As the prospect of a full eurozone bailout looms large in Spain, private banks are looking for more innovative ways to differentiate themselves from their competitors. Maryrose Fison finds that enhanced services and client segmentation are at the forefront of wealth management businesses’ growth strategies.
Persuading clients to increase their risk appetite in times of high market volatility has never been a simple task.
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Convincing investors to change their portfolio strategy when their country is on the brink of a full sovereign bailout and safe haven investments have been reclassified as risky compounds this challenge.
Such is the conundrum facing Spain’s private banks as the nation endures its second recession in three years.
With Eurozone ministers having agreed to loan Spanish banks up to $123bn(€100bn) last month, it would be easy to paint a bleak picture for Spain’s private banking sector.
In fact, the situation is less gloomy than outsiders first assume.
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By GlobalDataWhile the pool of high net worth (HNW) individuals remains static and investor sentiment is heavily skewed towards wealth preservation, this has not stymied growth in the most adaptable private banks.
Total assets under management in Spain’s wealth management market reached €356bn in December 2011, 4.4% more than in 2010, according to the latest report from Spanish business and finance consultancy DBK.
Universal banking institutions strengthened their position in the private banking market, to hold 70.2% of total assets under management in 2011 compared with just 55.3% in 2007.
By contrast, specialised banking institutions have lost some market share and today account for 26.3% compared with 36.3% in 2007.
Other financial entities account for 3.4% of the market today compared with 8.1% in 2007.
Consolidation underpins this trend and private banking experts expect the pattern to continue. José Garcerán, head of BBVA private banking in Spain and Portugal, told Private Banker International he expected more restructuring of the market to play out over the coming year.
“In the next 12 months, the Spanish banking map will change dramatically as the number of players will decrease as a consequence of the consolidation process that we expect.
“The mergers will affect the smallest institutions which have not got a significant market share in private banking,” he said.
“On the other hand, we expect that the flight to quality process will continue and the investors will seek the institutions with the highest solvency.
“That means that the market share of large institutions with private banking activities will increase even further.”
Evidence of this consolidation is already apparent. Two years ago, approximately 10 banks controlled the majority of the private banking market. Today, the number has halved with five banks managing large chunks of the nation’s wealth management assets. Santander, BBVA, CaixaBank, Sabadell Urquijo and Bankinter are among the five largest private banks in Spain.
Juan Gandarias, general manager of CaixaBank Private Banking, told Private Banker International that organic and inorganic growth underpinned the private bank’s success.
In 2008, CaixaBank acquired Morgan Stanley’s private banking division and with it an extra €8bn in assets under management.
This year, CaixaBank has acquired Banca Civica, a transaction which Gandarias expects will ramp up client numbers even further.
“We expect the number of clients we have will grow by 10% in the next month as a result of this transaction and that will give us a market share of 13.5%.
“We are trying to achieve a market share of 15% by 2014. To achieve this, we will need to increase our client base by an additional 10% following the acquisition,” he said.
With more than 38,000 clients and €39.48bn in assets under management, the average equity of individual clients is approximately €1m.
Gandarias says two recent developments have further driven the bank’s growth prospects.
Client segmentation
In 2011, the bank upgraded its portfolio management methodology to a new version known as “Time”.
He says the new methodology aims to help customers structure their capital in portfolios distinguished by five aims: retirement tranquillity, availability of income over time, capital growth, transfer between generations and coverage of risks.
The group has also taken the step of segmenting its ultra HNW clients from the remainder of its clients.
The threshold level of equity for clients of CaixaBank is €500,000 with the target level being around €1m.
Those with more than €10m in assets under management – approximately 300 individuals, or 0.6% of CaixaBank’s total clients – are now classed as part of the new “Altium” bracket.
“A key difference between Altium and the service we offer to the rest of our private banking clients is the ratio of private bankers to clients, the type of advice, the frequency of advice and services available,” Gandarias explained.
“We have one private banker to 20-to-25
Altium clients compared with one private banker for 100 regular private banking clients.
The level of service is much higher and our bankers will meet almost every month with their clients to review their portfolio.
We give them advice on their whole position, not only in La Caixa but also outside La Caixa, so it’s an advisory service for the whole portfolio.”
CaixaBank is not alone in finding new ways to sharpen its competitive edge.
Last month, Santander, Spain’s largest bank with around €75bn in assets under management in its Spanish private banking units, launched a new portfolio service for clients.
