China Wealth 2017: The Way Ahead After a Golden Decade

Transcription

1 China Wealth 2017: The Way Ahead After a Golden Decade The Boston Consulting Group in collaboration with China Industrial Bank Private Banking December 2017

2 Contents 1. Introduction 1 2. The World s Second Largest Wealth Management Market Takes Shape Wealth Management Grew Rapidly over the Golden Decade Entrepreneurs Are Autonomous Wealth Management Clients and Pursue High Returns The Competitive Landscape Is Changing Business Models Are Retail-upgraded and Product-driven Chinese Private Banks Are at a Crossroad Yield Expectations Under the New Normal Changing Client Demographics, Changing Wealth Management Needs Cross-sector Competition Intensifies as Business Boundaries Break Down Changing Strategic Positioning Driving Reforms A Unique Path for Chinese Private Banks Private Banks Need Client-centric Value Propositions Capabilities Across the Whole Value Chain Are a Source of Advantage Building Specialized Private Banking Within a Branch Network How Mainstream Commercial Banks Can Develop Private Banking Outlook for the Chinese Wealth Management Market in Conclusion 33 Appendix I: A Description of the Methodology 34

3 China Wealth 2017: The Way Ahead After a Golden Decade 1. Introduction After 40 years of rapid economic growth following China s economic reforms, 2.1 million Chinese households are now high net worth. This has created a private wealth management market of RMB 120 trillion of assets under management (AuM). Twelve Chinese commercial banks now have over 500,000 private banking clients and about RMB 8 trillion in AuM. However, Chinese private banks are challenged by imbalanced capabilities and homogeneous business models. As the Chinese economy transits into the new normal, the private banking environment is changing: Market. While asset returns are under pressure, wealth continues to grow rapidly. A huge quantity of wealth will continue to chase after scarce high-quality assets, changing the expectations of both private banks and their clients. Clients. HNW clients are becoming more diverse and sophisticated, with a growing demand for wealth preservation and succession planning. They have a deeper understanding of risk-return and seek more competent and specialized services from wealth managers. Landscape. As competition intensifies across sectors, China s financial system is getting mature, and regulation and supervision have been improved. This will help private banks to overcome barriers to cross-sector business and create new business models. Proposition. Reforms of financial regulation mean banks are seeking less capitalintensive lines of business. Private banking carries low levels of credit risk, and hence requires less capital than traditional lending businesses, showing a new strategic value. As the 10th anniversary of private banking in China approaches, commercial banks should clarify the strategic position of their private banking offerings, finding a model with December 2017 China Industrial Bank Private Banking The Boston Consulting Group

4 2 China Wealth 2017: The Way Ahead After a Golden Decade distinctively Chinese characteristics. These models should be client-centric, offer a value proposition that is more than retail upgraded, with capabilities over the whole value chain, and establish specialized governance structure with private banking as a quasiprofit center. In the short and medium term, commercial banks should: Establish a specialized private banking team that provides a differentiated value proposition for private banking clients. Strengthen product platform capabilities and investment consultant capabilities, especially for researching and distributing multi-asset class strategies and equity products. Improve coordination between departments and between head office and branches, using profit sharing and performance incentive schemes. 2. The World s Second Largest Wealth Management Market Takes Shape Private banking took off in China in 2007 when Bank of China and Royal Bank of Scotland jointly introduced private banking services. Over the past decade China s GDP has grown by 170%, the disposable income of urban households has increased by 150%, and over 2.1 million households have become HNW ones. This accumulation of private wealth, has made China the second largest wealth management market in the world, and Chinese private banking has ridden the wave. Below, we review the development of Chinese private banking over this golden decade, looking at market size, competitive landscape, clients characteristics and business models. 2.1 Wealth Management Grew Rapidly over the Golden Decade Benefited from rapid economic growth over the past four decades, private wealth has increased dramatically in China. In 2016, total individual investable assets in China was estimated to be RMB 126 trillion (about 1.7 times GDP). Individual investable assets is projected to grow steadily and reach RMB 220 trillion by (See Exhibit 1.) The economic reforms of the late 1970s allowed Chinese citizens to become affluent. Each subsequent wave of economic activity the begin of private businesses in the early- 1980s, the rise of manufacturing in the 1990s, the booming of real estate and mining at the early 21 st century and the current mass enterpreneurship and innovation has China Industrial Bank Private Banking The Boston Consulting Group December 2017

5 China Wealth 2017: The Way Ahead After a Golden Decade 3 EXHIBIT 1. Private Wealth in China Realized 20% Annualized Growth, and Is Projected to Grow Steadily to RMB 220 Trillion by 2021 Total Individual Investable Financial Assets in China 1 Trillion RMB % % E 2018E 2019E 2020E 2021E Sources: BCG Global Wealth Database; BCG analysis. 1 Individual investable financial assets include offshore assets but exclude non-financial investment assets such as real estate and luxury goods. produced its own HNW households (defined as households with private financial wealth exceeding RMB 6 million or USD 1 million 1 ). The number of HNW households grew at an annualized rate of 21% between 2007 and 2016, reaching over 2.1 million. These HNW households account for 43% of the total private financial wealth in China. As in other countries, HNW households in China accumulate wealth faster than the rest. From 2011 to 2016, their wealth increased at an annualized rate of 25%, and ultra-hnw households (with private financial wealth exceeding RMB 30 million 2 ) got richer at a rate of 29%, compared to 14% for ordinary households. With economic growth slowing down, the wealth of HNW households will also grow more slowly, but still at 15% annually from 2016 to By 2021, AuM in the Chinese HNW wealth management market are expected to reach RMB 110 trillion, offering huge opportunities for private banks. (See Exhibit 2.) China s wealth management market officially started when the first wealth management product (WMP) was issued in Since then, the products in China s wealth management market have direct equity investment, now including bank WMPs, trusts, mutual funds, PE funds, direct stock investment, insurance, and pensions. The great bull 1. Threshold in the model is USD 1 million, approximately RMB 6 million. 2. Threshold in the model is USD 5 million, approximately RMB 30 million. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

6 4 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 2. China s HNW Households Total 2.1m. A Private Banking Market with Assets of 110 Trillion Is Projected to Take Shape in 2021 Total HNW Households in China 1 Total Investable Financial Wealth of HNW Households in China 2 10,000 households Trillion RMB % 12% 87% +21% 150 2% 12% 86% 186 2% 12% 86% 212 2% 12% 86% 244 3% 12% 85% 277 3% 12% 85% +13% 314 3% 12% 85% 355 3% 13% 85% 400 3% 13% 84% % % E 2018 E 2019 E 2020 E 2021 E E 2018 E 2019 E 2020 E 2021 E > USD 20M USD 5-20M USD 1-5M Sources: BCG Global Wealth Database; BCG analysis. Note: Calculation is based on USD to RMB at 1:6.642; some percentages may not add up to 100% because of round-up. 1 HNW households are those with investable assets of over USD 1 million. 2 Private financial wealth includes offshore assets, but excludes non-financial investment assets such as real estate and luxury goods. market in drove the growth of mutual funds; the wave of investment through trust plans that started in 2009 opened the door for investment products exclusively for HNWIs; and from , private investing PE funds 3 grew and reached RMB 2.4 trillion at an annualized rate of over 110%, becoming a popular choice for HNWIs. Bank deposits account for about half of private asset allocations, but their dominance has declined in recent years. (See Exhibit 3.) As private financial wealth growing rapidly and capital markets getting mature, private banking in China has grown significantly. According to publicly available information, the private banking arms of 12 Chinese commercial banks had acquired more than 500,000 clients with nearly RMB 8 trillion of AuM 4 by (See Exhibit 4 on page 6.) This makes Chinese private banks comparable in size to well-established foreign private banks. The largest Chinese private bank was one of the Top 20 Global Private Banks in Including PE funds and private securities funds. 4. The 12 banks included are: Bank of China, China Merchants Bank, China CITIC Bank, Industrial and Commerce Bank of China, Bank of Communications, China Construction Bank, China Minsheng Banking Corporation, Agricultural Bank of China, Industrial Bank of China, China Everbright Bank, Shanghai Pudong Development Bank and Ping An Bank. Overlapping clients are not excluded. China Industrial Bank Private Banking The Boston Consulting Group December 2017

