Asian private banking has felt a curious impact from the financial crises in the west. Asian economies, some blips apart, have sailed through everything from US sub-prime to Southern European sovereign debt problems with little direct impact; their stock markets, though, have plunged with the rest. And many clients in Asia, diversified into world markets, have been hit as badly by global problems as if they had been sitting in New York or London the whole while.

Correspondingly Asian high net worth clients, and their bankers, have done as much soul-searching about risk and portfolio strategy as anyone else. As elsewhere in the world, there has been a shift away from complexity; an increasing awareness of the need for a diversified and stable portfolio; heightened willingness to seek and pay for risk management services; deleveraging; and a loss of trust in many hedge fund and other alternative asset managers.

“Clients ask for transparency, they don’t want to fly blind,” says Marcel Kreis, head of private banking for Asia Pacific at Credit Suisse. “Knowing what the risks are is one thing but can the clients stomach the risk if it materialises? In 2007, clients and the banks took on enormous risks without being very clear on what would happen if those risks materialised. They did, and it cost a number of them everything. The same goes for clients.”

Clients today like their assets to be visible and solid. “People have started looking at real and tangible assets such as gold and property,” says Aamir Rahim, CEO of private banking for Asia Pacific at Citi. “Property is real, you can feel it and touch it, and it doesn’t collapse.”

One of the obvious areas to suffer in this new sentiment is structured products. There’s still room for them, provided people can clearly understand what it is they’re investing in, but their golden days appear to be gone.

“There’s great suspicion about anything that is not transparent,” says Debashish Duttagupta, who heads investments for Citi Private Bank in Asia Pacific. “The days of ‘here’s a new proprietary technology but we can’t tell you how it works’ are far away. But people are now comfortable using what I would call flow structured products, with short tenors, though they are not anywhere close to the levels of acceptance in the boom days of 2007.”

Peter Flavel heads the private bank at Standard Chartered and sees a similar theme. “As confidence has returned to the markets, we’ve seen clients prepared to take greater degrees of risk,” he says. But with the return of risk appetite has come greater suspicion, particularly around counterparties. “Once upon a time it was: ‘what’s the structured product and what’s the return?’ Now it’s: ‘I need to understand the product’, and the issue of what institution stands behind that product is very important.” But there’s still plenty that can be done within those parameters. “Products around underlyings of commodities or foreign exchange, people are prepared to invest in those.”

Renate de Guzman, CEO at Bank of Singapore, reports continuing interest in structures such as equity-linked notes and range accrual notes, but like Flavel he says people have become much more selective about the counterparty behind the structure. “With problems in Europe you have to be selective with European banks.”

Eventually, though, there’s no choice for private clients but to use a structure if they want to achieve a particular outcome. Andrea Carl, head of product and services at Clariden Leu in Singapore, says that although structuring to trade on a particular idea is out of favour, “a structured product can make sense to create a certain payout structure you want to have because of asset distribution.” Kreis sees activity in structured products with currencies – particularly in light of the fall of the euro – and commodities as underlyings, though not for long-term products. And Rahim adds:  “There’s always a role for structuring. If you want to take a view on sterling in six months, you can do that with a forward rate agreement, but if you want a series of options on a particular fixed income security that’s not publicly traded, you’re going to have to go through the structuring route.”

“Clients ask a lot more questions – as they should – about the fees we charge, the cost of unwinding and the like,” he adds. “But they are still interested.”

Still, the lack of volume in structured products has not been great for the bottom line. “Clients are very cautious in making long term commitments to more complex structures and products, and this has an impact on revenues without a doubt,” says Marcel Kreis, head of private banking Asia Pacific, at Credit Suisse. “Simple products don’t tend to be as rich in fees as more complex solutions.”

Another area that really felt the brunt of the change in sentiment was alternative investments.

“We are finding a lot of alternative managers had no clothes, so to speak, and there’s been a big flight to quality,” Duttagupta says. “Alpha does exist, but clients have come to realize that there are fewer managers who can add value compared to the number of people who say they can but just add leverage.”

Again, this has not been an area where managers or products have been cut off en masse. Clients do appear willing to distinguish between different managers, styles and asset classes. “In real estate, people are comfortable: we’re seeing that through fresh inflows,” Duttagupta says. “The private equity side of things is much more damaged.” Also at Citi, Rahim continues to see selective interest in hedge funds, just with greater scrutiny of the fund structure than before. “People are looking at hedge funds that have either no gate or a defined one so they can manage their liquidity more precisely,” he says. “One of the big issues was hedge funds gating people and not allowing them to take their investments out during the financial crisis. Clients now want to know how long their money will be locked up for.”

Flavel says the increased due diligence that has followed the financial crisis has an impact here. “A by-product of that is that it favours the incumbent and larger, stronger players, rather than a new start-up,” he says. “Pre-crisis, there were a lot of new hedge funds going out and setting themselves up. Now, doing that and getting on the approved list of a major player is going to be quite difficult.” Carl at Clariden Leu makes a similar point, saying interest in hedge funds has gravitated towards “more liquid, USIT-3 types of funds, which have more transparency and liquidity.”

Despite changes in appetite, product manufacturers are not idle. Duttagupta says Citi is working on ways to address the issues that will arise when rates begin to rise worldwide, and to provide cheap hedges for that event. Other clients want to park cash and make a decent return from it, so Citi is designing short-term, low-risk carry products. It has broadened its property advisory business, developed products to invest in UK property, has staffed up its investment labs with quants to help with asset allocation, brought in a new focus on fixed income with detailed credit analytics brought in from rating advisory teams, and is looking at ways of investing in themes such as distressed US real estate, or to exploit inefficiencies in commodity markets.

“Nothing dramatically complex,” Duttagupta stresses. “Nothing that will take more than two minutes to understand.”

Elsewhere Clariden Leu reports an increase in inflation-linked and capital guaranteed product, and many institutions are busy finding ways to build exposure to the robust Asian growth story. At local institutions, BDO Private Bank, for example, is looking for “sectoral and thematic funds, bonds and appropriate structured products that take advantage of activity in the power, infrastructure and manufacturing sectors in the region,” according to Josefina Tan, who runs the business.

