China Merchants Bank Private Banking is today China’s largest private bank by client assets, having achieved phenomenal growth since its doors first opened in 2007. Asian Private Banker speaks with its general manager, Wang Jing, who has overseen CMB’s transformation into a private banking major.
As of Chinese New Year, 2016, CMB Private Banking had RMB1.3 trillion (US$197.4 billion) in assets under management (AUM). Has there been any change since then?
“Our latest figure for 2016Q1 is RMB1.4 trillion (US$212.6 billion).”
Is this figure specific to the private bank or does it shadow the entire bank’s assets?
“These figures are specific to the private bank. Yes, some of our [private banking] clients used to be clients of our retail banking business. But once they meet the RMB10 million (US$1.5 million) threshold, or they are adjudged to have the potential to be upgraded, then their assets are transferred in their entirety to the private bank.”
You continue to experience rapid AUM growth at a time when private banks in Hong Kong and Singapore are struggling to maintain past momentum. What’s driving this growth?
“The impetus for growth today is the same as previous years – though I am not so sure the same can be said about Hong Kong. In Mainland China, the first quarter – more than any other – typically sees an immense surge in individual wealth.”
“It’s partly because companies often pay out bonuses in the first quarter, especially in January and February. We also observed that some major shareholders sold their stocks last year. I believe these are the major reasons why our AUM increased over the past few months.
Of course, there was significant unrest in the stock market mid-last year. The government launched a policy imposing certain restrictions on how big shareholders offload their shares. However, the policy expired at the beginning of this year. Therefore, the ones who planned to sell their shares but were held up due to the policy likely sold in Q1, leading to a surge in AUM.”
Cost/income (CI) ratios in Hong Kong and Singapore remain high. How profitable is your business, and how does your CI ratio compare across the industry?
“Our income last year was around RMB$7.5 billion (US$1.1 billion) while profit was around RMB$5 billion (US$759 million). In Mainland China, banks don’t share CI ratios, so it’s difficult for me to make a comparison.
Presently, CMB Private Banking’s CI ratio is 25%. I understand that this is an [unusually low] number, as European banks tend to hover around the 80% mark. This shows that there is still plenty of room for us to invest in the business.
Our biggest expenses are wages, compensation, and personnel-related costs. Also, because my clients use services provided by other divisions – e.g. overseas or credit card services – we must also share these costs. However, I believe that offering all-round services is one of our points of comparative advantage.
For example, we have a dedicated 24 hour call centre service for our private banking clients. We run three eight hour shifts per day, with three staff assigned to each shift. Each time a client calls in, he or she will speak to the same operator, depending on the time of day. So they feel that their service is customised.”
What’s your relationship manager (RM) headcount?
“Right now we have 1000 RMs.”
With such a large number to manage, how do you ensure that your RMs remain compliant, and that their level of service is up to scratch?
“That’s actually a very good question, and one that I think about every day. It is very difficult to coordinate a group of this size. Of course, we demand a high degree of professionalism and sophistication from our RMs. 70% of my RMs previously worked in CMB’s corporate finance or retail banking departments – some for as long four years. The remaining 30% were recruited from fund or trust houses.
As far as discipline and compliance goes, we have several measures in place to ensure that our RMs remain above board. We conduct internal training sessions, regular post-sales checks and, in fact, our system only allows trades that have met certain compliance-related criteria to go through.
From the first day an RM steps into the office, we [provide training] on compliance, products and investment[s], whether for Mainland China, Hong Kong and overseas. That’s why some banks – including Goldman Sachs – come to our Shenzhen office to contribute to our training programme and exchange experiences. We even send some RMs to Hong Kong to train.”
Who are your biggest competitors?
“There are two major types of financial institution doing private banking in Mainland China today.
The first is large local banks with private banking arms, such as ICBC. ICBC has a considerable base that reaches small cities across Mainland China, including cities where we do not yet have a presence. This is perhaps why ICBC maintains a close relationship with the general [mass retail] client segment. Equally, there are many HNWIs in smaller Chinese cities, and so ICBC has a great foundation to tap into this market. Our branches only cover first and second-tier cities at the moment. We have 42 private banking centres nationwide.”