7 China Wealth 2017: The Way Ahead After a Golden Decade 5 EXHIBIT 3. Private Financial Asset Allocation over the Past Decade: Deposits Continue to Decline, Bank WMPs Are the Most Important Products Besides Deposits, and Trusts and Private Funds Also Grew Fast % 100 Product Category of Private Investable Financial Assets in China Others 1 Annualized Growth ( ) 37% Deposits 2 14% Bank wealth management products (WMP) Stocks Mutual funds Trusts PE Insurance and pensions 49% 13% 13% 63% 58% 19% Sources: BCG Global Wealth Database; BCG analysis. 1 Including bonds, asset management plans of securities companies, investment overseas and futures, etc. 2 Including money in circulation. 2.2 Entrepreneurs Are Autonomous Wealth Management Clients and Pursue High Returns Unlike HNWIs in developed markets, whose wealth was often accumulated over generations, HNWIs in China emerged within the recent 40 years since the economic reforms that began in (See Exhibit 5 on page 7.) Most made their money by owning a profitable business or assets that have appreciated in value, especially real estate. Many of them began business in the 1980s or 90s and are now between 40 and 60 years old. Chinese HNWIs have not gone through a long period of accumulation, and a remarkable number are still expanding their businesses. Rather than preserving their wealth, they seek to create new wealth by reinvesting capital in their enterprises. Over the past 10 years, returns from most investment products issued by financial institutions have been far lower than returns from business and real estate, which partly explains their lack of appeal to HNWIs. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

8 6 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 4. By end-2016, 12 Chinese Private Banks Served over 500,000 Clients with AUM Close to RMB 8 Trillion, Which Is a Leapfrog Growth Name Year of Opening Number of PB Clients 1 Total AUM (RMB 100 m) 1 AUM per Client (RMB 10,000) 1 PB Threshold2 BOC Mar ,000 10,000 1,000 RMB 8 m CMB Aug ,000 16,600 2,800 RMB 10 m CITIC ICBC BoCom 3 CCB CMBC 3 ABC CIB CEB SPDB PingAn 3 Aug 2007 Mar 2008 Mar 2008 Jul 2008 Oct 2008 Sep 2010 Apr 2011 Dec 2011 Jan 2012 Nov ,000 70,000 30,000 59,000 16,000 70,000 20,000 28,000 19,000 16,000 3,200 12,100 4,000 7,900 3,000 8,200 2,900 2,600 3,500 2,800 1,500 1,700 1,400 1,300 1,900 1,200 1, ,800 1,800 RMB 6 m RMB 8 m USD 2 m RMB 10 m RMB 8 m RMB 8 m RMB 6 m RMB 10 m RMB 8 m RMB 6 m Sources: Annual reports and official websites of banks; public information; BCG analysis. 1 Rounded up to 1,000 for the number of PB clients, 10 billion for total AUM and 1 million for AUM per client. 2 Banks have different criteria and calculation of asset threshold for PB. The figures are only a reference. 3 BoCom did not disclose relevant numbers in its 2016 semiannual report and annual report, so the figures are from its 2015 annual report. CMBC and PingAn did not disclose all relevant figures in their 2016 annual reports, so the figures are from their 2016 semiannual reports. Most private banking clients in China are not yet comfortable having their wealth managed by financial institutions, for three reasons. First, they achieved success and accumulated wealth by accurately judging the economic situation and starting businesses that broke with traditional thinking. These first generation entrepreneurs are confident in their own ability to make investment decisions. Second, China s capital market is immature and not yet very efficient. Many Chinese HNWIs believe that through their extensive social connections, they can get information on investment opportunities ahead of the market, and the returns of these investments may far exceed that of ordinary products from financial institutions. Third, HNWIs have a strong requirement for confidentiality, which Chinese wealth managers often fail to satisfy because of their lack of specialized teams. Financial institutions and relationship managers (RMs) find it difficult to establish close and reliable relationships with HNW clients quickly. Hence, even as private banks boom, HNWIs maintain a high level of autonomy in wealth management. China Industrial Bank Private Banking The Boston Consulting Group December 2017

9 China Wealth 2017: The Way Ahead After a Golden Decade 7 EXHIBIT 5. China s HNWIs Share Commonalities in Source of Wealth and Age Distribution Source of Wealth of HNW Respondents Age Distribution of HNW Respondents 1,265 1,074 1, ,074 1,438 9% 11% 7% > % 53 % 47 % Profit from owning business 25% 28% 20% % 22 % 22 % Investment returns 40% 37% 35% % 7 % 1 % 2015 Survey 13 % 10 % 8 % 2 % 3 % 2016 Survey 21 % 2017 Survey Salary and benefits Inheritance Others 23% 18% 4% 2015 Survey 6% 2016 Survey 26% 11% 2017 Survey Profit from owning business and investment returns are the major sources of wealth; HNWIs are mostly in their 40s-60s Sources: Joint survey by CIB and BCG on HNW clients in This autonomy influences HNWIs approach to wealth management in three ways. First, they source investment opportunities on their own and directly invest in businesses, stocks, real estate, etc. Second, even if they put money in financial institutions, most use them as supermarkets to buy products, instead of seeking genuine wealth management services, such as asset allocation and investment advice. Third, HNW clients hold strong personal view about financial products and prefer to allocate assets into many institutions instead of one institution that offers asset allocation advice. For example, they buy guaranteed WMPs from banks, trust products with higher returns but some risks from trust companies, and higher-risk stocks and equity products from securities companies. For private banks, the autonomy of Chinese HNWIs is both an obstacle to business expansion and a reason to improve capabilities. 2.3 The Competitive Landscape Is Changing Four commercial banks released data about their retail AuM in Private banking accounts for only 13% of their retail AuM, far less than the 43% of total private wealth 5. The four banks are ICBC, BoCom, CMBC and Ping An Bank. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

10 8 China Wealth 2017: The Way Ahead After a Golden Decade that HNW households account for. This suggests that new entrants do not need to win business from existing institutions, because a large portion of the potential customers are now unserved. Banks, trust companies, securities companies and third-party wealth managers are all entering the private banking market, adding diversity and vitality. According to publicly available information, by the end of 2016, twenty-two commercial banks offered private banking services, including the big-five commercial banks, ten joint stock banks, six city banks and one rural bank. Many trust companies and securities companies are prioritizing wealth management services, and have set up separate VIP or private banking arms to serve HNW clients. Commercial banks have significant advantages in serving HNW clients: large retail client base, well-established reputations, extensive branch networks and the multi-sector licenses of their parent company. Our client surveys for 3 consecutive years show that 70-80% of respondents choose commercial banks as their primary wealth managers. However, a large percentage of clients are also well disposed towards non-bank institutions and willing to choose them as primary wealth managers. Fifty-seven percent of respondents said that in the past two years they had handed more assets to non-bank institutions or will consider doing so. Trust companies, insurers and securities companies are the three most popular choices. Their appeal comes from higher returns, a greater variety of products, and more customized offerings. Commercial banks no longer dominate the market, and the competitive landscape is continuing to change. (See Exhibit 6 and Exhibit 7.) China s financial system, which strictly limits the scope of business for each type of financial institution, hinders the development of wealth management capabilities. For example, commercial banks have long been confined to providing credit and are therefore more accustomed to analyzing and managing risks in fixed income products, while lacking experience and skills in equity products. Under the segregated regulatory framework, banks are not allowed to offer security brokerage services. Their private banking arms, therefore, cannot provide stock investment advisory services. as their European and Hong Kong counterparts do. Thus, private banking accounts are not cross-market or universal. Further, commercial banks have their hands tied when designing private banking products. Many work with non-bank institutions, such as trust companies and securities companies, to carry out cross-market, multi-license business. This increases management costs, operational risks and supervision difficulties. At the same time, the underlying assets, product structures and pricing mechanism in China s financial market are poorly developed, which constrains private banking service China Industrial Bank Private Banking The Boston Consulting Group December 2017

11 China Wealth 2017: The Way Ahead After a Golden Decade 9 EXHIBIT 6. 60% of HNW Respondents Use 3 or More Wealth Managers, Among Which Chinese Commercial Bank PB, Insurance Companies, Securities Companies and Trust Companies Are the Most Popular Number of Wealth Managers in Use Type of Wealth Managers in Use (Multiple Choices) 1, % 11% 8% 8% 5% 22% 29% 27% 25% 32% Only %= 1,438 respondents 36% 37% 40% 37% 30% 3 87% 24% 20% 25% 30% 43% 4 or more 47% 35% 23% 15% 8% 4% 4% 2% Total RMB 6-10M RMB RMB 10-30M M >RMB 100 M PB of Chinese commercial banks Insurance companies Securities companies Trust companies PB of foreign commercial banks Third-party wealth managers Internet FIs Overseas FIs Family offices Sources: Joint survey by CIB and BCG on HNW clients in EXHIBIT 7. Nearly Half of the HNW Respondents Have Transferred or Will Consider Transferring More Assets to Non-bank PB to Manage in the Past 2 Years Trends and Reasons for HNW Respondents Choosing Non-banks Having transferring more assets to non-banks for allocation in past 2 years? What are the major non-bank choices? 1, No 53% 43% Trust companies 36% Insurance companies 35% % Securities Third-party companies wealth managers 75 11% Internet FIs 29 4% Family offices/individuals 5 1% Others Reasons for Transfer No, but actively consider it Yes 29% 18% Total % Higher return rate % More diversified products % Family wealth planning, pass-on and management Customized offerings % % Financial services other than WM 66 10% Overseas financial services 66 10% Value-added services other than financial services % 4% Unsatisfactory services by RMs in CBs Unsatisfactory or inconvenient digital channels and client experience Sources: Joint survey by CIB and BCG on HNW clients in December 2017 China Industrial Bank Private Banking The Boston Consulting Group

