Economic growth in China during the last decades gave rise to the first generation of wealthy and to one of the biggest untapped wealth management markets. However Private Banking is a nascent industry in China with the first Private Banking operation launched in 2007 by Bank of China. The good thing about it is that the race for banks to establish a leading position in that market is still at a very early stage. Hence we will start our report evaluating the present and future potential of wealth management in China and size that market.
Opportunities and challenges
More than ever, successful institutions in wealth management are the ones that recognize and truly understand the specific needs of its clientele. This is especially true for Chinese high net worth individuals who have different needs from their western counterparts. We have analyzed the newly rich profiles in China according to their source of wealth, in order to appreciate their use of banking services and investment behaviors. Banks will have to tailor their unique value proposition to those needs. We will review Credit Suisse's unique value proposition and see if it can be successfully applied to the targeted customers in China.
Because local and foreign banks have different set of challenges, we have drawn a picture of the banking landscape in China. For the time being, foreign banks competitive advantage such as a wide and sophisticated product offering is being undervalued by regulatory constraints. Therefore we have done a feasibility analysis on possible product offerings and platforms available for banks to deliver their value proposition.
Recommended strategies
Given that wealth management is a very fast developing and highly competitive market, it is crucial to have the right positioning today to be successful tomorrow. In order to define a suitable strategy for Credit Suisse to be a leader in the Private Banking sphere in China, we have put into perspective the enormous potential of that market and the proven successful business model of Credit Suisse, with the regulatory constraints of the Chinese market. Therefore we have defined a strategy for what is possible to be done today and what would be the ideal positioning of Credit Suisse in the future once regulatory barriers are being lifted.
China Market Sizing
The first question we wanted to answer in this report is whether China is an attractive market for foreign banks and what is the existing and potential market they can tap into.
China fastest growing economy
If we look at economic figures, the real GDP growth in China has averaged 10% annually over the last 30 years. For the next five years, forecasted average annual growth rate in China is set to be 9.5% annually. The GDP per capita has more than doubled in the last 20 years and the national saving rate is as high as 51%, which is the highest in the Asia pacific region according to the BCG report of November 2009 on China wealth markets. This has brought China to overtake Japan as the second largest world economy in 2010.
China set to rank no. 2 in household wealth
China's strong economical growth, rising income and high saving rate has created wealth at a very high rate. China's Household wealth is set to double by 2015 to reach 35 trillion US dollars. In 2009, China ranked fourth in number of High Net worth Individuals (HNWI) (HNWI are referred to as individuals with asset worth USD 1mio or more) worldwide with 477'000 millionaire households. The HNWI population in China is expected to reach US dollars 7.6 trillion by 2013, which would mean a annual growth of over 13% as per the BCG November 2009 report on china wealth markets. Considering China's fast growth and high potential, we believe that it is one of the most attractive wealth management markets to date.
HNWI's clustered in 5 Provinces
Wealth in China is concentrated geographically with six regions accounting for more than half of the wealth owned by millionaire households as per Exhibit 9 below from BCG report on china's wealth markets. In fact, 90% of the top 800 HNWIs and top 500 large corporate are clustered around Beijing, Shanghai, Shenzhen and Chongqing, which makes it easier for foreign players to tap into that market.
Most HNWI's in China are "newly wealthy"
To be successful in the Private Banking (PB) business, it is essential to have a thorough understanding of customers' needs and investment behaviors. This is especially true in China where Private Banking is a new concept. In a survey conducted by China Merchant Bank and Bain & company in 2009, 80% of non private banking customers had either no idea or misunderstood what PB services entailed. Even among PB customers, over 30% of respondents significantly misunderstood what PB service offering is about.
HNWI Categorized in 4 Groups according to source of Wealth*
In order to establish a strong position in China, foreign banks will have to design a value proposition to customer's unique needs and investment behaviors. A good way to understand customer's characteristics is their source of wealth rather than the level of wealth. Therefore we have categorized HNWI's in China in four groups.
Entrepreneurs
This is the largest group of clients. Their need vary widely and depend on the development stage of their company. If the business is at an early stage or in expansion, these customers will invest primarily in their own business and their banking needs will evolve around basic transactional services or investment in highly liquid products such as fixed deposits or money market. More established entrepreneurs are more likely to have m ore sophisticated banking needs and may consider portfolio planning.
