The 2008 global financial crisis had a major impact on Korea’s private banking market. As in Hong Kong and Singapore, the most tangible effect of the crisis was to considerably reduce the number of wealthy people in Korea. The crash in domestic and foreign stockmarkets brought vast losses to investors and prompted them to adopt a more conservative investment approach.
Lee Hyung Il, division head and executive vice-president for private banking at Hana Bank, says the numbers of Korean US dollar millionaires only began to recover in 2010, after consistently falling until the end of 2009.
Individuals with financial assets in excess of US$500,000 are considered by Korean banks as belonging to the high net worth individual (HNWI) category. By comparison, the Capgemini & Merrill Lynch World Wealth Report consider those with assets worth over US$1 million as HNWIs. In Korea, individuals with more than US$3 million in financial assets are placed in the ultra-HNWI bracket, which in Capgemini’s view only comprises those with assets of US$30 million.
Conservative attitude
Numerous HNWIs who got burnt in the stock crash still lack faith in the investment products in 2010 and prefer to park their money instead in less risky products, remarks Lee. “They are opting for stability, although it is not surprising that, in view of the low interest environment, the appetite for interest rate guaranteed products has yet to pick up.
Private banks have a relatively young history in Korea, explains Lee, and hardly a decade has passed since major banks in Korea began to roll out a full-scale service offering to private banking clients. "This probably explains the conservative attitude of most clients towards investment."
According to the 2010 Wealth Report, except for HNWIs in Australia – where there has been a sharp increase in house prices – Korean HNWIs showed the largest increase in their average exposure to real estate investment last year: an average portfolio having an exposure of 37%, although this is projected to decline in light of the cooling of the real estate market in Korea.
At the height of the financial crisis, Hana Bank responded to the clamour for safety by providing investment products that guaranteed slightly higher returns compared to regular term deposits. Clients, Lee asserts, have been flocking to the safety of bonds and to emerging-market equities, the latter gaining respect as an asset class offering high potential returns, in view of the pessimism still affecting developed markets such as the US and Europe. The popularity of emerging-market equities can only continue to grow in the near and medium term, believes Lee, considering the vast amount of liquidity flowing into Asian assets from cash-rich pension funds and sovereign funds, both from the region and the rest of the world.
Hana Bank has succeeded in doubling its number of HNWI clients this year from the previous year, Lee enthuses, by coming up with relevant private banking investment products and providing more skilled advice. "The bank has made major readjustments in the way it sells products in the aftermath of the global financial crisis," Lee points out, "because the crisis necessitated a stronger focus on the bank's role as a guardian of wealth." (It used to be common, with a promise of high returns, to push structured products that turned out to be toxic.) “The focus has been to retain the trust by the investors by emphasizing the advisory nature of the relationship and so help protect wealth rather than promising to aggressively grow it. Our emphasis has shifted to providing “guaranteed” and “safety” products.”
Limitless competition
With the implementation of the Capital Markets Consolidation Act (CMCA) in 2009, plenty of Korean financial institutions transformed themselves into megabanks to meet mounting competitive challenges at home and abroad, explains Lee. Key changes in the fund transfer system and bank investment systems too served to heighten the aggressive streak of various types of financial institutions to expand their business operations. This presents both danger and opportunity, according to Lee. “The volatility of markets, the intense competition, and a plethora of risk and compliance issues all combine to increase the vulnerability of private banks in Korea, which is why a broader perspective and lucid thinking are required in assessing the true risks facing the operation of private banking institutions in the country.”
Lee says the implementations of the Overseas Fund Transfer Act and Bank Investment Advisor Act further blurred the boundaries separating banks, securities firms and insurance firms in the servicing of HNWIs and sparked an even intenser competition.
“We have arrived in the age of limitless competition. With various reforms to ease financial regulations, we can only expect competition to accelerate. I believe that, as a bank, we are the most prepared to compete in this fierce environment,” Lee states confidently.
Investor protection has become essential to Korean private banks. “More attention has been given to the oversight and review of risk management policies and procedures. Most banks have redesigned their risk management systems to reduce incidents of fraud.” In addition, CCTV surveillance systems have been upgraded across branches at a fair number of private banks to monitor how relationship managers transact and behave with clients.
Below the surface
Korea has about 127,000 high net worth individuals and their total assets reached US$340 billion at the end of 2009, according to the 2010 Asia-Pacific Wealth Report. Hana Bank’s “Gold Club” private banking services, catering to individuals with account balances of more than US$500,000, currently has 16,000 clients with a total of US$21.3 billion in assets. While their number is a mere 0.2% of the bank’s customer base, they accounts for more than 40% of total assets held by the bank.
The private banking industry is still in a nascent stage, stresses Lee. The investments poured into personnel and infrastructure have been considerable, though, and Korea has consequently witnessed the proliferation of private banking centres that spoil clients with various perks. On the surface, it looks as though a host of banks indeed provide superior services. But if one looks deeper and examines the insides of internal branch operations, a different pictures emerges and the wide difference in the service quality becomes apparent.
Lee says Hana Bank is proud of being the first private bank in the country. It was the first Korean bank too that established a global private banking service at a branch in Hong Kong to provide diverse private banking services targeting regions in the Asia-Pacific. In 2007 the bank established a subsidiary in China, providing financial services to Korean companies and Chinese companies that have Korea-related trading business. Hana Bank (China), has been looking at upgrading its licence to be able to expand its customer base to the top Chinese companies and provide private banking services to HNWIs in China.
Lee believes that the quality of Hana Bank's service remains unparalleled. “We have the requisite tools and resources to design and customize the selection of talents and we have intensive training programmes, offering specialized solutions and products, professional tax advisory services and real estate advisory services, and unique life-care services.” In addition, Hana Bank offers discretionary investment management services, backed by in-house investment experts, a highly disciplined team of portfolio managers, real estate analysts, and tax specialists.
“As competition intensifies in the private banking market in Korea, the banks are naturally forced to extend their competitive advantage through better customer services, a broader range of investment products that meet the needs of clients and finally win both old and new clients.” Merely giving away free gifts or additional bonus interest rates on term deposits, asserts Lee, no longer suffices to retain clients.
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