12 10 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 8. Key Financial Institutions Allocate More Assets in Fixed-Incomes and Less in Equities Asset Allocation of Various Institutions (2016) Allocation (%) 100 Deposit Bond Non-standard credit Stock Non-public equity Fund Deposit and credit product/asset account for over 80% Bank WMP Insurance AM Trust Securities company AM Nonpublicly Fund subsidiary offered mutual fund Mutual fund Private fund 100 % in scale Sources: WIND; Asset Management Association of China; China Trustee Association; Banking WMP Registration and Custody Center; China Insurance Regulatory Commission; BCG analysis. scope. The continued reliance on indirect financing leads to the fact that the quantity of fixed income products far exceeds equity products. And the wild volatility of the Chinese stock market makes asset allocation and investment strategies less effective than in more mature and stable markets. As a result of these restraints, wealth management portfolios are heavily invested in fixed income and lightly invested in equities. It is estimated that deposits, money market instruments, bonds and non-standard credit products account for 80% of the total underlying assets of major financial investment products, while equities and stocks account for less than 20%. 6 (See Exhibit 8.) 2.4 Business Models Are Retail-upgraded and Product-driven Chinese banks mostly adopt a retail-upgraded business model, in that private banking customers remain within the retail bank but are offered better branches and a wider 6. Limited by data accessibility, the data did not exclude embedded products across institutions. Estimated by BCG 2016 asset management industry model, even after excluding embedded products, equities and stocks are expected to account for no more than 25% of the total underlying assets of financial investment products. China Industrial Bank Private Banking The Boston Consulting Group December 2017

13 China Wealth 2017: The Way Ahead After a Golden Decade 11 range of investment products with higher returns (and risk). Private banking originates from retail business as retail clients accumulated wealth over the last few decades. By keeping it within the retail business, Chinese banks benefit from synergies with retail distribution channels, branding and its portfolio of basic retail products. Although the retail-upgraded model may be unsatisfactory for the wealthiest and most sophisticated private banking customers, at this early stage of development, it is adequate in serving the needs of most Chinese HNWIs. The standard Chinese private banking business model is also product-driven, relying on the sale of WMPs and investment products (mainly fixed-income with implicit guarantees), rather than professional investment advisory services and asset allocation. There are three reasons. First, like most financial institutions, Chinese private banks usually prioritize volume growth, especially in a fast-growing market. Most private banks take number of clients and AuM to be the most important KPIs, and, by these measures, they have been successful over the past decade. Second, most clients expect that financial institutions to implicitly guarantee their principal and expected returns, and therefore disregard the risk of investment products. This renders asset allocation advice meaningless, and makes returns and sales volume the key KPIs for private banks. Third, as mentioned, segregated regulatory framework means that financial institutions can offer only their sector-specific products (e.g. trust companies have trust products and securities companies have equity products). This eliminates an important motivation to provide comprehensive wealth management services. 3. Chinese Private Banks Are at a Crossroad In 2014, President Xi Jinping introduced the concept of new normal, signaling a new stage in China s socioeconomic development. This has changed the needs of HNW clients and the competitive landscape in private banking. The wild growth of old days is over, and new transformational opportunities are in sight. In this chapter, we examine these changes to the private banking market, and identify the opportunities they are creating. 3.1 Yield Expectations Under the New Normal Until recently, interest rate and asset appreciation in China were higher than that in more developed economies. Even fixed-income products offered considerable yields. As the Chinese economy slows down, investment opportunities that offer long-term, stable and high returns are increasingly hard to find. Enterprises with high leverage and overcapacity December 2017 China Industrial Bank Private Banking The Boston Consulting Group

14 12 China Wealth 2017: The Way Ahead After a Golden Decade are failing, increasing risk and the number of non-performing loans (NPLs). Private wealth, however, continues to accumulate, with its owners continuing to seek high-return investment opportunities. Shortage of quality assets and investment opportunities is becoming the new normal. This is not entirely bad news for private banks. Lower returns and more risk events will help investors understand risk-return. HNW clients will begin to recognize the value of advice from professional financial institutions on asset allocation, and have more reasonable expectations about returns. China s wealth management market will shift from high-speed accumulation to steady wealth creation. In this new economic environment, high-return products with implicit guarantees will no longer be sustainable. (See Exhibit 9.) Private banks will need to move away from their product-driven model, and instead offer clients proper investment advisory services. They will need to be able to gather and manage diverse underlying assets, understand the riskreturn of various types of assets, especially equity products, and reduce their reliance on fixed-income and non-standard credit products. EXHIBIT 9. Bank WMPs and Trust Products Saw Significant Decline of Return Rate over the Past 2 Years % 10 Changes in Return Rate of Bank WMPs and Loan-like Trust Products 8-190bps 6-130bps / / / / /08 Interest rate of loan-like trust products <1 yr Yield of 6-month bank WMPs Sources: WIND. Note: Data points are monthly averages. China Industrial Bank Private Banking The Boston Consulting Group December 2017

15 China Wealth 2017: The Way Ahead After a Golden Decade Changing Client Demographics, Changing Wealth Management Needs Three notable trends are changing the mix of private banking clients. The first is the growth of the ultra-hnw segment. According to BCG Global Wealth Management Model, in 2011 there were only 110,000 ultra-hnw households in China, with more than RMB 30 million worth of private financial wealth. 7 Private financial wealth then accounted for 16% of total private investable assets. By 2016, the figure had grown to 300,000 ultra-hnw households with nearly 24% of the total private assets. Ultra-HNW clients have more complex wealth management needs than HNW clients, usually requiring more specialized staff, products and services. The second notable trend is the emergence of second generation wealth. The children of first generation entrepreneurs are entering adulthood and starting to take part in managing family wealth and even family enterprises. Our client surveys over three consecutive years show that approximately 10% of HNW respondents inherited their wealth, suggesting that a rich second generation is emerging in private banking. For the time being, many first generation entrepreneurs let their children manage only part of the family wealth as training. They will inevitably need to pass on the wealth as they get old, and the second generation will become a more important client segment in China s private banking market. Finally, professionals are entering the ranks of HNWIs. According to our survey, 20-30% of the HNWIs are senior executives and non-investor professionals, such as doctors, lawyers or accountants. Unlike entrepreneurs, who make their money through bold ventures, professionals become affluent by applying the knowledge they have acquired. These changes in the HNW demographics will generate new demands on wealth managers. When HNWIs were mainly first generation entrepreneurs, they wanted wealth management to create even more wealth or to facilitate reinvestment in their business. As they age and their wealth increase, many adopt safety and security as their primary objective of wealth management. (See Exhibit 10 on page 14.) They also begin to see the need for wealth succession services as their children enter into adulthood. Our survey shows that 45% of the HNW respondents have considered or will consider wealth succession in the next three years. (See Exhibit 11 on page 15.) Following the last 10 years of stock and bond market volatility, Chinese HNW clients better understand the economic situation, developments in the financial markets and the 7. Threshold in the model is USD 5 million, approximately RMB 30 million. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

