Private banking in Asia, published in The Wall Street Journal

Published in The Wall Street Journal
Anyone superstitious - or merely curious - enough to flick through this year's Chinese Astrology predictions for The Fate of Hong Kong might puzzle at the love or health forecasts. But on the subject of money, the words have a familiar ring: 'The Wealth House is perhaps the best among the twelve houses. Hong Kong is financially sound and remains the goose continuing to lay golden eggs," it reads.

For those whose property interests plunged by 55% in the wake of the Asian crisis, or whose shareholdings crashed through the floor, this might sound like wishful thinking. Yet a surprise 0.5% second-quarter GDP growth rise, following several quarters of contraction, demonstrated a re-emergence of confidence in the territory.

Private bankers in Hong Kong back up the figures: "We've seen a strong recovery in the local market," says Nigel Jeacock-Fewtrell, director of the private clients group at Lloyds TSB Pacific. "Customers are prepared to move out of cash and into more adventurous investments such as property and equity."

Hong Kong's turnaround is proving more gradual than some of its Asian neighbours: Singapore posted a 6.7% second quarter GDP rise, South Korea 9.8% and Taiwan 6.1%, but the signs are generally positive, as property prices stabilise, exports increase thanks to a crackdown on smuggling from China and tourism regains ground.

A slew of private bankers are pacing eagerly through their air-conditioned corridors, keen to sign up customers with at least the magic figure of $1 million available to place on deposit. Once this figure is reached, the banks lay on a plethora of services, ranging from 24 hour phone access to platinum cards and leveraged foreign exchange investment facilities.

Competition between banks is tough and getting tougher. A number of mergers and acquisitions have taken place in recent months, including the sale of Bank of America's Asian and European private banking business to Union Bank of Switzerland (UBS) AG in March this year. "There are around 70 players in the market," comments Raoul Weil, head of private banking at UBS, "and there is not profit enough for all of them. There are a lot of clients but too many competitors. You can assume that not all will stay in the market."

Mr. Weil blames the high labour and infrastructure costs of operating in Hong Kong for the present squeeze, along with unrealistic expectations. "People thought they would outgrow their start-up problems, but they haven't grown quickly enough to make things happen. Some of the players were betting on 20 or 30% growth per year, which was conceivable pre-crisis." For UBS, the upside is a 'flight to quality'. Even though the market has shrunk, the company is gaining clients who are concerned about smaller, less well-capitalised companies. Recent figures in the International Herald Tribune showed the UBS private banking arm having 607 billion Swiss francs ($404.6 billion) under management and contributing 4.3 billion Swiss francs in pre-tax profits.

Private banking in Asia as a whole (including Japan) is thought to account for around 30% of the world market, despite the 1997 crisis. So there is little prospect of operations such as UBS leaving it behind. Indeed, Mr. Weil is bullish on the bank's future strategy: "We're investing in private banking, so we're very much open to opportunities," he says, referring to potential acquisitions. Citibank, which pioneered internet banking in the region, Lloyds TSB, Coutts & Co and others are all surveying the scene.

The same ambitions apply to ABN Amro, the Dutch bank which 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. The entire group's rising stock will clearly be an assistance - ABN announced a profits growth of 29.7% this summer - although Mr. Brutsch recognises that it is a crowded market. "There will be very fierce competition going forward. Some locals will disappear because they don't have the muscle or the critical mass. We'll probably see ten or twelve global players within the next ten years" he says. "But we don't want to compete on price but on relationships. The quality of service is what matters in this business: the role of relationship manager makes or breaks a private bank."

Away from finance, clouds of uncertainty persist in the region's political sky. While the concept of 'one nation, two systems' has largely been honoured by China, the country's government has taken unexpected and severe measures when it feels itself threatened. "There is an underlying concern over possible legislation or directives from the mainland," says Nigel Jeacock-Fewtrell at Lloyds TSB Pacific, "but generally there is complete harmony. Hong Kong is the goose that lays the golden eggs from the mainland's point of view," he added, echoing the Astrologer's phrase.

Taiwan, on the other hand, presents other, more alarming scenarios. Hong Kong's papers have been full of stories this summer about military build-ups by both China and Taiwan. "It has been a show of military strength. Relations are hostile and could deteriorate at any time," says Mr. Jeacock-Fewtrell. "We wouldn't get involved but there could be an impact on Hong Kong." Such fears of Chinese aggression persuaded many Hong Kong investors to place their money elsewhere and a thriving off-shore investment network has its base in the territory, with links to the Isle of Man, the Channel Islands and elsewhere.

The hand-over of Hong Kong to China in 1997 was itself an event which impacted on Taiwan. Taiwanese investors had traditionally put funds into Hong Kong, yet now that the territory is in the hands of the enemy, so to speak, there has been a drain of capital out of Hong Kong and into alternative locations, principally Singapore. On the other hand, Singapore used to benefit from Malaysian and Indonesian private investment, but changes in regulations and currency restrictions has caused this to ebb.