Enhanced service offerings
The service, known as the “advisory contract”, has been in the pipeline for 12 months and cost more than €1m to build, according to Luis Moreno, head of marketing at Santander’s global private banking division, which represents approximately half of the assets under management in the bank’s Spanish private banking business.
“The combination of market turmoil has really increased the necessity of having this more structured advice for clients,” he told Private Banker International.
“We have three types of private banking services. The first area is portfolio management.
The second area is advised custody and we have put this new service in between these two.
It is under a contract where we provide more in-depth analysis of the portfolio and have more frequent contact with the clients, offering constant advice and overview.”
“We have seen that some clients really want to be the ones to make the decision.
“Changes in the markets have happened so fast that some clients want to take control and be very sure that the decisions affecting their money are taken with their knowledge and approval at any time.”
Moreno hopes that the new service will attract more than 20% of Banif’s private banking clients within one year but declined to give specific targets for client numbers.
“Banif is the veteran private banking brand under which the global private banking division operates in Spain.
Growing organically
But this isn’t the only strategy the bank is employing to ramp up its profits. Faced with a shrinking market, Moreno says the most effective way to grow is organically and by attracting clients from competitor banks.
“We don’t do any advertising because it is an inefficient way of reaching such a small part of the population.
We believe very much in direct marketing. We have a few database mining experts in the bank but the most effective way of getting clients is through our bankers’ day-to-day work and customer referrals,” he said.
“We set up events where we invite clients to invite their friends. We run two different kinds of events – “professional events” and “lifestyle events”.
The professional events are conferences and seminars held on specific issues which might be interesting to the banking clients.
This could be on the markets or tax changes. Then there are the lifestyle events such as golf or art-related events.”
Banif has €37bn in assets under management in Spain, while the rest of Santander’s private banking business in Spain is carried out through Santander and Banesto branches, which manage assets worth approximately €38bn.
Investing in managers
While consolidation gathers momentum and banks vie for customers, falling markets mean investment expertise remains one of the strongest selling points for prospective clients.
In July, borrowing costs in Spain reached euro-era highs. The yields on 10-year government bonds exceeded 7% with shorter duration bonds, for two years and five years, rising above 6% and 7% respectively.
Faced with this market environment, portfolio managers’ skills are being put to the test.
Swiss bank UBS, which has private banking operations in Spain, has defied the markets, succeeding in growing its assets under management by between five and 10% annually in every year of the Spanish financial crisis.
How did it achieve this? Pablo Díaz Megías, executive chairman and chief executive officer of UBS’s Spanish wealth management arm, told Private Banker International that his portfolio managers invested money in funds outside of Spain.
“What we have been able to offer our clients is a very good global diversification and we have taken them to a very large extent out of the euro crisis and definitely out of Spain,” he said.
“Our asset allocation, which is reviewed regularly, has skewed towards the US, towards emerging markets, Asia and in Europe, we are only investing in the UK and in Germany.”
UBS has also put all of its client advisers on a two-year training programme to boost their expertise in investing further.
“We have set up a very intensive programme through which we get all our bankers to get specific certification in order to be able to do this advisory service properly.
“In that sense, we are turning our bankers more into investment managers,” he said.
Future threats
Withstanding the Spanish market woes is, however, only one part of the growth equation for private banks. The proliferation of independent financial advisers in Spain presents another potential threat to client retention.
Díaz Megías estimates that the numbers of independent financial advisers will multiply many times over in the coming year, potentially swallowing up a sizeable chunk of business historically undertaken by private banks.
“Independent financial advisers have started to appear. Some regulation which was passed two years ago encouraged small groups of bankers to set up advisory boutiques, so this is a part of the business which is growing the most,” he said.
“Before the financial crisis, it was not uncommon to find financial intermediaries in Spain but they were not regulated. The new regulatory framework has allowed for the set up of this segment. The number of independent financial advisers in Spain is coming from a very low base. We wouldn’t be surprised to see that, in about five years or so, 13% to 30% is within this market. Today the number of independent financial advisers doesn’t reach 5%,” added Megías.
While the full extent of the debt crisis continues to emerge, Spain’s large private banks appear to be better capitalised than retail banks which are feeling the pain most from bad loans. As the past year has shown, the private banking landscape has proven resilient and capable of adapting.
With enhanced services, more sophisticated client segmentation and technical investment skills buoyed by continual training in portfolio management, the wealth management arena looks well positioned to continue on its growth course.
Click here to read the Q&A with Jose Garceran, Head of BBVA Private Banking Spain and Portugal