16 14 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 10. WM Objectives Divert: Over Half of the Respondents Aim Mostly for Wealth Creation, While 40% Emphasize More on Wealth Safety and Security Main Objectives of Wealth Management 1,438 4% % 5% 4% 2% 4% Business facilitation 37% 36% 30% 31% 42% 6% 3% 3% 6% 8% 56% Wealth safety and security 54% 61% 62% 59% 48% 9% Effective planning of wealth succession 31% Wealth creation Total 20-29yrs 30-39yrs 40-49yrs 50-59yrs 60 yrs The older the respondents, the more emphasis on wealth safety and security Sources: Joint survey by CIB and BCG on HNW clients in various types of investment products. They also have a better appreciation of risk-return. According to our survey, about 50% of the HNW respondents are willing to accept capital loss, and more than 60% do not expect implicit guarantees from products with expected rates of return issued by trust companies, securities companies or insurers. (See Exhibit 12 on page 16.) As the financial market and regulation continue to develop, implicit guarantees will gradually disappear. Risk tolerance among HNWIs is becoming more varied. As first generation entrepreneurs age and their wealth accumulation slow down, their risk tolerance declines and they become more focused on wealth preservation. Younger entrepreneurs and professional HNWIs, being better informed about wealth management and still in the wealth accumulating phase, have higher risk tolerances and a greater acceptance of equity and net worth products. (See Exhibit 13 on page 16.) As the economy moves into the new normal, first generation entrepreneurs are finding China Industrial Bank Private Banking The Boston Consulting Group December 2017

17 China Wealth 2017: The Way Ahead After a Golden Decade 15 EXHIBIT 11. Growing Need for Passing on Wealth: 45% of the Respondents Have Considered or Will Consider Wealth Succession, Mainly Driven by Children Growing Up and Potential Policies Starting to Consider Wealth Succession? 1, Reasons Behind the Consideration (Multiple Choices) 100%=641 respondents 18% 27% 28% Already Children/grandchildren are growing up, which necessitates family wealth distribution 62% 27% 27% 25% Will in 3 yrs Existing or potential government polices (e.g. inheritance tax) 47% Personal needs to retire and pass on enterprises 38% 55% 46% 47% Will not in 3 yrs Legal issues with business operation and taxation and hopes to segregate risks 31% Changes/complexities in marital status of family members 11% Total UHNWIs Retirees UHNWIs and retirees have stronger need for wealth succession than other segments Sources: Joint survey by CIB and BCG on HNW clients in fewer investment opportunities with alpha returns. At the same time, domestic wealth managers are becoming more specialized. As a result, more HNWIs are accepting the practice of letting professionals do their job in wealth management. According to our 2017 client survey, over 50% of the HNW respondents mainly follow advice from professional institutions or use a discretionary service. More than 70% said that their ideal practice would be to have professional institutions manage their wealth instead of doing it themselves. As HNWIs become more varied, so do their needs for products and services. For example, ultra-hnwis are actively sourcing more comprehensive, customized and complex products and services, while clients focusing on wealth succession need family trusts or similar products. And as implicit guarantees become unsustainable, fixed-income products are losing some of their popularity. HNWIs are demanding more advice about asset allocation, and showing more interest in equities and overseas investment. The 2017 client survey shows that nearly 60% of HNW respondents hope to get professional advice on asset allocation and comprehensive financial services from private banks, no longer focusing merely on rate of return. (See Exhibit 14 on page 17.) December 2017 China Industrial Bank Private Banking The Boston Consulting Group

18 16 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 12. Nearly Half of the Respondents Are Willing to Take Some Extent of Principal Loss; Over 60% Do Not Expect Implicit Guarantee of Expected Return Products from Non-banks Investment Return Expectations and Risk Appetites No Expectation of Implicit Guarantee to Expected Return Products from Which Institutions 100%=1,438 respondents actively pursue high returns, and willing to take some/greater principal loss 1,438 13% Bank Trust company 18% 58% Pursue higher returns; willing to take limited principal loss 36% Securities company 71% Insurance company 58% Conservative; do not want to loss principal; willing to take some return volatility 40% Third-party wealth manager Internet finance 90% 96% Risk-averse; do not want to lose principal or take return volatility 12% None of the above 5% Total Sources: Joint survey by CIB and BCG on HNW clients in EXHIBIT 13. Risk Appetites Divert: UHNWIs, Senior Executives, Professionals and Young Clients Have Higher Risk Appetite Expected Investment Return and Risk Tolerance High 1,438 13% 36% 60 23% % 18% 16% 13% 11% 31% 35% 158 5% 32% Actively pursue high returns, and willing to take some/greater principal loss Pursue higher returns; willing to take limited principal loss Risk tolerance 32% 40% 28% 40% 39% 44% 38% 28% 30% 43% 45% 42% Conservative; do not want to lose principal; willing to take some return volatility Low 12% 17% 15% 9% 9% 13% 7% 21% Risk-averse; do not want principal loss and want defined return Total Household financial wealth>r MB 100M Senior executives and professionals Age Sources: Joint survey by CIB and BCG on HNW clients in China Industrial Bank Private Banking The Boston Consulting Group December 2017

19 China Wealth 2017: The Way Ahead After a Golden Decade 17 EXHIBIT 14. HNWIs Have Less Need for Autonomous Wealth Management, and Stronger Need for Asset Allocation Advisory and Comprehensive Financial Services Approach to Private Wealth Management: Reality and Ideal Role of Primary Wealth Managers: Reality and Ideal 100%=1,438 respondents 100%=1,438 respondents Self-study and self-decision 32% 24% Most suitable leading products 25% 20% Follow advice from family members and friends and decide 13% 9% Diversified offerings to choose 32% 23% Follow advice from specialized institutions Use discretionary services 51% 4% 58% 10% +13% Specialized asset allocation and investment advice Comprehensive financial services beyond WM 33% 11% 36% 21% +13% Current Ideal Current Ideal Sources: Joint survey by CIB and BCG on HNW clients in Cross-sector Competition Intensifies as Business Boundaries Break Down Since the first Chinese private bank established in 2007, there has been no clear regulation of private banking. The 2009 Notice on Further Regulating Investment and Management of Private Wealth Management Business of Commercial Banks mentioned private banking for the first time, but applied the same regulatory constraints as those for ordinary retail banking, taking no account of the special features of private banking such as investment objectives, risk management or investable assets. Although the Shanghai Office of the China Banking Regulatory Commission (CBRC) and the Shanghai Business Administration issued private banking licenses to ICBC, ABC and BoComm in , the regulators did not clarify the licensing standards or the business scope. Since the 13th Five-Year Plan went into effect, market-oriented financial reforms have been extended. Against this backdrop, calls to end separate operations and to shift from institution-based supervision to function-based supervision are getting stronger. Requests for the licensing of independent private banks, supervised under separate regulations, have been made. If these requests are met and regulatory constraints are somewhat relieved, private banks will be able to create business models that are truly client-centric. They will be able to build up cross-market and cross-institutional capabilities, and provide December 2017 China Industrial Bank Private Banking The Boston Consulting Group

20 18 China Wealth 2017: The Way Ahead After a Golden Decade products and services commensurate with the special needs of private banking clients. Many trust companies and securities companies are establishing teams dedicated to HNW clients. Mutual funds and private funds are also expanding their proprietary distribution channels for HNW and exploring exclusive asset management and asset allocation services. Such cross-sector competition will be pressuring traditional asset managers to maintain market share by extending their own capabilities in asset gathering and management capabilities. 3.4 Changing Strategic Positioning Driving Reforms Over the past decade, there has been no standard organizational treatment of private banking within Chinese financial institutions. Some regard private banking as a product department, while others regard it as a client relationship department. The private banking department is first-tier in some institutions but second-tier in others. Some institutions establish a separate private banking department, while more group it within the retail business. Many institutions have moved private banking back-and-forth between these arrangements. More and more Chinese financial institutions started to rethink their strategic and organizational positioning and adjust their internal resource allocation as they come to realize the importance of private banking. One driver of the increased importance of private banking is in the likely shift to direct financing from indirect financing. Chinese businesses have historically raised capital primarily from bank loans, with direct financing through equity or bond issuance developing slowly. Direct financing is sure to grow as the capital markets are liberalized. Private banking clients will make natural buyers of the securities, being willing and able to bear the risks. Private banking can therefore provide a sizable source of direct funding for Chinese businesses and increase the liquidity of Chinese capital markets. Another driver is the diminished return on capital that financial institutions are likely to achieve from traditional banking business. Commercial banks have achieved skyrocketing revenue and profit by rapidly expanding their balance sheets, mainly through lending to corporate clients. As economic growth slows down, however, and credit risk losses mount, this strategy is no longer viable. The profits of some banks are already contracting. Banks must seek revenues from less capital-intensive lines of business. Genuine wealth management, as opposed to selling implicit guarantee products, is a perfect example of capital-light business, since fees are generated from investment advisory services rather than from taking on risk. Private banking allows financial institutions to increase revenues without expanding their balances sheets. China Industrial Bank Private Banking The Boston Consulting Group December 2017