“There’s certainly a heightened awareness of the growth stories of China and India and the countries that are associated with that growth in Asia,” says Flavel. “But it’s not as simple as saying I want to buy an Indian or Chinese stock. It’s understanding this shift to the east in terms of economic power and growth, and working out which investments are going to do well as a result of that. It might be the mining stocks in Australia or Latin America, the shipping companies handling the resources, or the manufacturers selling components into India and China.”

Tied into this is the trend for Asian investors to bring money back home. “Through the crisis in the US market and now the European market we have seen Asia sail through relatively undamaged, and at times assisted by deposit guarantees to reassure investors in domestic markets,” says Duttagupta. “Asian wealth has been very comfortable with its own markets.” There is already a flight into emerging markets worldwide, and this return of capital home exacerbates the trend.

Others say the big themes in the industry are not about product so much as the way things are sold. “Client assets are spread across different institutions, jurisdictions, even different team members or family members, so there is much bigger demand for consolidating a view on to that,” says Carl. “During the crisis it was a fragment here, a fragment there. Now the holistic view is much more in favour. The relationship manager is becoming less an investment selector than a strategic advisor for the portfolio.”

Has the structure of private banking changed? Kreis at Credit Suisse says the people mix has changed at the banks. “One of the major changes would be a shift in focus in the type of relationship managers and investment professionals we would like to attract,” he says. “Leading up to 2007, the more bankers you had drove your net money acquisition. It was a market that was chasing everyone who had an interest in private banking.” But then everything changed. “2008 showed some of the glaring shortfalls in the quality of the bankers: the training, the supervision, their advisory capability. Many of them simply hadn’t been in the industry long enough and most of them had never seen a downturn. They had never had to deal with an investment recommendation they made that then went spectacularly south.”

For Credit Suisse’s part, it has continued to hire – even all the way through 2009 – but with a focus on more experienced relationship managers and what it calls the solution partners group, “which is in many ways a private banking internal investment bank that helps clients find solutions which we then execute through the investment bank”. Existing staff are more thoroughly trained as a consequence of the financial crisis. “A lot more effort goes into training and coaching the relationship managers, upgrading their technical skills,” Kreis says; all its client facing staff now having to go through an 11-module training and certification program.

And is the money coming back? Rahim says “clients ebb and flow” and that the first two months of the year were very strong for Citi, March and April reasonable and May weaker, impacted by people taking money off the table through the euro and Greece situation. “We are of the view that this is a much needed correction after a much needed rally – we see little danger of a double dip, though you can never say that the chance is zero.” Credit Suisse’s private banking assets in the region are at a record high of Sfr 74.2 billion as of the first quarter of 2010 – a 9.6% year-on-year climb in the quarter following 45.6% growth in 2009. Net new assets were Sfr11.5 billion in 2009, and a further Sfr4 billion in the first quarter of 2010. Domestic businesses, particularly Japan, Australia and Singapore, have been major contributors.

Private bankers have watched closely the increased scrutiny of Switzerland, where the idea of client confidentiality is under threat. Is the same attention coming to Singapore? Bankers are not worried about the Swiss situation – which was chiefly about America seeking tax evading clients – because, as de Guzman says, “Asia is more of a low tax environment”, and it’s not a place known for harbouring large amounts of American money anyway.

There is, though, regulatory change coming, and not just in terms of the requirement that clients fully understand what they are buying. Kreis notes discussion in Singapore about requiring private bankers to be registered and certified before they talk to clients. What does he think of that? “I think that’s good,” he says. “We’d like to think that self-regulation is preferable, but we are seeing more and more banks opening offices here [Singapore] and Hong Kong to take advantage of the world’s most dynamic region, and some industry professional minimum standards are required.”

Kreis thinks regulators in the region “are paying a lot closer attention to bankers flying in and out of countries. The days of unlimited unfettered travel and advisory activities in the countries where bankers visit their clients – those days are over. You are going to see a much tighter regime around international private bankers travelling into different jurisdictions.” This has a consequence for clients: increasingly they are going to need to come to Hong Kong and Singapore for portfolio and investment reviews, where there are established systems for legal, trust and product support. This is one reason Credit Suisse is opening its branches on Saturday mornings, to allow people in places like Indonesia or Malaysia to come through while passing through on leisure or to see family at weekends.

Flavel says: “There will be greater pressure because governments around the world are seeking greater tax compliance and looking for ways to ensure there are less avenues for people not to comply with onshore taxation. But it’s not going to affect the amount of money booked in private banking in Hong Kong and Singapore.” He adds, though, that “there is a trend of people putting money onshore,” such as people in India seeking to participate in their own nation’s growth story.

On balance, the market looks brighter in Asia than it does elsewhere in the world. “You see in Hong Kong and the east a natural exuberance about the future,” says Flavel. “People are still quite upbeat and confident even despite the recent volatility. Go to Europe and it’s almost despondent. Issues around privacy and secrecy in Europe and Switzerland have taken quite a heavy toll on the way people feel about private banking in Europe. Here, it’s not happening to anything like the same degree.”

BOX: Different positions

The financial crisis brought into stark relief the three distinct structures of private banking in Asia. There are the private banking arms of the global powerhouses, such as UBS and Citi; the Swiss specialists doing nothing but private banking, such as Clariden Leu and Pictet; and the local Asian institutions with private banking operations. They make for a competitive environment which the financial crisis did nothing to thin out. “If anything the field has gotten more crowded,” says Kreis.

Unsurprisingly, people’s views on the future of private banking depend very much on where they’re sitting. The big see the virtue in scale; the small see the virtue in focus; the local see the virtue in Asia.

“The landscape will increasingly shift towards banks that can provide full service private banking and bring genuine global advice and product capability to clients, rather than private banks that are boutiques and don’t have a global footprint in terms of research and product execution,” says Duttagupta at Citi. “Our client needs are becoming increasingly institutional and sophisticated in nature. Private banks that are part of larger banks can tap into that capability.”

The Swiss specialists see their own approach as the way to go. “For us, this model has worked for 250 years,” says Carl at Clariden Leu. “We have just the private banking clients to focus on. The future is bright for pure private banks.” Asked about clients wanting to see public data about these most private of private banks, she points to SFr 100 billion under management and a tier one capital ratio of 24.6%. “They feel a lot more comfortable putting deposits in our bank, particularly during the crisis.” She claims “very good momentum” in flows.

