NEWSLETTER

7

Getting Private Banking basics right

Roland Topic, Dubai offi ce

The United Arab Emirates (UAE) has one of the world’s highest con-centration of millionaires, with 6 percent of households holding in-vestible funds of more than a million dollars. Only Switzerland, Ku-wait and Qatar have a comparable concentration of High Net Worth (HNW) households. Abu Dhabi has the second highest percentage of millionaires in the world, just after New York, and leads UAE in terms of HNWs, closely followed by Dubai. GDP per capita rose to a record high US$ 53,300 in 2008, a 16 percent rise over 2007 and more than double its level in 2003. The country also provides easy access to a fast growing and large base of millionaires in South Asia and Africa, who have very limited access to investments.

With these positive numbers, the largest banking sector amongst the Gulf Cooperation Council (GCC) countries, a large and infl uential expat population in the country, an open regime, access to GCC, Asia and Africa and clients with high propensity to invest, UAE is a very attractive private banking market. The fi nancial crisis has dented trust in the system and also reduced wealth considerably. However, the main drivers of the private banking market remain intact and seem to emerge stronger as the economy slowly recovers.

The golden goose has resulted in over 50 banks operating in the country, in fi erce com-petition, in commoditisation, and in the lowest net interest margins amongst GCC coun-tries (an average of 2.9 percent in 2008). This margin pressure has led to banks aggres-sively competing to raise cheaper deposits, especially from HNW clients.

The private banking proposition in UAE is not comparable to Switzerland or other ad-vanced European countries, as very few banks offer true private banking services such as lifestyle services, equity fi nancing, estate planning, family offi ces, private equity, dis-cretionary portfolio management, etc. The focus is mostly on commoditised fi nancial and international investments. However, the industry is rapidly evolving. While foreign banks offer a broader and well differentiated private banking practice, local banks are trying to catch up and are making very aggressive moves to gain a larger share of this market. Interestingly, client needs are changing dramatically with a new generation of private banking clients emerging. These clients have a different attitude to money and risk, possessing greater knowledge and demanding advise not only on fi nancial matters

but also on their core businesses. This new generation has developed wealth in a shorter period with signifi cant exposure to non-oil assets and has a much larger international investment footprint. The deposit base in UAE is dominated by domestic banks with ap-proximately 75 percent of all deposits shared by local banks. Foreign banks, despite being quite limited in number, hold a signifi cant share of the market.

UAE enjoys the presence of 28 foreign banking institutions, but a 20 percent corporate tax rate and other branch license restrictions have resulted in international players competing with domestic players on a weaker ground. However, in 2004 the govern-ment allowed foreign banks to open branches in the Dubai International Financial Centre (DIFC) to all services with restriction-free repatriation of profi ts, zero taxes on income and 100 percent foreign ownership. This move resulted in a signifi cant increase in the number of boutique and private banking players opening their onshore centres in Dubai.

The large local banks, such as Emirates NBD, National Bank of Abu Dhabi, ADCB and First Gulf Bank, are all rapidly expanding their private banking services, wanting to leverage their large brick and mortar presence, their strong local reputation and Islamic banking capabilities to consolidate their market share amongst UAE HNWs, even though their private banking offerings are not comparable to those of full service private banks, like Credit Suisse, UBS, Sarasin, Mirabaud and Dresdner, or large retail banks, such as ABN, RBS, Citibank and HSBC.

Foreign banks 25%

Other domestic

banks 16%

ADCB 9%

National Bank of Abu Dhabi

12%

First Gulf Bank 9%

Emirates NBD 16%

Source: Credit Suisse, Central Bank

UNB 6% Dubai Islamic Bank 7%

Deposit base in UAE, 2008

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Its private bank services include real estate, trust and fiduciary, aircraft financing, art advisory, family advisory, multiple residence, farm advisory and philanthropy. It offers a broad range of services and manages the entire balance sheet of the client.

It offers a large portfolio of conventional products and has a large private banking practice in UAE. It is active in structuring and distributing Shariah compliant products such as Sukuks (Islamic bonds), Shariah compliant mandates, customised investment programmes and establishment of Islamic trusts.

Converted its 12 year old representative office to a subsidiary in the Dubai International Financial Centre (DIFC) to increase its private banking market share. It focuses on ultra High Net Worth (HNW) clients only. It complemented its strategy by offering Shariah compliant mutual funds managed by Allianz Global Investors.

