Wealth Management in India : Opportunities Galore

The wealthy Indian has just recently woken up to the concept of private banking. Until
recently, wealth management for High Net Worth Individuals (HNWIs) was an almost
unheard-of concept in India. A leading wealth management consultancy has found that
the industry is now growing at nearly 15% in terms of Assets Under Management (AUM)
figures. Indian HNWIs are beginning to explore investment opportunities beyond the
traditional capital markets, migrating to newer asset classes such as art, real estate and
overseas investment opportunities. The rising incomes and the unlocking of wealth from
closely held businesses have created a whole new generation of individuals that
constitutes a credible market opportunity for asset managers, private bankers, financial
advisors and others. All in all, the reasons for this sudden spurt in wealth management
business could be more than one.

Strong economy

The Indian economy has seen strong growth over the last 10 years with the lowest
recorded real GDP in 2002 at 3.9%. On an average, over the last decade, the economy has
grown at a rate of 6.4% driven by its continued development of the service industry
within its economy and strong growth in the technology sector. There is no doubt the
Indian economy is growing strongly, but it is also well-developed in comparison to many
of its Asian neighbors. In comparison to China, with its economy still heavily reliant on
labor-intensive manufacturing, India is better developed.
Rapidly growing HNWIs

In 2006, accelerated growth was witnessed in terms of both GDP and market
capitalization, the two key drivers of wealth creation. This growth led to an increase in
the number of HNWIs around the world and an increase in the value of their assets.
Globally, the HNWI population grew by 8.3% in 2006 to a total of 9.5 million
individuals. Total HNWI wealth in 2006 grew by 11.4% over the previous year, to US$
37.2 tn in financial assets, a significant gain over the 8.5% scored in 2005 and 7.8%
growth in 2004. Total wealth accumulation of the ultra-HNWI group also grew last year
by an impressive 16.8%, to US$13.1 tn, which is another sign that global wealth is
rapidly consolidating among this ultra wealthy segment. The number of individuals with
more than US$100,000 in liquid assets has grown at a rate of 17.7% averaged annually
over the 2001-2005 period as per the Global Wealth Model. In 2001, there were just
416,000 individuals with more than US$100,000 in liquid assets and 11,000 with more
than US$1 mn.
The BRIC nations (Brazil, Russia, India and China) are playing increasingly important
roles in the global economy which resulted in huge increase in the numbers of the HNWI
populations. India and China, of these four countries, made their way on to the list of the
10 fastest-growing HNWI population in 2006. China's HNWI population, for example,
grew by 7.8% in 2006, while India's expanded by 20.5%.
According to Merrill Lynch and Capgemini's World Wealth Report, more millionaires
joined HNWI group and also forecasted that global HNWI financial wealth will grow to
US$51.6 tn by 2011, at an annual rate of 6.8%. Thus, the wealth management and private
banking industry must offer their wealthy clients innovative and comprehensive strategies
to effectively organize their investments.

Burgeoning liquid assets

The Reserve Bank of India (RBI) has provided details on the value of savings deposits
held by residents in each of the states. This data reveals that there are four states which
stand out. These states are Maharashtra, Delhi, Karnataka and Tamil Nadu. Alongside,
the growth in the value of total liquid wealth, total affluent wealth has grown
considerably in the four states and there has been a sharp increase in both the number of
affluent individuals and their liquid assets. This has made these states the primary focus
for wealth managers and private bankers looking to target affluent clients in India.
Increasing investment options

According to those in the wealth management market in India, the typical Indian affluent
individual is not particularly sophisticated in terms of his investment needs. However,
now a paradigm shift is taking place. Historically, high interest rates in India prevented
demand for a wide range of investment products as investors could achieve a good return
with low risk in a basic savings account. However, recent declines in interest rates, and
the relatively low current rate, have prompted an accumulation of demand for non-
deposit products as customers' returns have steadily dropped. This obviously presents an
opportunity for potential wealth managers.
Not only is the investment environment developing in a way that will give
encouragement to those looking to build a wealth management business in the country,
but it seems Indians themselves are warming to the idea of investing. In the recent times,
when deposit rates began to drop, investors began looking to the other vehicles such as
equities and debt. On the positive side, interest in investment products, such as mutual
funds, is increasing. Simultaneously, new options for investing are emerging as well,
including art, overseas investments and real estate venture funds.