Local domestic banks claim to have come through the crisis with little impact, and gained in terms of flows. Josefina Tan, who heads BDO Private Bank in the Philippines, says “the global financial crisis had minimal effects on the assets of clients” with her institution. “Although the majority of the assets were in local currency (the Philippine peso), even the foreign currency assets did not suffer the massive valuation swings brought about by the violent market volatility.” She attributes this to the fact that banks like BDO have never offered risky or complex products, focusing instead on the basics of capital preservation and estate planning.

She says her bank “was a beneficiary to the inflow of investments back home: a flight to safety, so to speak.  Clients who have made investments abroad would select a strong and robust domestic financial institution with the experience and expertise in handling private banking funds.”

One institution uniquely well positioned to comment is Bank of Singapore, the private banking subsidiary of OCBC, the Singaporean bank. This is primarily made up of the private banking business that OCBC bought from ING.

Today, Bank of Singapore’s CEO, Renato de Guzman, pushes the advantages of local ownership: strength of the parent (OCBC is rated Aa1/AA+, higher than many global peers), the fact that Asian banks had little exposure to toxic assets or European sovereign debt, and a vast branch network to reach the local population (382 branches in Indonesia, for example, and a full bank licence in China where it offers banking services in seven provinces.) “For those who want to diversify out of Switzerland into Singapore, we are a different proposition to a branch of UBS or HSBC or Credit Suisse,” he says. “We are a locally-owned Singapore bank with expertise in global private banking.”

Local private banks in Asia universally claim to have received inflows as a consequence of mounting suspicion of western institutions through the financial crisis. “During the crisis a lot of money went from the international banks to the local banks because they are easier to understand and better regulated,” de Guzman says. “ING was very difficult to understand: insurance, banking… and when you look at the capital ratios, OCBC’s tier one ratio is 14%, whereas ING’s was 6, 7%. Generally the European banks are undercapitalized, overleveraged and have exposure to the PIGS [Portugal, Italy, Greece, Spain] countries.” He feels the combination of businesses in western banks also causes problems. “You see very complicated models in the US where investment banking and private banking platforms have been combined and got them into trouble.”

Whichever model works best, one interesting development is the degree of international seniority in the region. Standard Chartered has its international headquarters for private banking in Singapore; JP Morgan’s private bank international head is now in Hong Kong; and Citi’s international private banking head (that is, head of private banking operations outside the US) is in Singapore. Singapore is one of only two key booking platforms for Clariden Leu, the other being the home office of Zurich. “You really are seeing in Asia some very senior executives of global private banks being based in Asia,” says Flavel. “That reflects the shifts to the east. These are not Asian outposts; banks are voting with their feet and moving their senior executives to Asia.”

At the APEC meeting in November, Euromoney put a question to host nation Singapore’s Prime Minister, Lee Hsien Loong, who had spent part of his morning in talks with Barack Obama. The Obama administration, we said, was getting tough on private banking centres over client confidentiality and bank secrecy, most obviously Switzerland. Is that scrutiny coming to Singapore too, and what’s the impact on Singapore’s private banking industry – a mainstay of its financial services success story – if it does?

Lee told us it hadn’t featured in discussions with Obama. He underlined Singapore’s “high standards of probity and integrity”, and revealed that Singapore had now signed enough double taxation agreements with other jurisdictions to join the so-called “white list” the OECD keeps of countries that show an acceptable degree of international cooperation on tax matters. “I do not think it is a burning issue for us,” he said.

We’re not so sure about that. It’s true that the tax information-sharing deal signed with France, the 12^th such link, does take Singapore off an unappealing-sounding grey list held by the OECD (though notably the US is not among the countries with which it has signed agreements). But the pressure meted out to Switzerland in the last 12 months shows us the future for private banking in Singapore just as much as Zurich.

It’s not really just about tax. One of the most uncomfortable truths about private banking in Singapore is the origin of some of the money that resides there. Many senior Indonesians believe a lot of money that rightfully belongs to that country sits in Singapore; convicted white collar criminals who are believed to have lived and banked in Singapore include Bambang Sutrisno, Andrian Kiki Ariawan and Sudjiono Timan, all of them convicted of embezzlement of over Rp1 trillion apiece with the first two each given a life sentence. There is also discomfort about the support the private banking industry may have provided to Burmese leaders. After a stand-off in 2007 in which Indonesia briefly refused to sell Singapore any more sand (a crucial commodity in a place that has none of its own and needs tons of the stuff for land reclamation and construction), an extradition treaty was begrudgingly inked, allowing Indonesia more confidence that embezzled funds won’t now fly so easily to Singapore again. This, too, is the future: less safe harbours for funds of dubious provenance; less havens for tax avoidance.

The odd thing is that these trends have been coming together for years and Singapore has actually done very well out of them to date. Middle Eastern capital started to flow to Singapore after 9/11, whether in fear of greater scrutiny of accounts in the US and Europe or in protest at the conflicts that followed it. Some bankers report they have benefited from the alarm among private clients in Switzerland over the gradual and apparently inevitable erosion of secrecy there. It’s been a short term gain. But sooner or later, this attention is coming to Singapore too.

Happily, Singapore these days has more than enough going for it to remain a viable, indeed leading, private banking hub regardless: friendly business regulation, all the right banks represented, ease of doing business, efficiency and infrastructure. A cleaner reputation will be to its benefit. But don’t be surprised if some big redemptions start cropping up as money moves again, to more obscure locations, in order to stay further ahead of international attention. Make no mistake, Prime Minister, international scrutiny is a burning issue.

As the world’s private banks struggle to come to terms with their vastly changed status after 12 months of market turmoil, so too are they adapting to changing needs and expectations from their clients. The market for private banking services in Asia, and the models of those banks who seek to provide them, are in a great state of flux.

It starts at the very top. Consider the field of the world’s leading private banking groups. UBS remains intact, but with confidence in the bank and its model shattered and $4.4 billion of write-downs in the third quarter alone; it has committed to paying back $8.3 billion of auction-rate securities held by its private clients, securities it clearly now believes should not have been sold to them in the first place. Credit Suisse wrote down SFr2.4 billion in the same quarter. Merrill Lynch lost so much that it has been taken over by Bank of America. Citi’s losses were so big, in terms of money and confidence, that it had to be bailed out by the US government. Of the bigger names, JP Morgan and HSBC have come out looking best – and one would hardly call them unscathed.