21 China Wealth 2017: The Way Ahead After a Golden Decade 19 EXHIBIT 15. PB Is the Best Convergence of Big IBD, Big AM and Big WM, a Driver for Commercial Banks to Transform to Light Capital and Asset Commitment Business Models Private banking Investment banking Corporate clients of IB are naturally PB clients Serving corporate clients well will win more business for IB Private banking Asset management Big IBD Private banking Wealth Management PB clients are important investors of AM products Leading AM can provide PB with more competitive and diversified products and therefore help PB win more clients Big AM Big VM WM is one of the core services of PB PB clients are a core client segment for WM Private banking also provides important support to a banks investment banking, asset management and wealth management operations, feeding them with clients and capital. (See Exhibit 15.) Finally, the financial sophistication and higher risk tolerance of HNWIs makes them more amenable to innovation. Products and services first designed for private banking clients can eventually be disseminated to wider retail banking client base. Many commercial banks regard private banking merely as an upgraded version of their retail business, without realizing that private banking should be professional and exclusive. This blurs the boundary between private banking and retail wealth management, and undermines the delivery of a differentiated and premium service for private HNW clients. Many financial institutions also fail to allocate adequate resources to private banking and, as a consequence, lack staff with the required skills and lack products and systems of sufficient quality. To unleash its strategic value, financial institutions need dedicated and properly resourced private banking operations. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

22 20 China Wealth 2017: The Way Ahead After a Golden Decade 4. A Unique Path for Chinese Private Banks Benefited from the size of the Chinese population and decades of rapid growth, there are many so-called Chinese economic miracles. However, the economic new normal means that the miraculous days may be coming to an end and that China will more closely resemble the developed economies of the West. Against this backdrop, Chinese private banks should learn from the strengths and experiences of leading overseas players, while being creative and sensitive to the distinctive features of the Chinese market. In this chapter, we discuss the optimal strategic positioning, capabilities and organizational structure for Chinese private banking. 4.1 Private Banks Need Client-centric Value Propositions In this new economic and competitive landscape, Chinese banks must seek profit growth not from scale but from client value. Private banking clients contribute the highest value per client. HNW entrepreneurs are not only valuable clients for retail but also prospective clients for corporate banking. Since HNW clients are more demanding than retail clients, private banks will achieve client loyalty and win a large share of wallet only if they become genuinely clientcentric. This requires leading private banks in China and overseas in general follow three different models: retail-upgraded, standard private banking and exclusive private banking each tailored to a different client segment, and differing with regard to brand, distribution channels, offering, and service model. (See Exhibit 16.) A single financial group can have more than one value proposition, and thereby serve a wider client base. For example, a large multinational banking group has two institutions dedicated to HNW clients. One is an ultra-premium retail brand under the retail line, and the other is a private banking brand completely independent from the commercial bank. The ultra-premium retail brand targets HNW clients with over USD 1 million of individual investable assets, satisfying their mainstream financial needs such as daily settlement, wealth management and financing. The private bank is exclusively for HNW clients with over USD 3 million of individual investable assets, satisfying their complex financial needs, such as customized investment products, global investment in stock markets and investment in alternatives markets. Their value propositions differ in terms of accounts, channels, offerings and service models. In short, the ultra-premium retail brand provides an upgraded retail service, while the private bank provides exclusive and comprehensive financial services for wealthy individuals and their families. (See Exhibit 17.) China Industrial Bank Private Banking The Boston Consulting Group December 2017

23 China Wealth 2017: The Way Ahead After a Golden Decade 21 EXHIBIT 16. Value Proposition: Design Differentiated Value Propositions for Different Client Segments Target Clients Affluent/HNW Clients (with large assets but simple needs) Upper /Ultra-HNW Clients (with even larger assets and more mature and complex needs) Value Proposition Model Retail-upgraded Provide premium retail services Standard Private Banking Provide premium retail and standard PB services Exclusive Private Banking Provide exclusive and customized PB services Brand Usually without an independent brand Usually with an independent brand With an independent brand Manifestation Channel Offerings Within the retail channel May set up an exclusive service zone within branches Emphasis on more prioritized and premier retail services Some exclusive investment opportunities and value-added services Within the retail channel and may set up an exclusive service zone Independent from the retail channel within branches Completely within the Together with exclusive PB channel exclusive PB channel Emphasis on PB-exclusive investment opportunities and value-added services More prioritized and premier retail services Comprehensive WM and financial services Complex and customized products Exclusive and customized value-added services Service model Still maintained by retail RMs Can adopt add-on service system, offering specialized support from investment advisors and PMs Usually with exclusive PB RMs Additional support from investment advisors and product specialists Exclusive PB teams usually with 1+N model 1 for RM and N for product specialists, investment advisors, lawyers, accountants, etc. EXHIBIT 17. A Multinational Large Banking Group Has Both Standard PB and Exclusive PB, Offering Differentiated Value Propositions to Meet Various Customer Needs Target Clients Core Value Proposition Standard PB: Ultra Premium Retail Brand Common HNW clients with simple WM needs Assets required > USD 1m Provide differentiated retail offerings to affluent clients Exclusive PB: Independent PB Mature HNW clients with complex financial needs Assets required > USD 3m Provide exclusive and customized WM and comprehensive financial services to PB clients Channel Exclusive service centers with better furnishing and privacy within large or medium retail branches May share service channels with standard retail clients in small branches Exclusive PB centers with luxurious furnishing, privacy and security Manifestation Offerings Service model Use existing retail accounts and enjoy more prioritized and premier retail services Offer exclusive investment opportunities unavailable to standard retail clients Provide exclusive premium concierge services Retail 1+N : 1 is for the exclusive ultra premium retail RM, and N is for specialist advisors (including investment advisors and insurance specialists) shared with retail clients Standard premium services Completely independent PB WM accounts that cannot enjoy retail banking services Provide complex and customized products and comprehensive WM and financial services Offer customized services from specialized institution and private bankers PB-exclusive 1+N : 1 is for PB-exclusive RM, and N is for specialized teams with wealth planners, credit specialists, investment advisors, etc. Customized exclusive services December 2017 China Industrial Bank Private Banking The Boston Consulting Group

24 22 China Wealth 2017: The Way Ahead After a Golden Decade The retail-upgraded and standard private banking models will suffice for most Chinese banks with a strong retail base. Most HNWIs in China have household wealth between RMB 6 and 30 million, and their professions are usually unrelated to finance or investment. They need ordinary investment and wealth management, rather than complex or premium offerings such as family trusts, discretionary management, customized investment products, and special situation investments. Private banks should ensure these clients are prioritized within ordinary retail banking and assigned dedicated RMs to provide a sense of exclusivity. And they should receive standard private banking services, such as access to a wide variety of investment products and professional asset allocation advice. Ultra-HNW clients can separate wealth management from their transactional banking. This allows institutions to source these clients from outside their retail networks. Although they account for only a small portion of HNW clients, they account for a high percentage of AuM and their numbers are expected to increase as the economy develops. They place greater demands on channels, offerings and the professionalism of staff, and they require more exclusivity and customization than ordinary HNWIs. The exclusive model is usually the choice of private banks that are strong in asset management and product design but which have a limited branch network. 4.2 Capabilities Across the Whole Value Chain Are a Source of Advantage The wealth management value chain has four core components: asset accessing, product creation, investment advisory and product sales. (See Exhibit 18.) Institutions prioritize different components according to their capabilities. Banks that follow the asset management-driven model win by gathering quality assets and designing products that satisfy client needs. Those with an investment advisory-driven model rely on investment advisory capabilities and client management systems. As economic growth slows and quality assets become scarce, asset gathering and product creation become the most important competitive strengths for asset managers. Although Chinese HNWIs have lowered their expectation on investment returns, our client survey shows that products are still their primary consideration when choosing a private bank. With implicit guarantee products becoming unsustainable, wealth managers must not rely solely on fixed-income products but offer a wider range of cross-market products tailored to different risk-return preferences. Concurrently, private banks must also offer professional asset allocation and investment advice to create long term value for clients. This is not simply a fee generating add-on to the asset management business. As China Industrial Bank Private Banking The Boston Consulting Group December 2017