Booming private banking business

Wealth management solutions are the core of the private banking offerings. Private
banking provides a more personalized level of service than most individuals commonly
find at a commercial bank. This involves helping HNWIs invest wisely, while avoiding
risks that might reduce the value of their assets. Private bankers also offer tax planning
and pension advice, help clients develop a strategy for philanthropy, and advise them on
estate planning. In one subset of the private banking sector known as Family Offices, the
bankers also perform tasks that range from screening solicitations for charitable
contributions to making sure the clients' bills are paid on time. As the array of potential
investment products widens, the job of a private banker is becoming increasingly
complex. Private bankers need an understanding of financial products from basic stocks
and bonds to financial derivatives, private equity and hedge funds. The wealthiest tier of
people worldwide are getting richer, particularly over the course of recent bull markets
for stocks and real estate and so, the private banking business is going strong. A study
published in 2006 by the Scorpio Partnership, a London-based wealth management
consulting firm, found assets managed by private banks have surpassed US$8.5 tn
worldwide.
Along with many other banks, ICICI Bank, India's largest bank with respect to market
capitalization, offers a range of general banking services including private banking. The
bank's relationship manager acts as a financial doctor, diagnosing his client's financial
goals before prescribing the appropriate investment advice, and at the same time
ascertains his risk appetite for financial assets whose risk-return trade-offs vary across the
spectrum of instruments. The most crucial aspect of any financial planning process is the
monitoring and reviewing of the portfolio on a periodic basis.
Wealth managers also spot opportunities in various asset classes and design customized
products to suit client requirements. They aim to target all the five distinct risk profiles
such as Risk Averse, Conservative, Balanced, Growth and Aggressive. This approach
helps in creating the appropriate balance between safety, liquidity and potential for yield
enhancement through a mix of different asset categories that includes Bank Fixed
Deposits, Mutual Funds (both fixed income and equity) and Alternative Investments. The
bank's investment research services are grouped into three broad categories: Country
Research, Asset Class Research and Product Research. They provide independent
research as well as support services, which facilitate and add value to the clients.

Investment research process: Thriving challenges

Maintaining profitability in an ever more competitive environment is recognized as an

important challenge. Today, clients have become more demanding from their financial
institutions and advisors. Indeed investors are no longer looking for order takers but for
knowledgeable and trusted advisors, who can explain their investment choices in detail
and support recommendations with fact-based analysis. In today's world, clients are
expecting a greater personalization and better tax benefits. Private bankers should focus
not just on selling their products but also on providing advice and highly personalized
portfolio management services across multiple life cycle stage. This fundamental model
shift is required to improve the client's retentions. In order to achieve this, banks should
have a system in place to provide end-to-end integrated workflow and data consolidation
system and services.
In the last few years, the criteria used by clients for choosing banks have changed.
Though image and reputation continue to be the most important things in their mind
while choosing a bank, surprisingly, things like service and reporting have moved up as
key priorities in bank selection. Client experience has become a differentiator for success
and requires a new generation of relationship managers who demonstrate not only
competence but encourage trust and confidence. While the wealth management market is
expanding, regulatory constraints prevent banks from offering a wide range of services.
With the background of positive macroeconomic factors expected in India over the next
few years, the wealth of the Indian population is likely to continue to grow rapidly. The
private banks will need to adopt the best practices and understand the clients'
requirements in the highly competitive world of financial services to make the most from
the current competitive market.

Reference # 01M-2007-10-03-01.