None of these losses of capital and credibility have come from private banking divisions, but the perilous state of the parent organisations cannot help but have had a negative effect on private banking clients’ perceptions. And, though private clients are generally well diversified and long-term in their thinking, the losses from almost every asset class since the end of 2007 won’t have helped. So private banks face a double challenge: not only do they have to find ways to help their clients make, or at least preserve, money in one of the worst financial environments in a century, but they also have to rebuild the level of trust those clients have in the organisations as a whole. Private banking is the ultimate people-business, and trust is never more important than in this field of banking: an institution that loses that trust has lost its business model.

There are several knock-on effects of this change. One is an apparent opportunity for those private banks that do nothing else but manage wealth – names like Julius Baer, Coutts, LGT, Clariden and Pictet. Another is that an even bigger opportunity has been created for those local names in the region with aspirations in private banking: regional players like Singapore’s DBS, or the clutch of Chinese banks who have spent the last few years building dedicated wealth management divisions to serve their local population. So far the perception of the credit crunch from Asia has been that is mainly an affliction of Western investment banks; with no Asian banks (yet) caught up to any great degree, there is a major branding opportunity for them to present themselves as safer institutions more in tune with local requirements.

In fact, the level of competition for private banks has never been higher. In addition to the specialists and the locals, there are also insurance companies, commercial banks and independent financial advisers all competing for market share among the high net worth segment. In some countries, notably Taiwan, wealth management is increasingly seen as the only profitable game in town for commercial banks, as other areas of business have suffered increasingly cramped margins or regulatory change; every bank of note is now active in this area. Elsewhere, China’s Ping An is an example of an insurer that now wants to be a financial services powerhouse, with wealth management a key part of the offering. (Globally, one could point to AIA, Skandia and Axa as part of the same trend.) And in the long run, IFAs may yet be the biggest threat, although their involvement in private client affairs is still fairly nascent in Asia.

There are also considerable changes taking place in product demand. One of the biggest is a rising mistrust of complex structured products. Many private clients around the world had money in collateralised debt obligations or credit-linked notes and have come to regret it. Currency-linked accumulators have also cause problems, and in many cases litigation. The fate of structured products has depended very much on the underlying, and on the mechanisms used to access or replicate it, but many of these products have been plagued by low or non-existent liquidity, meaningless capital protection or hopeless returns.

When Ma Ying-jeou won Taiwan’s presidential elections on March 22, it marked a significant change of direction with far-reaching consequences for the country – and for investors in it.

Rather than domestic matters, overseas attention has instead been focused on what the new president will do with foreign policy: specifically, relations with China. His predecessor, Chen Shui-bian, had a fraught relationship with Beijing, championing Taiwan’s independence; whatever its ideological merits, that approach impeded flows of business between the two nations, particularly in the financial services sector.

It is likely that President Ma’s approach, which promises a spirit of friendlier cooperation between the two nations, will be reflected in investment flows and greater freedom for Taiwanese businesses in sectors from aviation (Ma has pledged to develop direct flights between China and Taiwan for the first time) to shipping to banking.

The change of leadership has brought a mood of optimism to Taiwanese business, and particularly to its financial services industry. “Imagine you can fly from Taipei to Shanghai in one hour twenty minutes,” says CY Huang, president for Greater China investment banking at Polaris Securities. “How would that change your organisation, the way you do business? You can position Taipei as your headquarters, fly there in the morning and fly back in the evening. Multinational companies may think of positioning Taipei as a hub for doing business with China.” Compared to other hubs – most obviously Hong Kong – land and property are far cheaper in Taipei, plus of course the whole population speaks Mandarin Chinese.

Huang feels much momentum has been lost in recent years. “Some people compare it to China in the 60s, and the Cultural Revolution; we almost had an economic Cultural Revolution,” he says. “We used to be number one among the Asian little dragons… but Taiwan fell into the trap of ideology, with too much politics, forgetting the world is borderless.” Now, though, he is bullish on a vastly changed Taiwan. “Taiwan will develop into something new: people just need to have imagination.”

The area that has perhaps suffered most from cross-straits tension, and which is showing the earliest evidence of change, is financial services. Taiwan’s banks have been prohibited from acquiring institutions in China, and so have only been able to service clients in the country in a very limited way. In addition, Taiwan-managed mutual funds have been unable to invest in Chinese securities, pushing much high net worth money offshore to be managed elsewhere. This is a big loss, because Taiwanese individuals and businesses, lacking the restrictions that are imposed on the banking sector, are among the most active nationalities on the ground in China: they are believed to have around US$150 billion in investments and assets on the mainland. The client base is there, but the banks can’t follow them.

“Lots of Taiwanese, probably millions, have moved to China,” says Allen Wu, senior vice president and head of investor relations at Yuanta Securities. “Although they share the same language, they have different cultures, and Taiwanese businessmen in China need some help from a company that shares their culture.” It’s a clear opportunity for Taiwanese banks, but one that has so far been barred to them. Wu compares the scale of financial institutions in China to those in Taiwan in order to illustrate the cost of this impediment. “Look at their market cap. The largest broker in China is CITIC Securities; their price to book is three to five times. In Taiwan, [similar institutions] are 1.5 to three times. Citic’s market cap is probably 20 times that of Yuanta Securities.”

But change is underway, and indeed was gaining momentum well before the election.  In early March, the government announced it would allow Taiwanese banks or financial holding companies to use their overseas subsidiaries to invest in mainland Chinese banks for the first time.

This move all but formalises a deal that has been talked about for years. Fubon, one of Taiwan’s largest financial groups, has a subsidiary in Hong Kong and has long wanted to use it to acquire a bank in Xiamen, mainland China. The Hong Kong Monetary Authority has acted as something of a go-between for the Taiwanese and Chinese regulators to thrash out the issues involved, and the Taiwanese announcement suggests the deal will finally go ahead.

“This is a major breakthrough,” says Victor Kung, president of Fubon Financial. “I would say a major hurdle now has been cleared, and we do expect that we can finalise and close the investment within a short period of time, definitely before the end of this year,” Kung says.

