Indian Summer

Ajay Piramal is just the sort of big fish every Indian private banker would love to land. With businesses ranging from healthcare to glass and property, the 56-year old Piramal has a net worth of $1.4bn, according to Forbes, good for 39th on its India rich list.

The problem, at least for the swelling ranks of wealth managers in India, is that Piramal doesn’t need them, putting his millions instead in his own companies and  extensive property ventures.

“These are only two areas I invest in, and therefore we don’t need any advisor,” said Piramal, who is approached by private bankers “all the time”. India may be churning out millionaires, but that is failing to translate to profits for the banks that have set up teams of well-dressed, well-paid bankers to help manage those riches.

A narrow product range, falling advisory fees and billions of dollars in wealth hidden from tax officials has stifled profits for private banks, which have aggressively ramped up operations. At the same time, expenses – mostly salaries – are growing by as much as 20 percent a year, meaning many private banks must absorb potentially heavy running costs for years before they are profitable.

The industry’s difficulties in India come as more established wealth management centres in Hong Kong, Singapore and elsewhere are buffeted by poor markets. Profit margin pressure on the sector that serves the wealthy is “partly driven by a plain vanilla product platform available for clients,” said Atul Singh, head of global wealth and investment management for India at Bank of America Merrill Lynch , among the biggest players in the country.

The challenge is made greater by a poor market performance, with Indian shares sliding about 17 percent this year. A spate of corruption scandals embroiling the country’s business and political elite has also soured sentiment among the rich.

The tough conditions are exacting a toll, even as many banks such as Morgan Stanley, Royal Bank of Scotland, Barclays and Bank of America Merrill Lynch continue to add staff, with an eye to the long-term potential of the fast-growing economy. Credit Suisse, one of the largest global private banks and a player in India since 2008, is cutting its India wealth management staff by 12 people, or 20 percent, as part of a global reduction. Credit Suisse is unlikely to be the last to trim staff over the medium term, industry players said.

A dearth of fee-spinning alternate investment vehicles such as hedge funds and private equity, a $200,000 cap on overseas investments by onshore Indians, and an underdeveloped corporate bond market means most investments are channelled into run-of-the-mill equity products, bank deposits, and government bonds.

Investments in exotic assets such as art and wine are rare in India. Instead, the homegrown rich keep their money in property and gold, which doesn’t require the services of polished bankers of the sort that cater to the rich in places like London, New York and Singapore. “When product platforms are largely undifferentiated, then prices get driven down,” said Singh. “Making money is certainly tough for players in the sector, especially ones without scale.”

Many tycoons like Azim Premji, chairman of the third-largest IT services exporter Wipro and the third-richest person in India, with net worth estimated by Forbes at $16.8bn, continues to use in-house staff to manage his vast personal wealth.

In neighbouring China, wealth managers also contend with tight regulations and limited product offerings, but they also face less domestic competition. Many rich mainland Chinese invest in property or stash their wealth in Hong Kong or Singapore. Many of the richest Indians also have substantial wealth overseas and do their private banking in Singapore, Zurich, London or Dubai, where there are more investment options and where some banks cater specifically to non-resident Indians.

Cost pressure
Private banks in India charge between zero and 0.5 percent advisory fees to wealthy clients, which barely covers costs, compared to about two percent in more developed markets.Pressure on fees and rising costs have dragged down most wealth management firms’ margins to 40-50 basis points now from one to two percent a few years back.

The gradual shift from charging transaction-based fees to an advisory fee model, amid a global move to discourage selling of risky exotic instruments, has added to margin pressure. “No one is making money in private banking in India,” said the head of India wealth management at a US bank. “Margins are so very low here because very few people want to pay money for advice and your cost of operations is going up.”

To woo clients, some banks will send the adult children of entrepreneurs for short training courses at US universities on preserving and growing family wealth, giving them an opportunity to rub shoulders with the sons and daughters of rich Americans. Closer to home, private banks coddle prospective and would-be customers with wine tastings and live music and dance performances by Bollywood stars.

In 2010, the population of high net worth individuals – those with more than $1m in investable assets – rose nearly 21 percent in India to 153,000 – making it the 12th largest such market, ahead of Spain and just behind Brazil, according to a report by Capgemini and Merrill Lynch.

Black money
A large chunk of Indian wealth goes undeclared. Tax authorities say billions of dollars in funds have been deposited by Indians in Swiss bank accounts and other tax havens. A government panel in 2009 found Indian illicit funds to range between $500bn and $1.4trn, which is now nearly the size of India’s economy. Global Financial Integrity, a Washington-based think-tank, estimated illicit outflows of about $16bn a year from 2002-2006.

Technology consultancy firm Cognizant said in a report that the Indian wealth management sector in the short-term would remain fragmented with a large number of brokers, financial advisors, insurance agents and tax consultants offering services.

Bank of America-Merrill Lynch, Kotak Mahindra, and HSBC were cited by Cognizant as strong players in the sector in India because of their reach, potential for cross-selling banking products and focus on domestic equities. Big banks that have yet to take the full plunge on Indian private banking may end up looking prescient, or lucky. UBS, a global leader in private banking, is in the early stages of providing onshore wealth management services in India.

Goldman Sachs’ private wealth management arm serves high net worth Indians from Singapore but does not have an onshore presence in India, while JPMorgan has pushed back plans to launch onshore services to late 2012, according to a source with knowledge of the situation.

Rising salaries, poaching of talent and wafer-thin margins have made it tougher for smaller home-grown wealth managers to compete with the global rivals. However, while western banks bring brand cachet and global expertise, they also tend to be saddled with higher costs.