Though Switzerland has so far been the global wealth management hub, the majority of
the private bankers in Europe believe that Singapore will overtake Switzerland within
two years as the world's most important growth center of private banking and wealth
management. In fact, it is not only Singapore with its congenial financial ambience, but
the entire Asia now poses a tempting business opportunity for the global private bankers
like never before. A sizeable 8.6% growth rate of the HNWI (High Net Worth Investors,
defined as those with a minimum net worth of US$1 mn) population in the Asia-Pacific
region in 2006, along with a healthy growth rate of 10.5% of the region's overall wealth
during the same period have led to an unprecedented rush among private banking service
providers to cash in on the trend. Backed by low taxes, buoyant equity markets,
confidence in banking, strong legal system, professional workforce and better regulatory
environment, Singapore and Hong Kong surely lead the show. Closely following their
example are nations such as Indonesia and Taiwan, which achieved double digit growth
rates in HNWIs in 2006. Soaring stock markets in China, India and South Korea have
seen new millionaires, thereby boosting the growth rate of HNWIs in the region. In Gulf
countries, high oil prices continued to benefit the Gulf Cooperation Council (GCC)
countries (Baharin, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) which led to
persistent wealth creation throughout the region. Barring notable exceptions of Japan and
Australia, the Asia-Pacific markets remained particularly strong in 2006. Most notably,
the Dow-Jones China/Shanghai Index returned a whopping 130.6%. Even smaller Asian
economies of Indonesia and the Philippines fared exceptionally well where Dow Jones
Indexes fetched 62.0% and 49.5% respectively, on the back of strong fundamentals. In a
nutshell, local markets in Asia have witnessed a strong recovery and Asian customers are
willing to move out of cash and into more adventurous investments such as property and
equity, derivatives and currencies, which eventually is leading to a rapid surge of private
banking and wealth management activity there. Moreover, unlike the European HNWIs,
whose wealth is mainly inherited, these new-age young HNWIs of Asia have amassed
wealth mainly through their entrepreneurial talent and therefore obviously more
adventurous and keen to park their assets in more esoteric avenues. Whatsoever, these
unprecedented and bountiful opportunities in the Asian region have lured the global as
well as the local private bankers to set up shops here. But with the surge of more and
more players into Asia, competition has also intensified and Asia's private banking space
suddenly looks overcrowded.

Overcrowding

Private banking is now the fastest growing among all the financial services and is the
means of managing private clients' money by providing various services such as efficient
wealth management, savings, inheritance and tax planning. These banks promise to
maximize returns and minimize risk along with the tax burden of the clients through
careful allocation of their money. It is anticipated that private banking revenue in the
Asia-Pacific region would grow at an annual average rate of 37% up to 2009. An
astounding figure indeed, compared to a growth rate of 30% in the US and Latin America
and 22% in Europe, the Middle East and Africa. The top three private banks in Asia by
assets under management are UBS with $100 bn, followed by Citigroup and HSBC. The
industry's other big players such as Credit Suisse and Merrill Lynch are also eyeing a
bigger pie. Citigroup Private Bank, a division of the US financial-services giant
Citigroup, says it has already captured half of Asia's approximately 88 billionaires as
clients, even as it launches operations in the relatively untapped markets of China and
India and has been unanimously judged as the best private banker in Asia. UBS, which is
already the world's largest wealth manager, had just 153 private bankers in Asia-Pacific
six years ago; earlier this year that number reached 600, most of them working in Hong
Kong and Singapore. "By 2015, we expect the Asia-Pacific market to be bigger than the
European market", says Kathryn Shih, the Hong Kong-based Head of UBS' wealth-
management operation in Asia-Pacific. Niche players like Pictet & Cie, one of the oldest
Swiss banks, have also expanded their private banking operations in Singapore. ABN
Amro has operated a private banking service in the region for more than 15 years. The
bank's regional head of private banking for Asia-Pacific, Urs Brutsch, based in
Singapore, is keen to expand his customer base in Hong Kong. Standard Chartered,
which sold its private banking business in 1996, relaunched a global private banking
business in Singapore this year, with an eye on Asia's 2.6 million HNWIs who had $8.4
tn of assets at end 2006. In addition to Dubai and Singapore, the London-based Standard
Chartered Bank is planning to operate in 10 markets including Hong Kong, Shanghai,
and Beijing. HSBC, which has refocused itself on emerging markets, plans to open
private-banking offices in China and push growth in India and the Middle East to harness
the growing demand from wealthy customers. Merrill Lynch, the No. 3 securities firm,
plans to double its network of financial advisers and its business in India this year to help
it compete with overseas rivals. Crédit Agricole SA (CASA), the largest banking group in
France, is planning a private banking thrust into Asia's fast-growing marketplaces. Credit
Agricole's private banking division said it wants to invest in China, Vietnam and India
over the next five years as it expects Asian assets to expand by as much as 30% a year
going forward. The French bank plans to hire more private bankers over the next three to
five years as it boosts its business in Asia. The group is also looking for opportunities in
private banking, asset management and even retail and is considering both acquisitions
and partnerships in China, India and Vietnam. Currently, Credit Agricole has 110 private
bankers based in Singapore and Hong Kong, by doubling the 55 it had three years ago.
Moreover, niche bankers such as Zurich-based Julius Baer and Fortis, a financial services
company, based in Belgium and the Netherlands, have opened shops in Singapore and
Hong Kong—two of Asia's key private banking hubs.