Executives and professionals
It is the most educated group. Due to their busy schedules, they do reply on banks to receive good investment advices and pro-actively identify good investment opportunities. Some actually delegate the management of their assets to private banks.
Professional investors
Such investors represent a small portion of PB customers in China. They do not place much value on advisory services as they are typically well versed in investment instruments. Instead they value constant access to banking services and fast execution of orders. They do appreciate though timely market information.
Independently wealthy
It is the group with most diverse backgrounds such as celebrities, retirees or wife and children who inherited their wealth. They have more time and clear needs for advisory services.
As we can see from the above categorization, a majority of clients have simple investment needs. However this will evolve while market matures and banks in China are allowed to develop new products.
Chinese Investors
Chinese HNWI's have very distinct investment behaviors from their western counterparts. This is something that foreign banks have to take into consideration in order to develop an offering that reflects those needs. The most common investment objective is "continuous wealth accumulation" followed by an "improved quality of life".
HNWI's in China tend to have more polarized asset allocation and have a preference for tangible investments such as real estate or their own business. They tend to hold as much as 60% of their assets in cash or liquid assets as such for security. Given the exceptionally high growth rate of the Chinese economy, they tend to have high expectations and expect on average 20% return on investments. This is a challenge for private banks which have to set more realistic expectations and correlations between risk and return.
China's Banking Landscape
Nowadays, QDII is the main ways to go overseas for investors since the regulation in China is relatively restrictive. In China, local private banking and asset management services are being improved especially when more and more foreign banks are getting into the market to play part of it, particularly in the form of joint ventures which is promoted by regulators of the country. Some of those foreign banks are setting up partnerships with the domestic banks in order to leapfrog some developmental stages in the wealth management markets.
On the other hand, some large international private bankers also join in to be the players in the market of China. Due to their experience and professional, they are targeting to offer financial advisory services and expertise to help people in mainland become wealthier. Regulatory therefore encouraging foreign bank to join the market via partnership, joint venture with local bank players in order to provide a platform for the local bank players to gain the knowledge from those expertise in the world to develop with a more sophisticated financial industry in China with good quality service being provide to people in China as well as worldwide.
Below, we are going to introduce the banking landscape of China by dividing the section into three categories:
Regulatory
Local players
Foreign players
Regulatory
Regulations in People of Republic China (PRC) related to financial industry are monitoring and governing separately by difference commissions. Two of the main Regulatory Commissions in mainland China governing the financial industry of China are:
China Banking Regulatory Commission (CBRC)
China Securities Regulatory Commission (CSRC)
CBRC is overseeing commercial banking activities while CSRC is monitoring securities and Trust firms in mainland.
Current regulations do allow banks to invest client money overseas. Given the tight capital account control in China, QDII scheme is the most direct way of diversifying into overseas investment alternatives. Under the scheme, domestic investors can invest in those approved funds that focus mainly on equities or bonds traded in overseas market that are authorized by the local regulators. Local clients can invest in structured products or deposits with underlying assets linked to overseas equities, commodities and currencies. These tailor-made investment vehicles can be dominated either in RMB or other major currencies and require appropriate regulatory approval.
As mentioned, the 2 main regulatory commissions are governing three platforms in the financial industry of China. They are:
Banking Platform
Securities Platform
Trust Platform
Definition of 3 financial platforms
Banking Platform
Banking &/or Financial institutions established in the People's Republic of China can take deposits from the general public. The institutions include commercial banks, urban credit cooperatives and rural credit cooperatives. All of them are regulated by the banking policy. CBRC under the State Council is responsible to the regulation and supervision of the banking institutions in China and their daily business operations.
Securities Platform
Financial institutions which enter into securities and futures markets insuring and trading in China of shares, corporate bonds and such other securities that are lawfully recognized by the State Council. CSRC responsible to the regulation set up and governing the activities of those financial institutions which are running their business under the securities platform.
Trust Platform
Financial institutions mainly engaged in trust business which establish in China needed to follow the Company Law of the People's Republic of China. The term "trust business" in these Rules refers to the operation that a trust company accepts the entrustment and deals with the entrustment affairs as the trustee for the purpose of operation and remuneration. The entrusted property is neither the assets owned by the trust company nor its liabilities to the beneficiary. When a trust company terminates, the entrusted property shall not be included in assets to be liquidated. CSRC is responsible for exercising regulation and supervision of trust companies and their activities.