25 China Wealth 2017: The Way Ahead After a Golden Decade 23 EXHIBIT 18. Core Capabilities: Transforming from AM-driven and Investment Advisor-driven to Whole Value Chain Capturer Asset Accessing Product Design Investment Advisor Product Sales Asset Management-driven Key successful factors: quality assets and competitive products suitable for clients needs Core organizational support: Private banks have autonomy in screening assets nd creating products Accessing quality products consistently: Establish product platforms Develop capabilities in sourcing and screening quality assets and products Build capability in creating some products Future Direction Future Direction Outstanding investment advisory and sales capabilities: Train dedicated and specialized teams to improve customer experience Develop investment advisory capabilities over asset allocation Train product specialists to have deep understanding of clients needs and introduce specialized products Investment advisor-driven Key successful factors: specialized RMs and investment advisors; specialized asset allocation and investment advice; deep and reliable relationship with clients Core organizational support: private banks have their own RMs and investment advisors mentioned previously, asset managers are clearly extending their business to the realm of wealth management. Likewise, wealth managers should also extend their business to the realm of asset management. Asset management capability is able to attract downstream funding from wealth management, just as wealth management capabilities is able to secure distribution channels for upstream asset management business. The two components are entirely complementary, and institutions with capabilities across the whole value chain stand to gain far more from their private banking businesses. Capabilities across the entire value chain cannot be developed overnight, of course. The proper path to this goal depends on the institution s starting point. Institutions with a strong retail base can adopt the investment advisory-driven model, starting from the wealth side and work towards building upstream asset management capabilities. Institutions with strong asset management and investment banking capabilities, such as securities companies, trusts and corporate banks, can start from the asset managementdriven model, and work towards developing downstream wealth management capabilities. In-house, organic development of capabilities can ensure control over resources and operations, but requires considerable investment in training. It is slow, which may hinder institutions in capturing market share as competition heats up. Building platforms, by contrast, gives up some control but can quickly provide access to a wide range of products and investment advisory services supplied from across the group or from external partners. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

26 24 China Wealth 2017: The Way Ahead After a Golden Decade 4.3 Building Specialized Private Banking Within a Branch Network Private banks are beginning to realize that they serve clients distinct from the retail segment and require distinctive set of offerings. In short, they need to be specialized. Central management is necessary for this. If private banking were managed in silos from retail branch, it will be difficult to deliver the distinctive value propositions of private banking and customers experiences may also differ significantly across branches. At the same time, branches are the first point of contact of private banking. And they must not be centrally directed in a way that is demotivating and, ultimately, hinders performance. Over the past decade, private banks have struggled to create organizational structures that provide the right balance between head office and the branches. This area should warrant some thought going forward. There are broadly three organizational structures in the market: branch-dominated, quasi-profit centers with strong control from head office, and profit centers with complete vertical control from head office. (See Exhibit 19.) Institutions with a long retail history, a strong branch network and, therefore, many potential private banking clients are not advised to turn private banking into a profit EXHIBIT 19. Organizational Support: Three Models to Build Specialized Private Banking Systems Branch-dominated Quasi-Profit Center Independent Profit Center Headquarter Headquarter Headquarter Retail PB Other Retail PB Other Retail PB Other Guidance and advice Governance and control Branch Branch Retail branch Retail branch Advantages versus disadvantages maximize motivation of branches and utilization of their source Difficult to design and deliver differentiated PB value propositions, and against specializing PB PB development is determined by understanding of branch heads which differs greatly across regions Leverage resources and capabilities of branches, while maintain some degree of exclusiveness and specialization in value propositions e.g. offerings Require strong internal management capabilities and cooperation mechanisms (e.g. assessment and pricing) to balance the headquarter-branch relationship Private banks have more flexibility and autonomy, conducive to building specialized PB Bad for business lines within the institution or group to produce synergies Difficult for smaller PBs to self-finance Sources: Expert interviews; BCG analysis. China Industrial Bank Private Banking The Boston Consulting Group December 2017

27 China Wealth 2017: The Way Ahead After a Golden Decade 25 center immediately. The head office should support branches to become more specialized, providing capacity and training to leverage the retail resources of branches. The head office should not directly control branches or compete with them for profit. If the institution has a limited branch network and retail base, by contrast, the head office should consider making private banking a quasi-profit center, strengthening control over the staffing and budget allocation of private banking business in branches. The private banking client base is another factor for making the decision. If the bank has few private banking clients, but they are geographically concentrated and very highvalue, then the head office can serve them directly. This is a practical model for some city commercial banks, trust companies and securities companies. Financial institutions with target clients spreading all over the country must rely more on existing branch networks. Finally, maturity is also a factor. If the private banking business already has substantial client base, good profitability and access to resources, then the head office can consider furthering the specialization: that is, turning private banking into a quasi-profit center or even an independent profit center. In each model, branches will remain the main channel for delivering private banking services to clients. Branches must therefore have special service standards and procedures for private banking clients. These can be delivered through dedicated branches (for example, independently operated private banking centers) or within existing branches. Specialized private banking teams are needed in either case. These should include relationship managers (RMs), investment advisors, and product experts. The head office should make the call in the assessment of frontline staff and the allocation of resources to branches with private banking business. But this vertical management should be aimed at delivering the private banking value proposition, not at controlling branches in a way that will likely create conflict with frontline branches. 4.4 How Mainstream Commercial Banks Can Develop Private Banking Private banks can be summarized by their target clients, core capabilities and organizational position. For example the exclusive private bank + asset managementdriven + independent profit center model is usually the choice of private banks within financial institutions that have strengths in investment banking or asset management, such as Goldman Sachs Private Wealth Management. The standard private banking + investment advisory-driven + quasi-profit center model is popular with retail-based commercial banks, such as Citi with its Citigold Private Client. The exclusive private December 2017 China Industrial Bank Private Banking The Boston Consulting Group

28 26 China Wealth 2017: The Way Ahead After a Golden Decade banking + whole value chain capturer + independent profit center model is mostly for private banks with independent licenses within comprehensive financial institutions: HSBC Private Bank, for example. Given the current development of the Chinese private banking market, universal commercial banks should adopt private banking value propositions that go beyond the retail-upgraded model, improving capabilities across the value chain, and building professionalism by making private banking as a quasi-profit center. (See Exhibit 20.) Moving beyond the retail-upgraded value proposition reflects changes in the preferences of Chinese HNW clients. As they accumulate more wealth and become more sophisticated, they need private banks to provide offerings better differentiated from those of retail banking. However, Chinese HNW clients still lack the wealth of their peers in developed markets and have simpler needs. A highly exclusive and customized offering will increase costs and impede synergies with the retail system. Mainstream commercial banks private banking businesses should therefore continue to leverage the retail brand, channels and basic offerings, while improving the professionalism of retail managers, extending the exclusive product offering and providing value-added services differentiated from the retail banking offerings. As client base becomes wealthier and has more complex needs, commercial banks can add an exclusive private banking value proposition aimed at ultra-hnw clients. EXHIBIT 20. Mainstream Chinese PB Models: Value Propositions that Break Through the Retail-upgraded Model, Whole Value Chain Capabilities and Specialized Quasi-profit Center System Target Clients Affluent /HNW Clients (large assets with simple needs) Upper HNW Clients (with even larger assets with complex and mature needs) 1 Value proposition Retail-upgraded Standard PB Exclusive PB Client needs for PB Low High 2 Core capabilities AM-driven Investment advisor-driven Whole Value Chain Capturer Capability maturity Low High 3 Organizational support Low Branch-dominated Quasi-Profit Center Independent Profit Center Specialized systems High China Industrial Bank Private Banking The Boston Consulting Group December 2017

29 China Wealth 2017: The Way Ahead After a Golden Decade 27 Large banks that are strong in corporate banking have easy access to underlying assets and strengths in investment banking and asset management. By adding asset allocation and investment advisory services, they can develop a whole value chain offering that extracts the most value from their private banking business. (See Exhibit 15.) To develop these capabilities, commercial banks should make full use of the financial group to which they belong, and adopt the platform strategy that coordinates internal and external resources. Third, the quasi-profit center setup balances China s unique head office-branch structure with the need for specialization in private banking. Large and medium Chinese commercial banks have deep-rooted headquarter-branch structures, where branches have long controlled their resources and daily operations. The quasi-profit center model can maintain their virtues of branch control of branch resources, while providing a degree of central guidance required to make private banking a distinctive and specialized line of business. The quasi-profit centre model works within the existing legal structure of the larger bank. With the regulatory framework still immature for private banks with independent licenses, adopting the Independ Profit Centre Model may be inappropriate. In brief, after identifying the value proposition, core capabilities and organization structure, Chinese commercial banks should carry out the following measures: First, establish exclusive and specialized teams for private banking, including RMs, investment advisors and product specialists. Second, strengthen capabilities in investment advisory services, especially in research and sales of multi-asset strategies and equity products. Third, improve inter-departmental and head office-branch coordination mechanisms. These may include profit sharing and performance incentive schemes. None of these measures can be implemented overnight, and require ongoing effort guided by a clear vision of the strategic goal. 5. Outlook for the Chinese Wealth Management Market in 2017 In 2016 wealth managers grew rapidly in size but were also challenged by higher volatility of the financial markets, tightened regulation and the shortage of quality products. Interest rates remained low, resulting in declining yields. The stock market continued the sluggish and volatile performance of 2015, with the Shanghai Composite Index dropping 12.3% and Shenzhen Composite Index declining 19.6%. The FX market saw an RMB depreciation as the RMB/USD middle rate plunged by 4,434 basis points or over 6%. The bond market experienced wild volatility, opening with a bull run but ending in a slump December 2017 China Industrial Bank Private Banking The Boston Consulting Group

