality buildings in top-tier locations because of high liquidity.
The concept of diversification, with regard to location (domestically and internationally) and property type (commercial, residential, logistics) is not well understood by Japanese wealthy investors yet.
Q: One thing about the Japanese market that’s not known internationally?
A: The fact that Japan has the world’s third largest population of millionaires after the US is not widely recognised. This large millionaire population in Japan means there is significant growth potential for private banking businesses in Japan.
Q: Outlook for the private banking industry in Japan?
A: I believe Japanese clients will continue to look to diversify their portfolios even more and therefore, financial service providers must provide innovative solutions with the flexibility to deliver tailor made products and services to meet the clients’ individual investment needs.
Wealth managers with global reach and expertise with a deep private banking heritage like Credit Suisse will be better positioned to offer such solutions that can cater to these evolving client demands for more diversification and better personalisation.
The regulatory requirements on the financial industry in Japan are increasing. This will driver higher standards and best practices in the industry.
While the competitive landscape in the Japanese private banking industry continues to evolve, Credit Suisse will continue to capture the tremendous growth opportunities in Japan as we have a global platform and network together with a long history and track record of operating in Japan.
This article was first published in the November issue of the Citywire Private Wealth magazine.