While looking into the banking landscape of China, it is important for us to have the view of the market players also. In the following part of this section, we are going to focus on the local bank players and foreign bank players.
Local Players
In fact, local bank players are occupying the biggest market share in terms of number of customers, AUM and network coverage of the whole China market. While, roles of the foreign bank players become subsidiaries only. All of them establish their own branches as a platform for distributing the RMB products in mainland China. In regard to the onshore private banking business, foreign bank players seems like handicapped by lack of competitive investment products offering, regulatory issues and limited onshore talent pool.
The banking industry with main involvement by the local bank; there are 4 local banks well-known as "Big Four" in the market:
Industrial and Commercial Bank of China (ICBC)
The Agriculture Bank of China (ABC)
The Bank of China (BoC).
The China Construction Bank (CCB)
Industrial and Commercial Bank of China (ICBC)
ICBC which had established in Shanghai since March 27, 2008, its Private Banking department is directly under ICBC which is the joint stock commercial bank with the largest market value and highest profitability at present worldwide. It is also the exclusive operating institution that first obtains Private Banking Service Financial Permit issued by China Banking Regulatory Commission. Its target customers are the high net worth clients with personal financial assets over RMB 8 millions, and it offers the custom and professional wealth management services centering asset management and focusing on consulting service. Currently, the Private Banking Department has established branches in Beijing, Shanghai, Guangzhou, Shenzhen, etc.
The Agriculture Bank of China (ABC)
ABC launched private banking on September 29, 2010 in Shanghai. Aims at those high net worth individuals run agriculture-related businesses as well as those sectors including transportation, heavy equipment and energy conservation. The while the bank plans to expand its private banking business to 12 affluent Chinese cities.
The Bank of China (BoC).
BOC, the 1st local mover, launched its Private Banking business in 2007, and was followed by a no. of players. No one has established a dominant position yet. It is the nation's second largest state-owned commercial lender who launched a private banking service for millionaires only in Beijing and Shanghai since March 2007.
Only clients with financial assets exceeding one million U.S. dollars are eligible for the service that is being offered in conjunction with the Royal Bank of Scotland, which owns a 4.4 percent stake in the bank. It offers diversified and all rounded wealth management solutions through its "one-stop" service platform and provides affluent individuals, their families and businesses with a high degree of personalized services addressing their evolving financial needs, from cash management to financing, from asset allocation to wealth transfer.
The China Construction Bank (CCB)
CCB has established in Beijing during July 2008. It starts the highest-end banking services to people with liquid financial assets above RMB10 million (i.e. 1.47 million U.S. dollars equivalent) in the country's four most affluent areas, Beijing, Shanghai, Guangdong Province and Shenzhen. The CCB would provide services including wealth management, consulting, charitable trustee, tailor-made financing products and so on.
In fact, most Chinese banks are still searching for the right balance between leveraging their existing HNWI resources in the retail network and developing the differentiated and professional Private Banking operations. Many are also developing the necessary capabilities and addressing a range of organization issues.
Foreign Players
On the other hand, most of the foreign bank players have been actively developing their Private Banking businesses in China. There are some key regional Private Banking competitors in China. We will focusing to three of them in the report, they are:
Citibank
HSBC
UBS
In between, the biggest foreign player is UBS with the acquisition of Beijing securities. However, there is no bank has emerged yet as dominant player as of now.
UBS
UBS was the 1st foreign-invested and managed securities firm to be granted a comprehensive domestic securities license in mainland China. It has introduced the sophisticated risk control and operation mechanisms in 2006 that adhere to the highest international standard. It also owns asset management AM partnership with China Dragon Fund Management (JV). It recently submitted applications for RMB and wholly foreign-owned banking licenses which, if secured, will allow the range of products and services the bank can offer domestically to be expanded.
The dual platforms which UBS has maintained do provide the greatest channel to allow it to respond to the changes in the regulatory environment by delivering full range of products and services to their clients that diversified investments and services to its international HNW clients can be offered also.