30 28 China Wealth 2017: The Way Ahead After a Golden Decade in which debentures defaulted frequently. Real estate is the only hot market, leading many local governments to introduce strict controls to cool it. The regulation of asset management was tightened, ending the era where asset managers aggressively pursed growth and regulatory arbitrage, changing the product mix and competitive landscape in wealth management. Despite this complicated and volatile economic environment, HNW clients are satisfied with their investment returns in Eighty-five percent of the respondents said that they have realized their investment return goals or even exceeded them: 91% said they realized positive returns and 45% said their return rate was over 10%. (See Exhibit 21.) Economic conditions made HNW clients generally conservative investors in Their largest increases in allocation were to bank WMPs, deposits, insurance and trusts, while mutual funds and stocks suffered the largest cut, as in In 2016, the primary stock market failed to sustain its initial bull run and became unattractive to investors. Over the last two years, insurance products have gained popularity with HNWIs protectionoriented insurance, investment-oriented insurance, critical illness insurance and pension insurance being the most popular. (See Exhibit 22 and Exhibit 23.) Looking to 2017, our client survey shows that HNWIs are optimistic about China s economy and investment returns, and confident about the growth of their family wealth. Fifty-four percent of respondents believe that housing prices in tier-1 and tier-2 cities will EXHIBIT 21. Returns and Return Rates of HNW Clients in 2016 Overall Investment Returns in 2016 Overall Investment Return Rates in %=1,438 respondents 1, ,074 15% 14% 14% 14% 10% 19% Higher than target 91% of the 5% 13% 16% 12% 10% 12% respondents 12% realized profit Lower than target 46% 2% 1% 0% 0% 100% 72% 71% 75% 76% 78% 70% Reached target 34% Total RMB 6-10M RMB RMB 10-30M M > RMB 100M Last year 3% Surplus >50% 8% Surplus 31-50% Surplus 10-30% Surplus <10% Breakeven Loss <10% Loss 10-30% Loss 31-50% Loss > 50% Total Sources: Joint survey by CIB and BCG on HNW clients in China Industrial Bank Private Banking The Boston Consulting Group December 2017

31 China Wealth 2017: The Way Ahead After a Golden Decade 29 EXHIBIT 22. Reasons for Adjusting Asset Allocation in 2016 Reasons for Adjusting Asset Allocation in 2016 (Multiple Choices) 100%=1,438 respondents 58 % 54 % 47 % 40 % 31 % 10 % Domestic stock market RMB exchange rate Domestic interest rate Real estate market Domestic macro-economy Overseas market Sources: Joint survey by CIB and BCG on HNW clients in EXHIBIT Asset Allocation Adjustment: Products with Increased and Decreased Holding Products with Increased Holding in 2016 Products with Decreased Holding in %=1,438 respondents 100%=1,438 respondents Bank WMP 67% Stock 41% Deposits and cash 39% Mutual fund 37% Insurance 37% Private securities fund 27% Trust Fixed-incomes from non-bank, non-trust institutions 34% 25% Deposit and cash Private equity fund 26% 23% Stock 23% Internet finance 21% Precious metal 19% Fixed-incomes from non-bank, non-trust institutions 21% Mutual fund 16% Others 20% Offshore asset 12% Trust 20% Private securities fund 11% Derivatives 16% Private equity fund 8% Bank WMP 15% Real investment 8% Real investment 13% Internet finance 7% Offshore asset 12% Derivatives 6% Precious metal 12% None of the above 4% Insurance 11% Sources: Joint survey by CIB and BCG on HNW clients in December 2017 China Industrial Bank Private Banking The Boston Consulting Group

32 30 China Wealth 2017: The Way Ahead After a Golden Decade continue to rise, but the overall expectation of growth is less strong than last year. Sixtysix percent believe the stock market will stabilize or climb. (See Exhibit 24.) Nearly 60% believe the RMB will stabilize or even appreciate. (See Exhibit 25.) Eighty-seven percent are optimistic or neutral about the future economic transition, and 93% believe that their family wealth will not decline in the coming environment. (See Exhibit 26.) Nearly 70% of HNWI respondents expect to maintain the same risk tolerance in 2017, while 20% said that they would be more prudent. (See Exhibit 27 on page 32.) Bank WMPs, deposits, insurance and stocks are the most popular choices for increased holdings, while deposits, trusts, and fixed-income products from non-trust or nonbank institutionsare the most popular reduction targets. (See Exhibit 28 on page 32.) Respondents still believe in bank WMPs but have diversified into fixed-income products issued by non-bank institutions because of declining yields and declining confidence in the implicit guarantee from banks. It is the first time since the stock market turbulence of 2015 that HNW clients have shown much interest in stocks, with higher confidence in equity products. Despite the general optimism among HNWIs, we believe that the economy in 2017 is full of uncertainties: increasingly complicated global politics and economics may lead to more frequent black swan events, and the continuing domestic economic transformation and tightening of regulation will have a great impact on the financial system and the financial markets. Wealth managers should be prepared as follows: EXHIBIT 24. Macro-economic Outlook I: Real Estate and Stock Market Outlook for Real Estate Outlook for Stock Market 1, ,074 1, Increase nationwide Rise Increase in tier-1 and 2 cities, and decline in tier-3 and Stabilize Level off Decline Decline nationwide Others Hard to tell Total < RMB 6M RMB 6-30M RMB M > RMB 100M Last year Total < RMB 6M RMB 6-30M RMB M > RMB 100M Sources: Joint survey by CIB and BCG on HNW clients in China Industrial Bank Private Banking The Boston Consulting Group December 2017

33 China Wealth 2017: The Way Ahead After a Golden Decade 31 EXHIBIT 25. Macro-economic Outlook II: RMB Exchange Rate Outlook for RMB Exchange Rate 1, % 11% 9% 9% 60 10% 1,074 6% Continue to rise 45% 51% 45% 44% 33% 31% Stabilize 45% Continue to decline 36% 28% 36% 37% 47% 10% 10% 10% 10% 10% 18% No idea Total < RMB 6 m RMB 6-30 m RMB m > RMB 100 m Last year Sources: Joint survey by CIB and BCG on HNW clients in EXHIBIT 26. Macro-economic Outlook III: Macro-economic Transformation and Private Household Wealth Outlook for China s Macro-economic Transformation Outlook for Private Household Wealth 1,438 1,074 1,438 3% 107 4% 291 3% 504 4% 378 3% 158 3% 1,072 No idea 32% 42% Optimistic 42% 47% 51% 42% 37% 35% 34% Increase 55% 50% Neutral 51% 46% 42% 50% 57% 56% 46% Stabilize 6% 7% 8% 0% Pessimistic No idea 4% 4% 3% 4% 4% 6% 20% Decrease Total Last year Total yrs yrs yrs yrs 60 yrs Last year Sources: Joint survey by CIB and BCG on HNW clients in December 2017 China Industrial Bank Private Banking The Boston Consulting Group

34 32 China Wealth 2017: The Way Ahead After a Golden Decade EXHIBIT 27. Expected Changes of Risk Tolerance in 2017 Expected Changes of Expected Investment Return and Risk Tolerance in the Next 12 Months High 1, % 9% 9% 6% 5% More aggressive investment with higher risk tolerance Risk tolerance 68% 66% 70% 75% 72% Maintain existing risk tolerance and return expectation Low 20% 22% 3% 3% Total RMB 6-10M 19% 16% 2% RMB 10-30M 3% RMB M 22% 2% > RMB 100M More prudent investment with lower risk tolerance No idea/not yet planned Sources: Joint survey by CIB and BCG on HNW clients in EXHIBIT 28. Expected Changes in Asset Allocation in 2017: Plan for Increasing and Decreasing Holdings Products Planned to Increase Holding Products Planned to Decrease Holding 100%=1,438 respondents 100%=1,438 respondents Bank WMP Deposit and cash Insurance 40% 34% 66% Trusts fixed-income from non-bank, non-trust institutions Deposit and cash 33% 32% 25% Trusts 32% Private equity fund 22% Stocks fixed-income from non-bank, non-trust institutions precious metal 29% 23% 19% Private securities fund Mutual fund Internet finance 22% 21% 21% Mutual fund 16% Stocks 17% Offshore asset 13% derivatives 16% Private equity fund 11% Bank WMP 15% Private securities fund 9% Offshore asset 14% Real investment 8% precious metal 13% Internet finance 6% derivatives 6% Real investment Insurance 13% 13% Sources: Joint survey by CIB and BCG on HNW clients in China Industrial Bank Private Banking The Boston Consulting Group December 2017

