? Onshore private banking in Asia is where "the real business" is.
? In re-focusing on key high-net-worth clients, Citi Private Bank in Asia is the group's big wealth management growth story.
After 37 years in the business, Citi Private Bank's Asia-Pacific head, Bassam Salem, is set to retire in February 2018.
Salem, who plans to launch a social media company after his retirement, joined the private bank in Geneva in 1985, subsequently becoming the unit's global investment head. His career then took him to EFG International AG in 2001, and in 2011 he returned to his previous employer, joining Citi Private Bank, a unit of Citigroup Inc.
He spoke with S&P Global Market Intelligence about onshore investing in Asia, a "very difficult" proposition for foreign wealth managers for cultural and regulatory reasons.
The following is an edited transcript of the conversation.
S&P Global Market Intelligence: According to Boston Consulting Group,
Has global private banks' pursuit of Asian clients paid off?
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Bassam Salem, Citi Private Bank's Asia-Pacific head Source: Citi Private Bank |
Bassam Salem
I think they tried but things became more competitive. Since the financial crisis [in 2008], banks are better managed, more focused. Looking forward, the large players will continue to have a big chunk of the market.
The numbers you cite include both onshore and offshore wealth but the real business is in onshore, especially India and China. In China, you need to partner with a local company before you are allowed to operate, though regulations are being eased and all the banks will be looking at it differently. But the onshore culture is very different. For example, if I were to put China's onshore wealth management products through Citi's due diligence program, I don't think more than 5% would pass it. It is very difficult for foreign banks to participate in onshore markets.
Private banking margins are also low in Asia-Pacific, partly because clients tend to bank with more than one institution, while operating costs are rising along with regulatory requirements. How has this impacted the market?
Cost-to-income ratios in the industry in Asia are averaging about 80% to 90%, which is the same as it was three, four years ago. This is why you continue to see [private banks] exiting the region.
Citi Private Bank in Asia is posting about 58%. What we did was to exit all the "hobbies," that is, things that were not profitable. We exited the onshore private banking businesses in South Korea, Taiwan and Indonesia. We exited about 1,000 client relationships that were not the target market. ... [W]e targeted clients with a minimum net worth of US$10 million. We moved other clients with a net worth of US$2 million, US$3 million or US$4 million to consumer bank Citigold Private Client, where the cost of servicing them is much cheaper. Apart from a few other [private banks] like those at UBS, Credit Suisse, JPMorgan and maybe HSBC, everyone else is competing for clients with net worth of between US$1 million and US$10 million.
We also focused on getting the right products and pricing for our target market. For instance in Asia, we are charging custody fees when most banks don't. Some large institutional clients had a problem with this but we stuck with the fees. We also started bringing in real estate opportunities that are very popular with Asian clients. These are funds that invest in, say, just one building, rather than a diversified portfolio that depends more on the fund manager's skills. We used to raise US$40 million to US$50 million in our private equity real estate funds. More recently, these have raised US$200 million to US$300 million each.
The industry in Asia has been consolidating in recent years. Is the bulk of consolidation and M&A over for the foreseeable future?
I believe you will have banks like those in Singapore, DBS, Bank of Singapore, maybe UOB, looking to acquire. Julius Bär, EFG and some others are still looking for opportunities to buy. On the other side, a large number [of private banks] do not have the critical mass or are not profitable, and sooner or later their management will have to make a decision about whether to sell. Definitely, there will continue to be consolidation.
The region was buffeted by the 1997 Asian financial crisis and the global financial crisis a decade later. How has this affected the market?
The industry is cautious now. If you were adventurous, you would trade bitcoins! Regulatory cost has gone up significantly and the fines make it imperative that [private banks] get it correct.
It is different today compared to 30 years ago when it was a growth industry. For one, clients in emerging markets then faced a high degree of political risk. You had military coups and massive currency devaluations, for example. So clients were happy to put money abroad with a private bank because their businesses onshore, be it Brazil or Philippines, required them to take a certain degree of risk.
This degree of political risk has subsided and as a result, clients are a lot happier investing in their business and setting aside less money for private banking offshore investments. Even then, many allocate money directly to private equity and real estate rather than private banking, where only the large banks are able to offer such platforms. So the market is a lot more competitive.
Asia is expected to be the world's biggest private banking market in less than five years. What could knock this growth off course?
Nothing will stop the Asian growth story. This year, for instance, Citi Private Bank in Asia was the fastest-growing business in the banking group's private banking division while Asia is the fastest-growing region [for the group].
In the West in particular, we put democracy at a very high level, as something that is essential for an economy to grow, and that might or might not be the case. But what I do know is that what many people in China, and I am not suggesting it is right or wrong, really want is to succeed economically. They really seem focused on succeeding individually.
It is refreshing to see that entrepreneurial spirit alive and equally so to see that there is funding for good ideas. Money is never an issue in Asia; there is so much money chasing opportunities. The ecosystem is there.

