Hang Seng Private Bank is a local Hong Kong player in the truest sense – not to mention one of the largest, with US$25 billion in assets under management as of the end of 2015. Alan Luk, Hang Seng’s head of private banking and trust services, sits down with Asian Private Banker to discuss the bank’s Mainland ambitions, as well as the rising cost of doing business in offshore Asia.
(This article first appeared in Issue 101 of Asian Private Banker’s monthly print magazine, published in July 2016.)
Alan, there’s only one place to start. How exposed have you been to the Brexit outcome?
We are not sitting comfortably following Brexit – just look at the knee-jerk reaction from the markets. It’s a global issue, and so even though our clients do not have major exposure, directly or indirectly, we feel the pain because many [clients] have some exposure to UK property. So the impact [of Brexit] has been negative overall. Many of these clients hold property for income purposes so they are asking “how low can the pound sterling go?”. My gut feeling tells me that we are not yet at the bottom.
What’s your client acquisition strategy?
Most of our core clients are Hong Kong Chinese, of course, but with China’s wealth pool growing exponentially, we are now onboarding more and more Mainland Chinese. Right now, about 50% of our new clients are Mainlanders – so for every 10 accounts we open, 5 are Mainland Chinese.
They mainly reach us through two channels: our branch network, and the Hong Kong government’s Capital Investment Entrant Scheme. This programme was ceased in 2015, but we understand from the market that there are still around 10,000 applications in the pipeline. Because we have good connections with immigration agents, they refer clients to us that require an investment account at a bank to fulfil their immigration qualification criteria.
Why would these Mainland investors choose Hang Seng Private Bank when they already have relations with Chinese banks with an offshore presence in Hong Kong and further afield?
It’s an interesting question. Perhaps it seems logical that Mainland Chinese who are already familiar with Mainland banks would make these banks their first choice when they go offshore. But just because it is logical doesn’t mean they will do that! When Mainland Chinese have the chance to go offshore, they will look for something different in business culture, servicing and the investment product suite.
You do not have an onshore private banking business at the moment. Any plans to set one up?
We are aware that there are strict limitations to the types of products that can be developed and sold in Mainland China. Even if I had an onshore operation, I wouldn’t have a fully-fledged product shelf and, in any case, those products that are available are very similar to what clients can get from our branch network – so there’s no differentiation.
We do have commercial banking and mortgage services onshore, with about 50 outlets in total. Many of them are located in the Yangtze River Delta and in Guangdong – effectively the tier one areas. While these are not private banking businesses, we want to handhold Chinese entrepreneurs and offer them the full range of services. These branches refer clients to our Hong Kong [private banking] office when the need is there. At the same time, if we have a private banking relationship that was forged in Hong Kong, we may refer this client back to Hang Seng China if they have mortgage or commercial facility requirements.
Will your core business be under threat when China fully liberalises the capital account?
Hang Seng as a whole always tries to take advantage of opportunities driven by economic policy (e.g. Shanghai-Hong Kong Stock Connect, Closer Economic Partnership Arrangement). In fact, we have just obtained approval from the CSRC to establish a JV with a Mainland entity [Shenzhen Qianhai Financial Holdings Co. Ltd.] to operate an asset management company in Qianhai. But for private banking, once the market conditions are ready, we will look closely to identify the best strategic approach to onshore China.
As it stands, how profitable is your private banking business?
In the APAC region, the average cost/income ratio for a private bank is 73%. We are below this mark and in a good position.
At the end of 2015, Hang Seng Private Bank had US$25 billion in assets under management, according to our estimates. This is below a widely quoted US$30 billion profitability threshold for Asia. Do you need to ramp up scale?
We are different from the European players. Many of them do not have any wholesale, commercial or personal banking in the region, so their focus is on the (U)HNW segment. To achieve scale, then, they must do one of two things: they must grow internally [organically] or they must acquire client assets externally, whether by buying another private bank or by poaching relationship managers. Hang Seng as a whole has over 3 million clients. We have a natural, internal infrastructure to acquire private banking clients.
What’s the minimum requirement to for a Hang Seng customer to become a private banking client?
We have a minimum requirement of HK$10 million. Yes, this is a standard industry benchmark, but the point is, the minimum requirement is really just an internal measurement to segment our clients. We have customers that don’t bother coming in to our central office because they have retired and they don’t want to wear a suit and tie. Instead they feel more comfortable talking to my branch colleagues. But the size of their transaction is sometimes bigger than a ‘normal’ private banking client. So the benchmark is only for the bank to segment. It means nothing to clients. If I am only worrying about UHNW clients, I may forget about the lower segments to my own detriment.
Markets have not been kind to investors for some time, and there is a pressing need for private banks to ensure recurring sources of income by building out discretionary offerings. Do you have plans to set up a discretionary portfolio management (DPM) service?
Our clients are traditionally hands-on and transactional in nature, and we often educate each other about what is happening in the market. But they want to be the decision makers and are not so keen on discretionary mandates. Equally, our clients are ageing and they are less keen on being involved in the lengthy sales process, especially because the market is becoming more complicated. That’s why some are asking for DPM so long as the returns are there. We do have plans to set up this offering but there is no timeline. We had it before but its success was less-than-satisfactory because clients typically benchmark returns – and if their performance does not exceed a given index, they wonder why they’re being charged. Now we are investigating how to revamp our former DPM service.
Private banks are also revamping their tech systems/offerings.
This is a critical issue. A large part of banks’ C/I ratio is driven by system upgrades, IT and compliance. We need to upgrade our system so as to better deliver information to our advisors and clients to make effective decisions. We have put a lot of resources into system enhancement and digital banking, but the data flow must be secure for our clients.
Is there any demand from clients or RMs for a mobile app?
Most of the communication between RMs and clients is via the phone or in person, so I would say that at this stage there is less need. If you look at the private banking niche, it remains very close and personal, so clients still prefer to interact in real life rather than through an app.
What does the rest of 2016 hold for Hang Seng Private Bank?
Our brand name is well received by Hong Kong and Mainland Chinese. And even though China’s GDP may dip below 6.5% and suffer from structural problems, many HNWI Chinese have already taken advantage of the high-speed growth experienced during the past 20 years, so they have already accumulated a very sizeable portfolio. Their next step will be to interact with a wealth manager or private bank to invest overseas and diversify. That’s an opportunity for Hang Seng Private Bank that we intend to take advantage of.