Fubon is likely to be seen as a test case, viewed closely by both Taiwanese and Chinese regulators, and the results will dictate how future ventures are approved. A lot is at stake. “For Taiwanese banks, we are all very eager to be able to open branches in China and invest into Chinese banks,” Kung says. “We have a lot of clients there – Taiwanese enterprises are a major investor in China and have done very well there.” But until now, “while they are our customers in Taiwan, we are unable to service them when they move to China. Therefore we lose business.”

Even now, banks will only be allowed to hold 20% in a Chinese bank, so the immediate impact to the bottom line is unlikely to be particularly big. But that perhaps disguises the significance of this move. “Since we will be able to deepen our relationship with our clients, we should be able to generate more revenues from our clients in Taiwan as well as in Hong Kong,” says Kung. “That’s strategically very important, perhaps more so than what we can see from just the profit contribution from the Chinese bank.”

Key to this has been the efforts of the regulators – three of them, in Taiwan, China and Hong Kong. “We have been engaging in trilateral negotiations,” says Sheng-Cheng Hu, chairman of the Financial Supervisory Commission. “The process is quite smooth and I hope we will be able to complete the procedure pretty soon.” Hu credits the role of the Hong Kong Monetary Authority in making things happen. “We have a middle-man, a go-between; it was much easier this way,” he says. “I hope that this will allow us to continue other talks and negotiations.”

Still, some believe it is possible to read too much into the Fubon situation. “The only bank to have the muscle to do that is Fubon,” says Huang at Polaris. “It’s a good thing for them, but I don’t think there will be many other examples like that.” But he does think there are other benefits from cross-straits openness. Wealth management, asset management and institutional brokerage, for example, are all more sophisticated in Taiwan than in China today. That expertise, he believes, is exportable. “Taiwan has a model of distributing financial products to the mass population, different from in Hong Kong or Singapore where it is more addressed to the middle and high end level,” says Huang. “China is very rich but they don’t know investment or wealth management. People need to develop a sense of asset allocation and investors need to be educated. Who is the best at that [in the immediate region]? The Taiwanese.”

Domestically, Taiwan’s banking sector has had a volatile couple of years. It has had to deal with a crisis in unsecured consumer lending and credit cards domestically, before running headlong into the global problems with sub-prime lending and the credit markets. “Despite all these difficulties, the growth in the financial sector last year was a nine-year high,” says Hu. “The quality of assets are good, the banks are strong, the overall non-performing loan ratio is just 1.87% and the adequacy rate is over 10%.” The broader economy has stayed strong, with exports up sharply in the second half of last year driven by increased volumes to southeast Asia and Europe. “When the economy is strong the financial sector will remain strong.”

Taiwan’s banks have tended to focus their attention on wealth management; Fubon, for example, doubled both revenue and profit from this business last year and it is not alone in benefiting. “The Taiwanese population is entering into a stage where there will be more retiring people, and the savings pool is accumulating very fast,” says Kung. “In the meantime Taiwanese investors are opening up to the global investment markets, and are becoming more used to putting some of their assets abroad.” When they do so, “they are more willing to have those assets managed by professional investment managers. It creates opportunities for banks and life insurance companies to distribute wealth management products.”

Wu at Yuanta Securities reports growth in three particular areas of investment: insurance-linked products, structured notes, and offshore mutual funds. All of this is to the benefit of wealth management divisions, and he argues that improved cross-straits relations are going to help investors to diversify their portfolios. “People can improve their financial returns and financial institutions can improve their bottom lines.”

The problem is, everybody has the same idea, and wealth management has already become ferociously competitive in Taiwan. In previous years, banks could also rely on credit card and other consumer loan revenue; not any more. The only other area of optimism domestically for Taiwanese banks is in lending to small and medium enterprises. But it’s not enough to support such a crowded local banking industry. “The spread for banking portfolios is terrible,” says Wu at Yuanta. “Most of the banks, if you look at their portfolio, consumer or corporate, the spread is in the range of 2 to 2.5%.”

This leads to calls for consolidation. There are almost 40 domestic banks in Taiwan for a country of 23 million people, even after considerable efforts have been made to reduce the number. Much has been done but clearly more must follow.

“I think we have been making good progress,” says Hu at the FSC. “We have cleaned up our distressed debts; we have had five banks acquired by international institutions, and three turning over their control to foreign funds; it all greatly strengthens our banking sector.”

Specifically, Standard Chartered has bought Hsinchu International Bank, Citigroup bought Bank of Overseas Chinese, ABN Amro purchased Taitung Business Bank, HSBC took over Chinese Bank, and in February Singapore’s DBS Bank said it would acquire the “good bank assets” of Bowa Bank. On the private equity side, Carlyle, Longreach and GE Consumer Finance have all made purchases. Hu says that the foreign share of Taiwan’s banking sector has risen from around 4% to 15.8% as a result of recent acquisitions, and that the work continues. “We still have parties from other international banks who are interested in spending,” he says.

What links all these banks is that they are in varying states of disrepair: either failed, or at the very least troubled. In some cases, like ABN Amro, they had to be paid to take on the institution. So what’s the appeal for foreign banks, particularly in distressed institutions like these? “I think foreign banks come here for various reasons,” says Hu. “One is wealth management. They consider this market to be very attractive. Secondly, they are interested in loans to small and medium businesses. And by coming to Taiwan they can access the region in southeast Asia and China.”

One fly in the ointment came when Temasek, the investment arm of the Singapore state, announced in March that it would pull out of its own investment in a Taiwanese bank, E-Sun. Hu takes a pragmatic view. “We have so many foreign acquisitions – I think in the last few years we have had 18 or 19 – so ultimately one or two will not work well,” he says. “A few years ago Citi participated in a bank, it did not go well, but they have now taken over the Bank of Overseas Chinese. Even though Temasek decided to withdraw from E-Sun, our understanding is it is still interested in this market, and E-Sun has found another participant. These things will happen with so many acquisitions going on; I’m not surprised.”

Kung adds: “It’s only natural to see that some would like to come in and others to get out, but I think the fact that all the foreign banks are interested in Taiwan demonstrates that fundamentally there is still money to be made here.”