But there is patent opportunity in these smaller cities, even given your RMB10 million threshold?
“Yes. For example, southeastern parts of China, like Zhejiang, Jiangsu, Fujian and Guangdong are where property and assets tend to accumulate. These provinces harbour a lot of potential. Take Zhejiang as an example. ICBC has a great number of clients in Zhejiang since it has branches across the province. We only have one branch in Hangzhou. As far as I can remember, ICBC’s number of [private banking] clients in Zhejiang will exceed 10,000 very soon. So there is a plan to move into these smaller cities, but it is a bit difficult for us to hire suitable RMs or related professionals in those cities.”
And the second source of competition?
“Yes, the other major type is non-banking institutions – asset managers and investment banks – such as CITIC Securities and Noah. Even though Noah is not a private bank, its business is set up like a private bank. Similarly, CITIC Securities has set up a new department that caters to HNWIs brought across from its investment banking and wealth management businesses.”
What about the foreign players?
“Many people assume that foreign banks, given their maturity and experience, are a natural source of competition for onshore majors in China. However, their growth has been unexpectedly slow due to licensing and product-related issues. Some foreign private banks have even laid off staff in the Mainland, or have merged with retail banks. It seems to me that that they do not have a consolidated foundation to grow in a profitable manner.”
If and when capital account liberalisation occurs, will you be better placed to challenge these foreign banks in Hong Kong and Singapore?
“I believe that liberalisation will happen in the near future. At CMB we are preparing for this by establishing a worldwide service network by inking international partnerships and enhancing our ability to service clients from all over the world. From my experience with clients, mutual trust determines where they choose to put their money. Building trust takes time, and so I doubt that our clients will look elsewhere when that time [liberalisation] comes.”
Have you formed any strategic partnerships with foreign players?
“No. We are still in discussions throughout various regions, and no final decisions have been made. However, I believe that our partnerships will be diverse in terms of the areas they cover and the types of cooperation they involve.”
A common line of thought is that China’s private banking industry is effectively hamstrung by the lack of product available to investors.
“I think this is more about how one understands the word “product”. Products are essentially tailormade solutions for clients. So solutions like non-banking products or legal advice can also be considered products.”
Do you think business would be easier if you had access to a wider range of more complex offerings?
“These are early days for China’s private banking industry. We do not simply rely on financial tools to attract clients. We believe that by providing clients with customised solutions, we are more likely to contribute to the long-term development of the business and of the industry as a whole. We are not strictly profit-oriented.”
I’m sure most private banks would say the same thing.
“Well, you would be interested to know that the reason why we have become such a large private bank and have grown our AUM by 30% over the past year is because we offer clients solutions when everybody else talks about products. This means that we have been able to build deep and sticky relationships with our clients, and to enhance our brand. Clients notice that CMB is different to its competitors because it doesn’t just push you to purchase products.”
How do go about constructing a diversified global portfolio given that there is limited access to foreign markets in China?
“Even though restrictions remain on the inflow and outflow of capital, our clients have on average 20-30% of their total assets in foreign countries, for reasons such as investment immigration or perhaps they have children studying abroad. Of course, capital outflows are increasing.”
Do you think politics plays a significant role in offshore flows?
“No, I believe outflows are driven primarily by a concern for diversification and the need to achieve growth.”
The fintech revolution is very much in full swing in Hong Kong and Singapore. How are you coping with these changes?
“It is the biggest item on our offshore budget sheet. We have a traditional platform for our onshore business, but we are now building an independent platform for our expanding offshore business. But it’s a challenge. Our offshore platform must be localised according to jurisdiction. So we have a team that is dedicated to offshore system innovation. The design of the whole system is coordinated by our headquarters, but engineers from all over the world are involved.”
Clearly you see sufficient promise in your offshore business to dedicating such a large amount of resource to it?
“Everything revolves around our clients. Our offshore plans are driven by our clients’ demand for offshore services, even though the offshore business is not where our strength lies. We are still in the process of figuring out how best to build our offshore business. What I can say is that whatever we do will reflect our core belief that “our clients come first”.