From a new client perspective, SA's private banking industry is thriving on a rising tide of affluence almost unequalled anywhere. Referring to Merrill Lynch's global survey of high net worth (HNW) individuals, Roger Eskinazi, head of BoE Private Clients in Gauteng, says during the 2004-2005 period analysed, a 22% increase in the number of SA US dollar millionaires was second only to Singapore.
"There is a lot of growth in the market," agrees Paul Hanley, head of Investec Private Bank. The obvious factors driving this have been strong gains in equity and residential and commercial property values over the past three years or more, the increasing number of black South Africans in senior executive positions and wealth spin-offs from empowerment deals.
But there have been other key drivers of wealth creation, says Hanley. One has been the foreign asset amnesty which has led to a greater disclosure of wealth and, in some cases, repatriation of assets to SA. Less obvious have been whites faced with early retirement who have gone on to build successful businesses. Numerous management buy-outs of noncore divisions from corporates have driven a strong entrepreneurial wealth-creation cycle, says Hanley.
Eskinazi feels that over the next five years the number of SA dollar millionaires "will increase dramatically" on the back of a strong economy and a surge in new and emerging wealth.
There are also other drivers of the SA private banking industry's success story, says Eskinazi.
"The growing number of HNW individuals are not only looking for bespoke investment advice but want to get it in one place and for a good price."
Increasingly HNW individuals are tiring of "the opaque, confusing and mysterious fee structures and artifice of some money managers and institutions", says Eskinazi. As a result, he feels more HNW individuals are choosing private banks to manage their wealth because of transparency, relatively low fees and the wide range of services on offer.
Eskinazi says recent developments have made people skittish about fees and very cautious about who they give money to . He says : "Just look at the spate of retirement annuity complaints against life assurers because of outrageous and Byzantine fee structures."
Similarly, he says HNW individuals see private banks as an attractive alternative because they are growing cautious of alternatives like unit trusts that levy heavy upfront fees and a variety of other charges.
HNW individuals can also not complain about a lack of choice when it comes to private banks. Indeed, they face a barrage of offerings which has led to a situation where SA private bankers have become locked in an intense battle for market share.
Echoing a widely held view, Absa Private Bank executive director Zarina Bassa says: "The market is extremely competitive." She says that until a few years ago Investec had the only real private bank offering but today the market is bulging with new players. Notably, 12 private banks were included in PricewaterhouseCoopers' 2005 SA banking industry survey.
The growing number of affluent South Africans will ultimately also attract foreign competition into the private banking industry, says Hanley. But their entry is unlikely to be plain sailing. "It is not possible just to transfer products from overseas into SA; it is essential to have an in-depth understanding of the local market," says Hanley.
Among factors very specific to SA is black economic empowerment (BEE).
"You have to understand the dynamics of BEE," says Hanley. "For example, it is often necessary for a private bank to provide funding for a BEE deal. This can often be difficult for a foreign bank to grasp."
BoE Private Clients MD Vince Boulle shares Hanley's view on barriers to entry by foreign participants.
"A foreign newcomer will also have to convince potential clients that they are here to stay and will not pull out after a few years," says Boulle.
A pull-out of the SA private banking market by a foreign bank was seen in 2005 when UK bank HSBC sold its SA operation to Investec. At the time HSBC had R2,9bn in funds under management and R12,1bn in funds under administration.
But despite the obstacles, Hanley says the determination and abilities of foreign banks should not be underestimated. "I expect it could take two to three years, but they will come to SA."
RMB Private Bank Western Cape divisional head Marius Kilian also believes foreign competition is heading for SA.
"I am not too concerned," says Kilian, who feels SA banks have the skills to provide tough opposition. The positioning and capabilities of many SA private banks do not trail global best practice and in some areas are "perhaps ahead", he says. This is particularly true of highly technical areas such as structured finance and specialist lending.
To an extent foreign competition has arrived in the form of Barclays' acquisition of Absa. Bassa says one of the key benefits for Absa Private Bank has been the ability to offer a more comprehensive product line-up, including "seamless" offshore asset management and transactional banking services.
From a competitive perspective, Boulle says: "Barclays has had no impact yet and we have seen no threat to our client base." But he says if this were to occur, "we would defend our position aggressively".
What does require aggressive defence by private banks at present is their skilled staff base.
"Some competitors have aggressively tried to poach our staff to accelerate entry into our space but have met with little success," says Hanley.
"It has become a war for talent," says Boulle. "All private banks want the best people; getting them is a challenge." Though BoE Private Bank is well staffed, it will need more people if it wants to continue growing, he says.
If you can't buy them, train them, it appears from an initiative of Absa Private Bank.
"We have just established the Absa Private Bank Academy in conjunction with a local university to qualify our own private bankers," says Bassa. "It is critical for transformation and ensuring the availability of the right calibre of people."
She explains that the three-year degree course will focus on wealth management and consolidate private banking as a profession.
"In many respects a private banker has much in common with a chartered accountant," says Bassa. "They both entail a high degree of ethics and building long-term, sometimes lifetime, positions of trust."