It extensively uses open architecture to offer an optimum product mix to clients. Partnership with Credit Suisse, Société Générale, Fortis and parent bank Mirabaud & Cie. It focuses on Ultra HNW clients only.

It is developing its private banking business aggressively. On-shore, its asset management group develops local and international funds. Structured products are designed by its investment banking division which also has capability to develop tailor made solutions for its ultra HNW clients through its Switzerland and US subsidiaries.

It recently deployed an end to end wealth management system from SAGE (Swiss IT firm), to strengthen its private banking proposition and provide much needed information and support to its relationship managers and clients.

It launched its private banking arm in 2004 and it now positions itself as the Islamic products market leader. Through its Johara branded accounts, and with female private banking managers, it offers exclusive accounts for women only. It is also an active player in structuring innovative Islamic products for its private banking clients.

Key offer points

In a highly competitive market, where both domestic and foreign players are moving to-wards improving their HNW proposition, five essential elements to build a strong private banking franchise need to be addressed.

• Client segmentation In Middle East, private banks need to choose more consciously the type of clients they pursue and to whom they can offer a superior proposition (Asian, local, GCC, African, etc.). They need to factor changes in sources of wealth (e.g. from oil and real estate to equity investments in different industries), geographic re-quirements (e.g. from predominantly offshore to a combination of GCC and interna-tional investments) and level of expected service. Winning banks will be able to carve a niche in the market and maintain their competitive position.

• Product innovation and depth Private banks need to be aware of the diminishing product life cycles, of the increasing commoditisation – thus reduced margins – and of the limited product/service portfolio. Promoting open architecture and Islamic products, offering the right combination of parent bank and partner products, extending services beyond financial investments to lifestyle services, building proposition for full balance sheet management and fiduciary planning are all critical to increase the customer investment wallet share as well as the relationship length. In particular, HNW clients appreciate having an aggregate view of their assets (real estate, financial investments, and even artwork they possess) and liabilities, regardless where these are held. Systems that give a single window of access to this information with powerful reporting tools are in high demand. Adding estate planning, family wealth management and trust management, for example, provides several benefits to the bank, including a shift from short term to long term mindset for both the client and the bank. It also cements the client’s relationship with the bank, lasting for over 20 years, instead of 6-7 years without a fiduciary solution. In addition, it allows access to next generation in the family, provides better knowledge about client assets and needs, and increases cross-selling opportunities. Last, but not least, it improves brand perception and trust.

Essentials in the UAE

private banking market

Peoplequality

Productinnovation and depth

Client segmentation

Premium branding

Local market

know-how

Citi

Credit Suisse

Dresdner Bank

Mirabaud

National Bank of Abu Dhabi

ADCB

Dubai Islamic Bank

NEWSLETTER

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• Local market know-how Players with insufficient understanding of the GCC market will experience major growth challenges. International banks may have greater expertise in complex financial products, but they can lack local market knowledge and skills in creating Shariah compliant products. Also, it is essential to develop an onshore client servicing model rather than an offshore or a suitcase-based one. The model followed by most foreign banks is to use their Dubai office as a hub for relationship managers serving Pakistan, India, China, African countries and GCC, which increases profitability significantly.

• Premium branding Customers are discerning and tend to relate only to premium brands, like any of their other luxury needs. Branding and positioning therefore are critical to ensure communication of exclusivity and reliability. International banks are showing the way: with its Van Gogh Preferred Banking, ABN Amro projects an image of exclusive service by leveraging the Dutch painter’s name to associate banking with art and luxury. HSBC Premier, instead, is leveraging its unified global brand, targeting travelling expats and affluent individuals.

• People quality Private banks need to restore confidence and the trust not only of the banks as a brand but also of the relationship managers who were in charge of client relationships. In the high growth period, most banks either hired junior private bankers or upgraded retail wealth managers to become private bankers and handle sensitive relationships. This resulted in many cases of mis-selling, incorrect risk profiling and lost trust. In GCC the main challenge is to find a sufficient number of top quality people with previous experience in private banking.

In these days of crisis, the UAE private banking market continues to be extremely attractive. Easy access to overseas markets, a very large local base of millionaires and the early stage of private banking industry represent an opportunity to already established and new private banking players. Those who get the basics right will undoubtedly emerge as winners.