One could argue that foreigners buying into banks doesn’t help Taiwan with its consolidation problem: it means there are just as many banks as before, only now with a greater number of able competitors. The counter-argument to this is that these foreign banks, once established, will use their new platforms to buy other small banks, eventually reducing the total number.

One barrier to consolidation is that about half the market remains in state hands. The departing DPP government had a stated policy of wanting to keep only two banks in their own hands; it is not yet clear what the new government’s stance will be on the sale of state assets, but given the global situation this is hardly an ideal time to sell down.

“Because the government banks still have about 50% of banking market share, consolidation cannot avoid being intertwined with government privatisation of the banks,” says Kung. “With the government in transition, I think it is going to be very difficult for anyone to embark on bold moves. But hopefully with the new government in place [it takes power in May] it will do the right thing and push for consolidation by privatising some of the government banks. That’s what we would like to see.”

The situation in brokerages is if anything more extreme. The number has come down – from about 400 brokerage houses in 1990 – but there are still more than 90, with the top 10 controlling more than half of the market share. Here, it’s a bit easier to consolidate. “They are all privately owned companies, so it is pretty easy to consolidate them with each other,” says Wu at Yuanta. Seven of the 10 biggest brokers in Taipei are already part of bigger financial holding companies; “independent brokers will find it difficult to survive in the long run,” he says.

Taiwan has been attracting a lot of private equity investment, perhaps prompted by the relative belligerence of China to private equity money there. “There was a lot of euphoria about China, but when we talk about execution things get stuck,” says Huang. “A lot of money is now turning to Taiwan.” There is much to attract it. For a start, valuations are among the lowest in the region. Secondly, Taiwan acknowledges the need for consolidation in some of its industries, notably financial services, and has therefore welcomed private equity as a means of setting that consolidation in motion. Thirdly, there is a willingness in Taiwan to expand overseas, and an acceptance that in order to do so the money and expertise of foreign partners could be helpful.

Despite this interest, Taiwan has long had to face hefty capital outflows. A recent report from Morgan Stanley said that there was a total $207 billion capital outflow from Taiwan between 2000 and the end of the third quarter of 2007. Clearly, that’s not all coming back, but there is a feeling that the quantum of disappearing cash might reduce. “I wouldn’t say capital outflows will reverse, but there will be capital inflows,” says Huang. The strength of the Taiwanese dollar, which has appreciated strongly, is expected to bring some flows back, and foreign portfolio flows are believed to be increasing on the back of the election and an expected boost to market performance as a consequence.

Taiwan’s stock market has long been reaching out to global investors in an attempt to bring capital back in. In 2007 alone the stock exchange went on roadshows to New York, London, Hong Kong and Singapore; investment forums will follow in New York and London this year. “The world will understand we are making progress towards liberalisation and internationalisation,” says Rong-I Wu, chairman of the Taiwan Stock Exchange. “It increases the attraction for international investors: it’s a transparent gateway to Asian prosperity.”

Taiwan’s markets have much to recommend them in regional terms. They are reasonably large (over US$700 billion in market capitalisation when the 698 companies on the Taiwan Stock Exchange are combined with the 547 smaller companies on the GreTai securities Market second board), and are liquid, topping US$1.2 trillion in trading volume between the two markets in 2007. Consequently foreign ownership of Taiwan’s stocks as a percentage of market capitalisation has more than doubled, to 31.1%, in the seven years to the end of 2007. Two other things add to the attraction: one of the highest average dividend yields in Asia, and low valuations. This all comes within a framework of good regulation and high transparency by regional standards. Taiwan’s various market entities – the two stock exchanges, a depositary and clearing company, and the futures exchange – are to be put into a new holding company this year which then will be listed on the exchange itself, probably in 2009, once the relevant legislation gets through parliament. “One immediate result will be one-stop shopping,” says Wu at the TSE. “And the synergies are very important, making it more efficient, in particular in terms of IT.”

While financial services is interesting, technology is utterly dominant in the Taiwanese economy, accounting for almost half of the country’s listed companies according to Wu, and at one stage representing 70% of the country’s market cap. Clearly, technology is exposed to a slowing US economy. As American consumers become more conservative, that naturally hits consumer electronics. In addition, the strengthening Taiwanese currency is not helping.

So what’s the future? Huang argues there are two approaches: build a brand as the best in the world in a specific, innovative segment, tailor-making products for big companies worldwide; or launch a new business model, as Asustek has done with its new line of $200 personal computers, cheap enough to be used as gifts, halfway between a toy and a sophisticated PC. “You don’t want to be stuck just manufacturing,” Huang says. “You need your own brand, channel, global market or have something truly innovative.”

It’s not all bad: IBM said in January it wanted to hire 300 new staff in Taiwan, many of them in research. An annual survey from Watson Wyatt says high tech compensation is higher than ever in Taiwan, and that turnover in jobs is very high as employees look for the best opportunities. And within some sectors, analysts are positive: Macquarie, for example, has outperform ratings on several manufacturers of TFT LCD chips, used in high definition panel screens.

Nevertheless, the global situation clearly can’t be ignored. Taiwan is looking good by world standards – it has averaged 5.2% growth over the last four years and analysts expect it to grow at 4.5% in 2008 despite global travails. Unemployment is at its lowest level in six years. But much depends on Taiwan building investment bridges with countries outside the United States. “Taiwanese businesses are gradually diversifying their reliance on the US market to the Chinese market and other emerging markets,” says Wu.

The positive view is that China replaces the role the US used to have as an engine for growth. “I think the impact of the US recession will be somewhat mitigated by the China factor,” says Kung.  Areas such as property, department stores, tourism, hotels and leisure should all benefit from closer China links. The negative view, though, is to recall that engagement with China is a two way-street, and that all the newfound political goodwill in Taiwan won’t matter unless the other side is committed to that openness too. On balance, the mood in Taiwan is extremely positive; but change doesn’t come overnight, and there is much more work to be done.

They are China’s emerging rich: hundreds of thousands of entrepreneurs, making money hand over fist in the world’s most vibrant economy. They want that money to work hard for them. And they are the target market for a whole new domestic industry: private banking.

Offshore banks have long targeted China’s ultra-wealthy through desks in Hong Kong, Singapore and Zurich, but the arrival of specialist private banking or wealth management divisions in China’s own domestic banks is a newer trend. Now most of the bigger home-grown banks have built businesses in this area, and they expect it to be one of the biggest drivers of growth in coming years.

