Aggressive competition for the wallets of the well heeled may be taking place in SA's private banking sector, but this is not a signal that it is either overtraded or without growth potential, says PricewaterhouseCoopers (PwC) partner Johannes Grosskoph.
However, he adds a caveat. The potential and the profits are there for only those who differentiate their offerings. And for those that get things wrong, it can prove to be a costly sector.
According to PricewaterhouseCoopers Strategic & Emerging Issues in South African Banking Survey 2005 , most banks have battled to make big profits from their private banking operations. Only one reported a "very profitable" private banking operation, with a return in the 20%-30% range. One reported "profitable" results, with a return of 10%-20%, and three reported "marginally profitable" results, with returns of 0%-10%.
It does not take much to pinpoint Investec Private Bank (IPB) as being the "very profitable" one, given its profit history.
In the year to March 2005, IPB lifted its net profit 82,2% to R388m, bringing its average profit growth over three years to 48%/year.
In the 2005 financial year, IPB accounted for 27,6% of Investec's total SA earnings of R1,4bn and produced a pretax return on equity of 28,4%. Globally, Investec's SA, UK and Australian private banking operations, which all adhere to the same model, turned in a 57,6% higher operating profit of £71,1m (R800m) in 2005 and represented the group's biggest source of profit.
IPB's results show how effective the right recipe can be and the reason SA's big banks are throwing everything they have into making their private banking operations successful.
Private banking also holds strong appeal as a high-value, lower-risk source of additional revenue from advances. In the year to June 2004, RMB Private Bank (RMBPB) reported nonperforming loans of only 1,8% of gross advances of R9,5bn. This compared with its sibling First National Bank's retail banking division's nonperforming loans of 5,9%. However, the high costs involved in serving wealthy clients were evident in cost to income ratios of 69,8% in retail and 77,9% in private banking operations.
Recently appointed Absa Private Bank (APB) managing executive Zarina Bassa, who is the first woman appointed to head an SA private bank, has set herself an ambitious target . "Absa is SA's largest retail bank; my aim is to translate this into a dominant position in wealth management."
APB, which is absorbing Absa's mid-tier offering, Personal Financial Services, appears to have gone some way in meeting this target. In the year to March 2005, APB reported a 28% increase in net profit to R221m, though this was still only 9% of total group headline earnings.
Bassa predicts that Absa's acquisition by Barclays "will add a significant dimension" to APB by introducing more comprehensive offshore banking and investment products.
Encouragingly, the joint 2005 Merrill Lynch/Capgemini World Wealth Report indicates there is scope for growth in SA's high net worth (HNW) market.
Last year the number of HNW individuals with more than US$1m in investable assets (excluding property) grew by 21,6% to 37 000. This was just short of the 22,4% recorded by Singapore, the world's fastest-growing HNW market.
Lower down the ranks of the wealthy, using an income-only measure of R1m/year as a hurdle, Vince Boulle, MD of BoE Private Clients puts the number of families in this category in SA at between 80 000 and 100 000.
Others are less certain of numbers. "No survey can put an exact figure on the number of HNW individuals," says RMBPB divisional head Marius Kilian. "Not all people are keen to tell the world what they are worth; we are continually surprised at the HNW individuals we find in the most unlikely areas."
But whatever the exact figure, Kilian agrees that SA's HNW sector presents private banks "with a lot of opportunity for expansion; there is a long way to go before the industry reaches saturation".
Private bankers are also hoping growth will come from moves by HNW individuals to consolidate the number of service suppliers they entrust with their wealth. "With the advent of legislation such as the Financial Advisory & Intermediary Services Act, much higher professionalism and service levels are required in dispensing financial advice," says Clive Douglas, Standard Bank director heading group private banking operations.
He says many HNW clients use the services of up to three banks and two other financial service providers.
However, Roger Eskinazi, the head of BoE Private Clients in Gauteng, says: "Clients are not looking for only bespoke investment advice but want to get it in one place and for a good price." He says a growing number of HNW individuals are tired of "the opaque, confusing and mysterious fee structures and artifice" of some money managers and institutions and are increasingly choosing private banks to manage their wealth because of transparency, relatively low fees and the range of services on offer.
Eskinazi believes HNW individuals prefer private banks because they are becoming cautious of alternatives such as unit trusts, which have heavy upfront fees, high annual fees and even more fees when units are sold.
Eskinazi says: "Compare this with a typical private client who pays fees on a sliding scale that is in proportion with the amount of assets under management." For example, a 1,2%/year fee on the first R3m , 1% on the next R5m, 0,5% on the next and so on to the level where anything over R10m becomes negotiable. Clients also have access to tax experts, fiduciary specialists, trust advisers and financial planners on top of expert asset management.
Another market sector that offers big potential in SA is HNW black families. "There is a lot of new wealth coming through," says Boulle. BoE Private Clients , which dominates the Western Cape "old-money" market, now views Gauteng, where Boulle is based, as "its growth focus" region.
"The black market has never linked itself to a single brand" says Boulle. "It will not necessarily be the first private bank that enters this market, but the one that applies the correct strategy, that will gain a big share."
There are also opportunities for private bankers in empowerment deals, says Boulle.