HSBC
HSBC group has been in China for more than 140 yrs and has established itself as a key corporate partner in the China market. With the strong brand in mainland,
HSBC is able to expand its private banking businesses by providing services in Shanghai, Beijing and Guangzhou. HSBC is a more experienced and well established name house of choice for client to invest. Its strategic recruitment process is one of the crucial criteria to support its anticipated growth in private banking business within mainland China.
Its main focus is on asset allocation and risk diversification. Although there is local restriction forbidden clients to diversify aggressively, with the approval of launching QDII-linked program by various institutions, HSBC still able to provide some diversification arrangement abroad.
CITIBANK
Citibank is ranked as second competitor from the overall foreign bank players in the market. Being on of the Lead in private banking business, it is one of 1st layer of foreign banks to establish an onshore presence in China with an office opened in Shanghai in Mar 2006 with its 2nd office opened in Beijing since year 2007 in order to focus on building up it's the brand and reputation in the market as well as gathering market intelligence and establishing client relationship. It also planned to extend its presence into other major Chinese cities in the near future, in consultation with the regulators and in line with the opportunities presented by these cities to create the largest footprint among any Private Banking in China.
Dominant Player of Private Banking in China
Up to now, there is no dominant player in China's private wealth management.
With the expertise in Private banking businesses in international markets, many of those foreign players are not able to deploy their full global capabilities and advantages in the local market due to the local regulation restrictions even though all of them understand and agree China's wealth management market has tremendous potential and promising future. While looking at the local player, experience is the main concerns to develop the private banking industry for China. Together with insufficient understand of the private banking services by the customers in China, it is still in an early stage of development however.
In the future, it is expected the winners will be the ones that have defined a clear goal, developed a deep understanding of their customers, invested in a tailored and differentiated business model (backed by the requisite capabilities), and mobilized and organization's capabilities to take advantage of this attractive opportunity.
Credit Suisse - "Preferred Investment Advisor for Top UHNWI's"
Credit Suisse (CS) integrated business model is all about focusing on the clients' needs, with the brand promise 'helping clients thrive'. The promise encapsulates the strengths of the CS client-focused strategy, the commitment to building long-term partnerships, and the firmly-rooted culture and heritage of CS.
Credit Suisse has focused coverage and service model with dedicated organizations in all regions; Network of UHNWI solution specialists; Dedicated trading desks and Premium mid- and back-office support and continues to roll out client centricity initiatives globally and has done relatively well during the years and its proactive and disciplined approach helped it to grow continuously and to build up on its strengths. CS has leading business model in attractive growth markets along with scalable platform and strong operating leverage and is able to foresee the industry and regulatory trends and leverage on it effectively.
CS has a Strong capital base and cash flow which combined with the reduced volatility and risk taking focus of the management makes it an employer of choice.
Now that we have already done the market sizing and looked at the banking landscape in China; and we all agree that China is a very attractive market with huge opportunities; let's now look at what makes CS unique and what value propositions can it provide to its clients.
Credit Suisse Vision
The vision of Credit Suisse (CS) is to become the world's most admired bank and valued for our advice, innovation and execution. This vision is based on the motto of "Helping clients thrive". This is the CS brand's promise to all its clients.
This promise is based on the principles of Understand, Excel and empowers the clients to help them thrive. This principle is explained further:
Understand
The focus here is to know the clients, as to be able to fully understand their needs and requirements. The objective is to be able to put the client in the center and then cater to their needs; i.e. offering them the customized solutions as per their requirements. Summarized as follows:
Always put the client first
Listen attentively
Offer solutions not products
Excel
The objective is to go beyond the client expectations, by providing them excellent services; consistently and reliably all the time. The focus is to have a long term and enriching relationship with the client. Summarized as follows:
Tolerate nothing short of excellence
Deliver with consistency and reliability
Create long-term stability
Empower
The focus is to empower the clients with the right knowledge and information and the advice. Clients must be able to view CS as their long-term partner of choice that helps them achieve their dreams and goals. They should be able to see us as their proactive, principled partner. The clients rely on us and we need to be proactive and to be able to challenge the clients, so as to add value to the partnership and to help them thrive. Summarized as follows:
Don't wait - be proactive
Be a challenging partner
Collaborate and share your knowledge and networks
Credit Suisse's CHINA Aspiration
Credit Suisse aspires to become the most admired bank for Wealth Management clients globally and to be industry leader in terms of client satisfaction, employee engagement, profitability, and growth.