Just how big is the wealth management opportunity in China? One of the most useful sources of data on this is a report published in October by the Boston Consulting Group. It estimates that households own around US$2.5 trillion in China, making it the largest market in ex-Japan Asia; if one considers Greater China collectively, including Hong Kong and Taiwan, it accounts for 45% of wealth in the region ex-Japan. BCG says Chinese wealth grew by a 23.4% compound annual growth rate between 2001 and 2006 – the fastest rate in the world – and at 31.6% in the year running up to the report’s publication, despite the fact that Chinese households have historically put a large proportion of their wealth into cash.

Everything suggests that pace should continue. There’s China’s extraordinary economic growth (11.4% in GDP terms in 2007), a liberalising market and strong asset returns, although recent drops in the stock market have at least temporarily dented the trend. BCG projects an annual rate of asset growth among Chinese households of 17.4% annually over the next few years, with assets under management projected to reach US$5.5 trillion – more than double today’s level – by 2011.

This, though, just tells us about the broader accumulation of wealth in China. What about the rich? Well, BCG estimates that by the end of 2006 there were 310,000 dollar millionaires in China – a 20% compound annual growth rate over the previous five years – meaning that already, China ranks fifth worldwide in the number of millionaires in the country. By 2011, it estimates the figures should have hit 609,000. Once people get wealthy, it seems they build fast: since 2001, households with greater than US$5 million in assets have grown their share of national wealth from 13.3% to 20.1%.

That’s the opportunity. “With economic growth, clients in China will have more and more demand for wealth management products and other private banking services,” says Lynn Zhang, general manager of private banking at China Citic Bank. “Chinese people accept new concepts very quickly. Although Chinese private banking has lagged behind western countries for about 20 years, the speed they are catching up is very quick.”

Citic is one of many institutions to have put into practice a plan to grab a piece of this new market. It set up its own private banking arm last August. It has what it calls a private banking sub-centre in Beijing, and plans to open new centres in the northeast and south of China this year. Other cities are served by dedicated relationship managers.

There’s a similar story at China Merchants Bank, which is setting up a private banking department within its head office, and has built private banking centres in Beijing, Shanghai, Shenzhen and Guangzhou, with relationship managers in each of them to serve customers. “The needs for banking services have changed a lot in China,” says Wang Jing, deputy general manager of the private banking department. “Before, it meant only settlement. Now they need more consultants for wealth management. That’s the trend now.”

Bank of China, working with its major shareholder the Royal Bank of Scotland, set up a business unit management structure for private banking this year, and has built a dedicated product team within it. It is already active in Shanghai and Beijing but this year should roll out outlets in a further eight coastal cities. Industrial and Commercial Bank of China (ICBC) has been targeting the wealthy for several years, and has over 5000 client managers in wealth management, including more than 500 planners with CPA certificates. China Construction Bank had 772 wealth management outlets nationwide by the end of the first half of its 2007 financial year.

The entry level tends to vary from place to place. At Citic it’s RMB8 million in assets, and at China Merchants, RMB10 million. At Bank of China, it’s US$1 million, though as Wang Yan in the private banking team there says, “it is not a very strict standard, we will consider the details of the client.” ICBC classifies two groups: those with over RMB 1 million (eligible for wealth management services) and over RMB 10 billion (private banking).

The trend is towards increasing the entry level, or differentiating a product for the more high net worth individuals. Here, the experience of Bank of Communications is illustrative. Two and a half years ago it started a new service for what Dicky Yip, the bank’s vice president, calls “our up-market customers”, for clients with RMB500,000 and more. After two years, and 300,000 clients, it became clear that most of the customers had at least four times that amount of assets, “so we were actually doing some sort of private banking service before we called it private banking.”

So at the end of 2007 a more targeted private banking service was launched, through a pilot programme in five cities, combining both the onshore service offered on the mainland with the offshore business based in Hong Kong. “Up to a couple of months ago we were focusing on our onshore business, and mainly their wealth inside China,” he explains. “But a lot of our customers already have money and assets outside of China. The idea is to provide Chinese customers with the opportunity to invest outside of China and make use of discretionary investment services.” The service aims to attract clients with a minimum of US$2 million in assets outside of China, and ties up with international managers such as HSBC Asset Management for international expertise.

This raises a key theme: onshore versus offshore. Chinese banks are not just up against one another when it comes to the provision of private banking services, but the allure of offshore private banking from foreign multinationals. Wang Ming at China Merchants says about 50% of her clients have both onshore and offshore accounts. “Maybe they choose the offshore accounts for tax and privacy and secrecy reasons,” she says. “But the Chinese economy and currency are moving upwards; clients have business in China and the majority of their income comes from China. So they choose domestic banks for onshore services.”

This is how the battle lines are typically drawn: offshore might offer expertise in international markets but that’s not really where the growth is these days. “I know a lot of people have offshore private banking accounts, in Hong Kong, Singapore or Switzerland, but they also want to share the benefits of the booming Chinese economy,” says Zhang. “In the last two years a lot of people have transferred their money back to China, to the stock market or real estate market here.”

Yue Yi, global head of private banking for Bank of China, adds: “It is true that some Chinese private banking customers have already received services and used products from foreign institutions offshore. This is quite normal. But this group of people are living and working in China, and the majority of their assets are based in China, so they must need services and products provided by Chinese banks.”

Chinese institutions have a few advantages to bring to bear here, he says. “China’s banks have a time-honoured relationship with their customers, and in this regard we are better than foreign providers,” he says. “Chinese people are improving in corporate governance, narrowing the gap with foreign competitors and increasing our competitiveness. We will catch up with international private banking providers and provide premium services to our customers.”

This makes Bank of Communications’ approach, linking an onshore and offshore offering into a single service, interesting. “Clients can link the onshore and offshore together rather than using offshore banks and service providers who don’t know their background.” It’s trying to bring control over local wealth back home, even if it’s actually being invested overseas. “We are training our account managers, when they do asset allocation or account planning, to inquire about customer intentions and wealth outside China. If you don’t ask them, you may not know.”