Private banking clients in Asia are predominantly entrepreneurs who have built up
successful multimillion dollar businesses.

How do you see the private banking landscape in Asia? Do you think it will
continue to grow at the same pace as it did earlier?

According to the Merrill Lynch Cap Gemini Report 2006 and 2007, Asia-Pacific High
Net Worth Individual (HNWI) wealth grew by 8% in 2005 and 10.5% in 2006. Looking
ahead, Asia-Pacific HNWI wealth is projected to total $10.6 tn, growing at a rate of
6.7% (based on the 2006 report).
There is enormous potential in the wealth management landscape with 5 out of the 10
fastest growing wealth markets in the world from Asia (Singapore, India, Indonesia,
Hong Kong and Korea).
In the case of India, we think the country's wealth management market will grow faster
than the Asian average, probably at a rate in the 15-30% range. In 2006, for example,
there were 55 millionaires created every day while in the most recent Forbes listing of
Asian billionaires, India outranked China and Japan for the largest number of
billionaires. This is an unprecedented achievement and indicative of India's rising
affluence.
Globalization, economic liberalization and regulatory reform are driving economic
growth and wealth creation across India and many other Asian markets.
This growth is further driven by a strong entrepreneurial culture, continued
modernization of the financial sector, a young and talented population, strong work
ethics, high savings rate and a growing middle-class.
Private banking clients in Asia are predominantly entrepreneurs who have built up
successful multimillion dollar businesses. This entrepreneurial culture will continue
enlarging the affluent class as they seek opportunities and advice on how to grow
personal and business wealth in line with the booming economy.

What is your view on the growing competition in private banking in Asia?

Citi Private Bank serves clients with a minimum net worth of $10 mn (approx. Rs. 50
cr). Our bankers act as trusted advisors to help clients not only in wealth generation but
also in wealth creation by leveraging both sides of the balance sheet —assets and
liabilities. We deliver a holistic proposition that gives clients access to innovative and
customized opportunities in areas including private equity, real estate, structured
products and co-investment which are not available to the mass affluent segment.
The current private banking industry in the region is a fragmented one so there are huge
opportunities for private banks to grow their business.
As clients become more sophisticated and demanding, to remain competitive, their
wealth management needs must be met in a holistic manner encompassing both their
personal and business wealth. Citi Private Bank's `private investment banking' model
couples our traditional private banking services with a degree of investment banking
discipline that helps our clients expand their businesses regionally and globally
throughout the wealth creation process. We also leverage on the knowledge and
resources of our vast network to give clients unmatched access to capabilities in other
Citi businesses such as the expertise of our corporate and investment banking
colleagues.
With more clients looking to invest in their home markets, it is critical to build a robust
onshore platform in markets like India. To be a market leader, we must be able to
compete effectively on the local currency platform demonstrated with local talent, local
research and intellectual capabilities.
Citi has invested heavily especially in India with the expansion of our private banking
business and the launch of Citi Smith Barney, a new wealth management proposition
offering financial planning and investment services via a retail brokerage platform. Citi
Smith Barney targets high net worth individuals whose net worth ranges between $1 to
10 mn (approx. Rs. 5-50 cr ).

