Foreign banks are exiting the wealth management business in India as they find the market too small and unprofitable in the long run given the stiff regulations.
In recent months, Swiss banks like EFG Group, UBS and Sarasin and US-based Morgan Stanley have exited their wealth management business in India. Sarasin had assets under management (AUMs) of around $100 million compared with larger peers like Standard Chartered and Bank of America that have estimated AUMs of anywhere between $3 and $4 billion.
The RBI said in June last year that banks can offer wealth management services only through a separate subsidiary, or through a “separately identifiable department or division” set up for the purpose, essentially to avoid any conflict of interest. Also, banks need prior approval of RBI before undertaking wealth management services.
“While India remains an attractive market, UBS has concluded that, in view of its recently announced strategy for investment banking, it will not be feasible to implement its business plan for the bank branch in Mumbai in the form originally planned,” UBS spokesperson said in an emailed statement.
The bank said that in optimising the use of both its capital and balance sheet, the bank branch will be constrained in its deposit and lending activities in India as well as in its ability to support the onshore core banking products demanded by wealth management clients.
EFG, with assets of $250 million, was sold off to L&T Finance and Morgan Stanley's business was sold to Standard Chartered last year. Interestingly, Morgan Stanley saw a 19% margin in wealth management business in the US, which helped it report 55% jump in Q1 profit, according to the company's Q1 results. “(The business was) too small and insufficiently profitable,” said Keith Gapp, spokesperson for EFG Group.
On whether the immature nature of Indian wealth management business had played a role in the exit, Gapp said it was a factor to the extent that it impacts the ability to grow the business as one might have wished, to get it to the point of acceptable profitability.
“Wealth management is an industry that is fragmented despite some recent consolidation, where laws and regulations are still forming, the product range is relatively limited,” said Shiv Gupta, managing director, RBS Private Banking India.
The wealth management market in India is very small compared to the developed nations with total AUMs of $30 billion. This, experts say, is because high networth individuals (HNIs) in India invest most of their wealth in real estate and gold.
According to Karvy Wealth Report, at the end of FY13, Indian individual wealth in financial assets stands at R109.86 lakh crore whereas Indian individual wealth in physical assets (gold and real estate investments) stands at R92.06 lakh crore. Out of the R109.86 lakh crore, only R26.03 lakh crore is in equity.
“It is true that a high proportion of investments tend to be in real assets due to the prevailing economic and interest rate environment but over the past few years, we have also seen considerable interest in fixed income and money market instruments across varying degrees of credit quality, tenors and investment strategies,” added Gupta. HSBC declined to comment on the story and an email sent to Citi Bank India, remained unanswered.
According to a senior wealth management executive, the businesses of these banks were anyway too small in India. Other reasons behind their exit, he said, could be that Indian HNIs invested only in low-risk portfolios, which did not earn the banks much money.
Even Indian regulations have played a part in these exits. Foreign bankers also took a hit when market regulator Sebi in August 2009 banned entry load to mutual fund distributors. through which they used to charge 2.25% of the investments up front.
“A large number of HNIs in India had their money in Swiss accounts and, after the black money issue, people got wary when these banks came to India. Their fear was if they have accounts in these banks, their money would come under the purview of the RBI which was not the case in Swiss accounts,” he said. Last month, HSBC settled a case for an undisclosed amount wherein it was alleged that the client had faced huge losses owing to the negligence of the bank in managing her portfolio. The client, had deposited R3.6 crore in MFs at the bank.