In Hong Kong it is not regulations or restrictions which have kept the recovery low key, but relatively high interest rates, now standing at 14%, alongside mild deflation, expected to be 3% this year, which has kept wages virtually static and depressed consumer spending. The only significant piece of intervention from the post-handover Hong Kong government came last summer, when it unexpectedly bought a large amount of stock on the local market, pushing up prices and embarrassing speculators who had been profiting from short sales of stock, which fell due to the Hong Kong dollar being pegged against the U.S. dollar. Capital outflows caused higher interest rates and an economic slowdown, hitting share prices.

This was a fairly sophisticated slap on the wrist to a section of the financial community and certainly well short of tanks rolling across from the mainland and curfews after midnight. In fact, while local observers confidently expect a shake-down in the Hong Kong banking sector, there are many reasons to trust that the industry is in robust shape. Of the 100 largest banks in the world, 79 have a presence there and it ranks 8th in volume of external transactions and 7th in foreign exchange. While the private banking sector is - like the rest of the economy - taking time to recover its full sheen, there is no doubt that its eggs are incubating nicely. And they're still golden.

Hong Kong's New Rich

"Certain clients have forgotten what happened," says Urs Brutsch, ABN Amro's Asia Pacific head of private banking. He has seen them going back into the same investment patterns as before, piling everything into property, or into one particular industry. "We recommend diversification," says Mr Brutsch, using the mantra of the modern private banker. "They should think global."

But will the young ever learn from the mistakes of their fathers, or even from their own mistakes? In Hong Kong, the urge to get rich at the drop of a hat is deeply ingrained. Fortunes have been won here since the days of the opium and spice traders and this year is no exception. Entrepreneurs have sprung up from the ashes of the Asian crisis, ready to stake their millions on the roulette wheel of internet stocks, of mainland Chinese start-up companies, or the international currency markets.

Some caution has been taken on board, however. Investments with capital guarantees, where the principle deposit is safeguarded, but profits are variable, is gaining in popularity. Derivatives, index-linked funds, funds of funds and the various financial instruments at the banker's disposal are also winning new friends in Hong Kong, according to those such as Mr. Brutsch who deal in them. This, despite the Long Term Capital Management fiasco in the US.

There have been subtle shifts in the make-up of the Hong Kong private banking clientele: ex-patriots are thinner on the ground, post-handover. "They were only ever a small part of the cake," says Mr. Brutsch, "the icing, you could say." They are being replaced by Asian customers, often people who own their own business and are planning for a prosperous retirement.

To attract them, banks host lavish and exclusive events, entertaining current clients but hoping to pull in their friends and associates. UBS might lay on a preview of antique jade jewellery; ABN Amro might invite its clients to an exhibition of Indian art. Sport sponsorship - cricket, racing or polo - is popular. More seriously, expert seminars on tax or trust funds are arranged.

Clients would typically include import-export directors, real estate company heads or partners in legal firms. With their $1 million-plus deposit, they gain access to the sanctuary of the wealthy, a kind of Masonic Lodge for today. Their tastes in financial instruments are certainly becoming more exotic. "In the last three or four months they have been more adventurous," says Raoul Weil, head of private banking at UBS. "Equity or regional investment was out of favour last year but now it's becoming en vogue."

Mainland Chinese immigrants rarely figure among the private banking clientele. Some attribute this to a lack of sophistication, since banking systems in China are far behind those of Hong Kong. Others have a different explanation. "Mainland Chinese is a very touchy issue because of compliance," explains Mr. Brutsch at ABN Amro. "You have to do very detailed due diligence on clients. Everyone is more aware of money laundering now, as you can see from the Russian experience recently. You have to be careful not to attract money you don't want. There are a lot of funny people running around Asia," he adds.

At the most conservative end of the scale are British bankers such as Nigel Jeacock-Fewtrell, director of the private clients group at Lloyds TSB Pacific. His customer base includes many Asians who have been educated in England, opened a bank account with Lloyds, and then developed the relationship further on their return to the east. "They know we won't be chucking their money around," he says. "We're not trying to be the highest performer, but balancing risk and performance to give a robust medium- to long-term return. We're a typical British bank."

Untypically for Hong Kong, Lloyds TSB does not operate the $1 million minimum rule, but increases the facilities it will provide in line with the size of deposit or potential earnings. And rather than spend money on fancy promotions or events, it relies on satisfied customers giving good word of mouth. Mr. Jeacock-Fewtrell has noted a particular fondness among his clients for guaranteed investment structures. "There is a definite demand for solutions with a strong upside and a very limited downside," he notes. "Especially from clients whose losses were beyond their wildest nightmares."