35 China Wealth 2017: The Way Ahead After a Golden Decade 33 The complexity and uncertainties in the economic environment have made asset allocation more difficult. Asset managers must stay sharp, actively develop asset allocation and hedging strategies, and improve their risk management mechanism. As market controls tighten and the real estate market starts to cool off, it may release a substantial amount of capital in search of new investment targets, creating opportunities for the asset management industry and the financial markets. Asset managers should strengthen investment advisory and comprehensive services capabilities so as to attract funds. Under pressure from financial deleveraging and credit risk, bank WMPs and fixedincome products cannot return to the substantial growth of previous years. Wealth managers should therefore focus on developing capabilities in capital market investment and develop PE, equity and insurance products. 6. Conclusion Since the first Chinese private bank established in 2007, private banking in China has gone through a glorious first decade with substantial growth in AuM, client recognition and capability development. At the same time, private banks have experienced back-andforth business models and organizational structures, and continue to face constraints from licenses and shortages of key capabilities. In 2017, Chinese private banking industry finds itself at the cross road to decide its path ahead in a changing environment. As economic reform continues, competition is intensifying and clients are becoming more diverse and sophisticated. We hope reflection on the past decade of the market can help private banks to find their own and unique Chinese models for success. Looking into the next decade, we believe that Chinese private bankers with the vision and courage to reform will develop the capabilities and business models that allow private banking to deliver its full strategic value in China s financial sector. If Chinese private banks can become truly client-centric, delivering differentiated value propositions, with strong whole-value-chain capabilities and specialized organizational structures, we will see many more glorious decades of private banking in China. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

36 34 China Wealth 2017: The Way Ahead After a Golden Decade Appendix I: A Description of the Methodology The 2017 study of China s wealth market compiled by China Industrial Bank (CIB) and the Boston Consulting Group (BCG) examined the characteristics, investment behaviors, overall financial needs, and choice of wealth managers of HNWIs. Metrics include demographics, source of wealth, distribution by profession and industry, risk appetite, outlook on the economy, features of private banking offerings, and preferences and needs of private banks. When choosing subjects, we selected HNWIs with net financial assets of RMB 6 million and more. To reflect the whole picture of China s private banking market and the differentiated needs of clients, we selected a number of ultra-hnwis (with net financial assets over RMB 30 million). We adopted the approach of mainly relying on quantitative questionnaires supplemented by qualitative interviews. To ensure that the results are representative and traceable, the study used a stratified sampling method and structure that builds on statistical theory and sampling principles. In addition to net financial assets, this methodology took into account many demographic statistical indicators such as gender, marital status, education background, age, profession and industry, and weighed sampling size from China s 21 most representative cities, encompassing Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Shijiazhuang, Hangzhou, Fuzhou, Taiyuan, Hohhot, Jinan, Chengdu, Shenyang, Chongqing, Wuhan, Changsha, Xiamen, Quanzhou, Ningbo, Zhangzhou and Qingdao according to the number of HNWIs and the geographic distribution of wealth, so as to make the study multi-dimensional and comprehensive. Among the 1,438 selected HNW clients, we also worked with third-party companies to include a number of HNWIs who are not clients of CIB s private banking division. We applied BCG s set of methods designed specifically to measure the scale of the wealth management market, distributing the country s total wealth to every household through the use of our proprietary Lorenz curve analysis. We also used other public resources (such as the Hurun Rich List) and BCG s proprietary information to fine-tune our data on the distribution of wealth. Through BCG s systematic research and mass-scale research of China s private banking market over the past decade, we ve accumulated research data on nearly 10,000 HNW clients, building a comprehensive and in-depth private banking client survey information database. This lays the foundation for mining deeper into the data, analyzing the market trends, gaining insights about client needs, and serving the wealth management market and clients in the future. China Industrial Bank Private Banking The Boston Consulting Group December 2017

37 China Wealth 2017: The Way Ahead After a Golden Decade 35 Acknowledgements China Industrial Bank (CIB) and BCG co-authored the report. Many leaders of CIB and BCG made important contributions to the publication of this report. Our special thanks go out to Mr. Yiping Tao, President of CIB, Mr. Jinguang Chen, Vice President of CIB, and Mr. Tjun Tang, Senior Partner and Managing Director at BCG for their support and guidance on the report. The main contributors to this report are from the management team of CIB s private banking division, including General Manager Mr. Ruifeng Xue, Specialist Bureau Team Leader Mr. Wenlong Lu, and the BCG Greater China financial institutions team, including Partner and Managing Director Mr. David He, Principal Ms. Tammy Tan, as well as project team members Xifei Wang, Dongni Zhang and Allison Xu. In addition, BCG global expert Ms. Anna Zakrzewski provided extremely valuable suggestions and support to this report. We would also like to thank Ipsos, a leading market research group, for providing assistance during the HNW client survey. Finally, we would like to thank the clients who agreed to be interviewed, and our colleagues at CIB headquarter and branches for their support in the successful completion of this report. We express our heartfelt thanks to everyone who contributed their valuable time and experience to this report. December 2017 China Industrial Bank Private Banking The Boston Consulting Group

38 36 China Wealth 2017: The Way Ahead After a Golden Decade About China Industrial Bank (CIB) Founded in August 1988 and headquartered in Fuzhou, Fujian Province, CIB was listed on Shanghai Stock Exchange (Stock Code: ) with registered capital of RMB billion on February 5, For the nearly three decades since its establishment, CIB has been advocating the business philosophy of Growing Together with Sincere Service and endeavoring to offer comprehensive, top-quality, and efficient financial services for clients. In recent years, CIB has steadily improved its market position and brand image. The bank ranked 59th in the Global 2000 published by Forbes Magazine in 2016; British magazine The Banker also ranked CIB the 32th in its Top 1000 World Banks 2016 rankings in terms of tier-1 capital; and Fortune Magazine s Global 500 ranked CIB at 195, and Top 50 banks, Top 100 publicly listed companies and Top 500 companies worldwide. CIB has won a number of awards, including the Best Chinese-funded bank, the Best Bank of Strategic Innovation, the Best Green Bank, the Financial Times Asia Sustainable Banking, the Financial Holding Company of the Year, and the Best Shareholder Returns. CIB currently has 126 branches and 2,015 sub-branches in major cities across China. About the Private Banking Division of CIB: The Private Banking Division of China Industrial Bank was established in 2011 as a headquarter-level division based in Shanghai. With the support of a comprehensive retail financial service platform, covering overseas finance, pension finance, wealth management, credit cards and community banks, the private banking division adheres to the principle of high starting point, specialized operation, global perspective, and unique features. In pursuit of offering all-function, all-coverage, all-around and all-weather services and becoming a market leader, its brand vision is to become the most reliable private bank, providing integrated, specialized and customized private banking services to meet multi-level and all-round demands. For the latest information about China Industrial Bank and PB Division, please follow their official Wechat accounts: cibdingyue (CIB); cib-pb (PB Division). China Industrial Bank Private Banking The Boston Consulting Group December 2017

39 China Wealth 2017: The Way Ahead After a Golden Decade 37 About The Boston Consulting Group The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with more than 90 offices in 50 countries. For more information, please visit bcg.com. About BCG China Financial Services Institute: Having served the Chinese market for over 20 years, BCG has established a leading position in financial services, particularly the private banking sector. BCG s financial institutions team has a network of experts on private banking worldwide and a proprietary global private banking database (covering nearly 200 large private banks across countries and regions). In addition, BCG has been doing in-depth studies about China s wealth management market since the very beginning of the domestic private banking. In the past 16 years, BCG has published 16 global wealth reports and 9 China wealth reports, and designed and executed private banking strategies for many domestic banks. Drawing on its global experience and insights about the Chinese market, BCG puts forward operational advice and creates substantive values for clients, which is highly appreciated by clients and the market. For more cutting-edge BCG insights and contents, please contact: greaterchina.mkt@bcg.com. Please follow BCG official Wechat account for more BCG insights; ID: BCG_Greater_China; QR code: Industrial Bank / The Boston Consulting Group, Inc All rights reserved. December 2017 China Industrial Bank Private Banking The Boston Consulting Group