At the same time, foreign banks are also trying to go onshore in China. The local incorporation of a number of foreigners, starting with HSBC, Standard Chartered, Citibank and Bank of East Asia, is just one example of the increased penetration of foreign names to the local market.  “That’s the big push for foreign banks, especially those who’ve already developed an offshore model,” says Tang. “A number of foreign banks have set up offshore, opening offices in Shanghai and Beijing, targeting the 10 million-plus (US$) segment. The product set you can offer today is relatively limited, but there’s a recognition you have to be onshore: there are assets to bank, a brand to build, relationships to develop.”

Foreign and local banks alike face a major problem with finding human resources. “It’s definitely very hard to find the right people,” says Zhang at Citic. “Private banking in China is quite new, like a child that was born last year. Training is the most important thing for me and my management team.” Getting around it, in her case, has involved hiring good people, and building up a training system, using overseas trainers with international experience. “That’s what I insist on, because I think in domestic China there are no qualified trainers now.”

Yip at Bank of Communications calls human resources “a real challenge,” and it is reflected in the bank’s gradual approach to expansion with its pilot scheme, which firstly helps the bank to learn about the area but also alleviates the pressure on new hires. It is looking at hiring “half a dozen people in Hong Kong and a dozen in China” to be allocated to its pilot private banking centres to work with account managers. “Yes it is a big challenge but if you do it gradually, hiring a dozen people rather than hundreds, that gives us the time to train our people and engage new recruits to merge with our own business culture.” Others use collaboration to help with the hiring process: Bank of China has an agreement with Singapore’s Temasek to provide training, and the presence of Royal Bank of Scotland also helps.

Wang Jing at China Merchants adds: “Honestly speaking, there is not much choice for us, for investment experts, relationship managers or even product managers,” in terms of the available pool of talent. There is a bright side, though: “At least the foreign banks with private banking services on the mainland face the same problem. We select the right people from our existing staff and try our best to train them.”

Having found customers and the staff to advise them, the next challenge is in deciding what to tell them to do. The behaviour of the wealthy is different in China to elsewhere. For a start, the source of that wealth tends to be a lot newer. Whereas western millionaires have often inherited fortunes that may go back centuries, that’s not the case in China; being wealthy in the Cultural Revolution was a very dangerous way to be. Instead, most of the wealthy in China today have become so during the last 20 years; BCG estimates that 90% of high net worth individuals in China are entrepreneurs, most of them first generation.

This tends to be reflected in asset allocation. BCG reports that many of this group tend to take a bi-polar approach to asset allocation: they hold significant levels of cash, for security, but are also highly speculative with a high tolerance for risk, reflecting their entrepreneurial backgrounds. Some, for example, will purchase high volumes of FX derivatives. Other characteristics are that they want to be in charge and involved in their investments; prefer investments in physical assets such as real estate or businesses; they want privacy; they use many different private banks; and are still somewhat suspicious about entrusting the management of their wealth to a third party.

Attitudes to allocation “depend on the different educational background, or their working experience,” says Zhang. “Most of them know they should allocate their assets to different categories, currencies and risk classes, but some need to be educated. That’s the real situation in China.” Most banks undertake this education both through one-on-ones with clients and through seminars around the country.

Zhang describes some interesting services beyond the transactional. Immigration services is one example, and another is targeted at second generation wealthy: the bank has organised summer camps to Switzerland for children of the wealthy to attend, “to help them know what wealth management is, what private banking is, what services we can provide. A lot of our clients are very interested.”

The Qualified Domestic Institutional Investor (QDII) programme, which allows some Chinese banks to offer international investment products, has had some impact here, in that it increases the range of products banks can offer to their clients. It’s not, though, the only way of achieving international exposure; anyone with an offshore private wealth advisor has been exposed to a greater range of much more sophisticated international equity products for years, and local banks can also offer structured products to give synthetic exposure to international indices. “QDII gave us an opportunity to invest globally, but clients are not familiar with global markets,” says Wang Jing. “Even our existing investment experts are not very familiar with global markets.”

Besides, international stock markets haven’t done much for investors anywhere in recent months. “Chinese investors are quite nervous to invest in offshore QDII products, as the products were launched at a time [of] high volatility in the global financial market,” says Rex Chan of China Hedge, a mainland research platform. “Most products now have an NAV of around RMB 0.7 to 0.8,” having started at 1. He instead sees more interest in Chinese local equities, mutual funds, futures, real estate and even oil paintings, reflecting the strengthening of the Chinese currency. Also, “most HNWIs are also aggressive to do private equity investments, as their circle is known among each other, so they can invest in their friends’ projects by referral instead of doing strict due diligence.”

Generally speaking, there is considered to be a shortage of product for onshore private banking clients. “Today’s offerings are still characterised typically as more ‘hardware’ than ‘software’,” says BCG. “Chinese banks have established luxurious wealth management centres across the major cities in China and launched new customer offerings based on the overall value of their local relationships. However, these superior facilities are not complemented by tailored products, service levels and advisory expertise that are common in international markets.”

The formation of domestic private banking services has been made tricky by a regulatory environment which has always insisted on a strict separation between commercial and investment banking, funds management and other areas of financial services. Private banks really need to draw on all these resources, so the fact that these restrictions appear to be easing is being welcomed by Chinese institutions. “The regulator will be more and more accepting of new concepts,” says Zhang. “For example there is a department in CBRC [China Banking Regulatory Commission] called the financial innovation department. The regulator is realising financial innovation is very important to the public.” Yue at Bank of China adds:  “In private banking, our government is very proactive in encouraging institutions to be innovative. Regulation is open and practical.”

That’s a more positive appraisal than those who look at the environment from the outside, but even among that group there is a sense that the regulator is trying to help move things forward. “Regulations are quite restrictive,” says Tang. “But they are trying to allow more and more product to become available in the market. It’s a learning process, but they’re open to understanding what these products are and how to regulate and manage them. I would expect in the coming few years the regulatory environment to loosen.”

Getting private banking right is a huge opportunity but it’s also fraught with challenges, many of them new: building the right brand for the rich, dealing with the client correctly. “One certain way to lose money in private banking,” says Tang, “is to go from a business model where a relationship manager might manage 1000 clients, to 25 clients but without generating the revenues to justify it.” But that’s not going to stop Chinese banks pouring more and more resources into this most lucrative part of the market. Says Yue: “It will be a top priority.”