In line with the One Bank aspirations, CS Private Bank aspires to be the preferred investment advisor for China's top 5000 UHNWIs by offering advisory and full range of investment products. And to be able to fully leverage UHNWI client relationships through the integrated bank model, with its client-centric product innovation and further develop pricing models reflecting premium client value. These aspirations are based on the vision and the unique value propositions that CS has to provide.
Unique Value Proposition
The unique value proposition that CS provides are listed below:
Advisory Approach
CS provides "Comprehensive advice"to its clients; which is need-based around asset allocation and ALM. Customized investment and financing strategies are provided to the clients as per their requirements. CS has a globally consistent and an award winning advisory process resulting in high client satisfaction.
.
Walter Berchtold (Chief Executive Officer Private Banking): Our advice is at the core. Our support is comprehensive, geared to the long term, and based on a consistent and proven procedure.
One Bank
CS serves its diverse clients through its three divisions - PB, IB and AM - which cooperate closely as one integrated bank, to provide holistic financial solutions based on superior products and specially tailored advice. CS has the Best-in-class capabilities around the globe and provides seamless collaboration for the benefit of the client.
Global Reach
CS is a global bank, and has presence in all major countries around the world with comprehensive offerings and booking capabilities in all regions of the world. The coverage is focused along the domicile, the wealth band and the investment behavior of the clients, which are continuously serviced by expert teams for their specific advisory and product needs.
CS has rich wealth management heritage and is a global leader in wealth management, which is also a core business of the bank. Also CS has a tradition of long-term partnerships with its clients.
Credit Suisse is unique in delivering all elements combined, also recognized by 2010 Euromoney award as best private bank globally.
Due to this client focused and capital-efficient strategy, CS Group's financial strength and resilient performance was showcased in the results: Net income CHF 3.7bn in 1H10, Total new assets: CHF 40.5bn in 1H10, Tier 1 ratio 16.3%, Asset under management CHF 1,246.6bn as of 30 June 2010.
Strategic Building Blocks / Drivers
The PB value proposition is centered on three strategic building blocks: "client first", "advice at core" and "best people". The core idea behind the proposition is to help the clients thrive.
These are elaborated further:
Clients First - is about creating added value for clients and long-term partnership by combined domestic and international capabilities to seize opportunities in the region.
We have a passionate focus on client needs. We always strive to exceed client expectations. We build true and long-term partnerships.
Advice at the core - CS has a global structured advisory process, to drive higher client satisfaction, better quality revenue and stronger NNA contribution and deliver all the capabilities of the integrated bank.
We deliver trusted advice, complemented by superior solutions and all the capabilities of the integrated bank.
Best People - to be an employer of choice and focus on senior bankers and specialists to enhance asset and revenue generation; considers the skills of its employees to be among its greatest strengths.
Our people are highly engaged, highly skilled, and committed to preserving our reputation. They are attracted by long-term career opportunities and a rewarding work environment.
Industry Recognition
Our client-focused approach, integrated banking model and ability to respond swiftly to market changes clearly differentiate us from our competitors" Walter Berchtold, CEO Private Banking, 26.10.09
To sum it up, CS with its strong value creation through integrated bank model has Global market access and superior product and service offering with focus on Client privacy. CS has the capability and experience in the Multi-domiciled/multi-shore clients with focus on geographical risk diversification. CS also has an Industry-leading compliance framework. And all this is backed by State-of-the-art execution platform.
All the above has been completely true as Credit Suisse has gained traction and received lots of recognition in the industry. Some of them are listed below:
Asset Asian Awards 2010
2009 Best Private Bank in Asia Pacific
2009 Best Private Bank in Singapore
2010 Best Private Bank in Asia Pacific
2010 Best Private Bank in Singapore
2010 Best Private Bank in Indonesia
AsiaMoney
2010 Overall Best Private Bank in Singapore for >US$25m
EUROMONEY
2009 Best Private Banking Services Overall in Singapore
2009 Best Private Banking Services Overall in Indonesia
2010 Best Global Bank
As can be seen Credit Suisse is valued by its clients, for the fundamentals they can rely on: integrity, responsibility, respect, compliance and confidentiality. These fundamentals are the basis of the success of CS. The brand and the constant delivery of the CS brand promise shape how we execute them. It is how CS differentiates itself in the competition.