What kind of challenges is it likely to face in the future?

Talent is the bedrock of our business and, perhaps, the single largest factor in
constraining the growth of the wealth management industry in Asia and also in India.
We expect strong double-digit growth for our business in the short to medium-term. To
match such growth, we need double-digit growth in our talent base.
The current demand for wealth management talent exceeds supply and this has made
Asia a battleground for qualified and experienced wealth managers.
Currently, the demand for wealth management talent exceeds supply. This shortfall has
led to aggressive hiring practices and in some cases, poaching, which we view as an
unhealthy short-term solution for both clients and the organization. Citi's commitment
to India and the rest of Asia has spanned over 105 years and we have invested heavily in
our strong institutional platform enabling us to hire the best and render extensive
training to our people.
In every strategic move or decision that we make, people are a primary consideration,
which is why we invest substantially in training, recognizing and rewarding our people,
and in creating opportunities for their career development. At Citi Private Bank, we
have long recognized the fact that in an industry like ours, building a pipeline of talent
is critical to our business and we have our own recruitment and development program to
ensure this.
- Ajay Sondhi
Managing Director
Region Head, Global India
Citi Global Wealth Management
This unforeseen proliferation of private banking activities in Asia has suddenly turned the
business more competitive and hawkish. Private bankers here have virtually engaged in a
war-like situation by offering more exotic investment options to the Asian HNWIs so as
to grab a larger pie of this lucrative business. The acute talent crunch has led to
widespread poaching of experienced bankers from rival groups. According to banking
sources, the Deutsche Bank has hired 18 from Citigroup and UBS lost eight bankers to
Goldman Sachs. "Poaching remains the primary recruitment strategy for private banks,"
commented Justin Ong, a partner at PricewaterhouseCoopers (PwC). A PwC survey
revealed that 15% of the banks are worried that more than 30% of the bankers may move
over to rival groups. Ong added that Asia's rapid growth and the shortage of trained
bankers have triggered a talent war among the private banks but it is believed that this
may come to an end over the next three years as more training schools are opening in key
wealth centers such as Singapore. However, he also warns that the next three years would
be really tough. "The estimates are that you need another 5,000-8,000 CRMs (Client
Relationship Managers) in the next three years," he said, adding that the demand is higher
than the number of new recruits entering the industry from training institutes and in-
house schools of banks such as UBS and Credit Suisse.

More warnings

Since 2003, stock markets in Asia, excluding Japan, have been rallying and are up by
23% so far, this year. But the specter of slowdown is looming large amidst problems in
the US subprime mortgage sector. Many policy-makers in Asia have also warned of an
asset bubble, particularly in China and have pinpointed the risks from an economic
downturn in the US, the biggest export market for some of the Asian exporters.
Moreover, "the total cost of doing private banking is enormous—real estate is
skyrocketing, the fixed cost of being in line of all regulations is high, and that's why the
barriers to entry are getting higher and higher," opined Michel Longhini, BNP's Chief
Executive for Asian private banking. But only banks with a larger retail presence or with
a wider geographical reach like that of UBS or Citigroup can withstand the harsh reality
of the market and expand operations in the long run. But mid-sized banks that have
recently started building up private banking operations in Asia could be forced to
withdraw because of cost difficulties and intensified competition. Longhini added, "In
Asia, we are at a time when everybody believes that because the market is growing so
fast, you should have a presence… That is certainly not the right strategy. It will certainly
force some banks to reconsider." Experts even warn that the increased competition,
escalating cost of private banking business and an increasing fear of a slowdown in Asian
economies will inevitably lead to consolidation in the industry similar to that in Europe
and North America, as mid-sized bankers have started realizing that otherwise they can't
compete with biggies such as UBS and Citigroup who enjoy huge economies of scale.

- Amit Singh Sisodiya and Sanjay De

Reference # 01M-2007-09-08-01.