In the wake of high-profile scandals in the Middle Eastâs private banking networks, we asked key individuals about what clients need from the sector.
Private banks pride themselves on discretion, so it must have been galling for Deutsche Bank to have had its dirty linen aired in the context of an investigation, revealed in April, by the Dubai Financial Services Authority (DFSA). The probe concluded that Deutsche Bank’s Dubai International Financial Centre (DIFC) branch was guilty of misleading the regulator and failing to meet acceptable standards in its governance and client take-on procedures. The bank was fined $8.4 million.
Deutsche Bank is not the only firm to have had its Middle East private banking operations investigated. Earlier this year, it was reported that the DFSA was also investigating ABN Amro’s private banking activities in Dubai in conjunction with the Dutch central bank. And, last year, DIFC-based Sarasin-Alpen lost a case against a Kuwaiti family that accused it of misselling investments during the financial crisis.
In the wake of these scandals, we felt it was a good time to ask key figures in the private banking world in the region about client needs, investment strategies and principles in private banking. We also tackled the question of how Middle East jurisdictions relate to booking centres in Europe, Asia and elsewhere.
GARY DUGAN, CHIEF INVESTMENT OFFICER, GLOBAL WEALTH, NATIONAL BANK OF ABU DHABI (NBAD)
What principles must private banks uphold to be fully compliant with all regulations in the Middle East?
Private banks around the world should uphold the same principles irrespective of jurisdiction and regulations. The most important principle is that of best advice. Private banks should not be distribution arms of big banks but rather the trusted adviser of the client through which they can gain best access to some top-performing products. Regulations in the Middle East do not differ remarkably from those in the rest of the world although there is an emphasis on ensuring the client is fully aware of all of the risks of the product.
What asset classes are high-net-worth investors in the MENA region interested in? Is it still largely real estate and private equity or do you see signs of increased interest in equity or fixed income funds?
The interest is largely in local equities and real estate. Ultra-high-net-worth clients have also traditionally invested in private equity. This is evolving. Rather than using private equity funds, clients are increasingly looking for club deals or direct equity participation in businesses. Local investors are maintaining their investments in local equities despite recent volatility.
In recent years, bonds and sukuks have become a larger percentage of the portfolio given the deepening capital markets in the MENA region.
Which global regions are particularly popular among high-net-worth investors in the MENA region? India, the US, Europe, for instance?
The regional interests of clients are evolving. In the past, their interest was very much in the US and Europe. We now find they are more prepared to consider India and other parts of Asia. Also, in the future, we believe some money will go into the African markets. Clients of the region have traditional trading ties with Africa and are looking to widen their exposure through bonds and equities.
KARINE KHEIRALLAH, DIRECTOR, PORTFOLIO MANAGER, FALCON PRIVATE BANK
What principles must private banks uphold in order to be fully compliant with all regulations in the Middle East?
Regulatory pressures continue to increase, pushing private banks to embrace changes and comply with new regulations aligning their business strategies accordingly. Private banks will have to implement the necessary regulatory infrastructure and optimise their operating model. Maintaining a clear and efficient business model, setting a set of values and ensuring discipline across the practice should be essential to move forward and improve the quality of private banking.
High-net-worth investors in the MENA region have tended to be clients of private banks outside the region, such as in Switzerland. Do you see signs this trend is changing?
The private banking sector in the region has continuously evolved while trying to adapt to the competitive landscape. There are currently more than 60 private banks that operate in the GCC, of which more than half are international banks, mostly based in Dubai. The UAE has emerged as a hotspot for private banks in the Middle East, establishing itself as one of the most attractive investment destinations in the region.
Following the global debt crisis, regional investors have started gradually to prefer booking their assets in their home country rather than to do it offshore as done traditionally. Consequently, the region has witnessed a tremendous inflow of wealth, not only from Middle Eastern-based clients but also from international investors as they are shying away from the more stringent regulated financial centres.
Also, supported by a booming economy, the region and particularly the UAE continues to be seen as a safe haven, attracting massive inflows from international and regional investors. On the other hand, with the ongoing concerns in Europe in addition to the strict tax and legal requirements, international private banks have been setting up new offices in the region aiming to benefit from the local wealth growth. Hence, the private banking industry in the region has been witnessing a rapid expansion compared to the more traditional markets such as Europe.
Despite the rising competition, the private banking sector in the region still benefits from healthy growth and the outlook remains positive.
How common is the practice of using leverage to enhance potential returns in the equity market? What advice do you give clients who are considering using leverage?
Following the local equity market rally the past few years, the amount of leverage offered to enhance returns reached high ratios. Equity lending had become a common practice in the region to cater to clients’ hunger for yields and had played a positive role in the liquidity of the markets.
However, using leverage to invest in the equity market could be very risky. Equity markets are very volatile, hence the smallest move can trigger margin calls or forced selling in worst-case scenarios.
Leverage should be used in moderation and with the right asset class while managing it very carefully. If not done properly, the client can be left exposed and at risk whenever the market witnesses a sudden move downward.
CARMEN HADDAD, CHIEF EXECUTIVE, CITIBANK QATAR
High-net-worth investors in the MENA region have tended to be clients of private banks outside the region, such as in Switzerland. Do you see signs this trend is changing?
There are various reasons behind this shift, a key one being the development of the banking industry and the increased sophistication of banks in the Middle East. The 2014 McKinsey Global Wealth Management Survey highlights the region as having the second-fastest-growing private banking market. Another is the increased pressure many traditional banking centres are under as a result of stricter regulations. The final factor is the sheer increase in the number of individuals in the region qualifying for private banking, with private wealth in the region increasing by 11.6% to reach $5.2 trillion in 2013, according to the 2014 BCG Global Wealth report.
These factors create opportunities across the region and an example is Dubai’s emergence as a leading financial hub. Citi Private Bank is firmly established in the region and has recently increased investment and banking resources, building upon its presence in its Dubai office.
How can MENA-based private banks and wealth managers offer a distinct service compared to private banks in, say, Singapore?
The key differentiator should be things that a private bank should offer regardless of its location. These differentiators should be a culture of putting the client and their interests at the centre of everything that you do. In the case of Citi Private Bank, for example, this is why it moved to an open architecture platform many years ago. It is also the reason why we tend to have a lower client-to-banker ratio to ensure that personal service exists as opposed to a mass-market approach to wealth management.
The advantage wealth managers have in the region is the knowledge they have of clients and familiarity with the region’s culture and customs. These factors have a tremendous effect on gaining the advantage over foreign banks. However, there are key things without which a private bank cannot compete, regardless of its location. A key factor is having a platform which is responsive to the needs of clients and affords them investment opportunities that are unique.
How important is Islamic finance to high-net-worth investors in the MENA region? How large a part of your product offering is sharia-compliant?
There is an increasing appetite for Islamic finance in the region. EY estimates that Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013 and predicts continued increased growth. Citi as a whole has been offering Islamic finance solutions for over three decades, and has played an instrumental role in the development of the industry offering murabaha deposits as well as having a range of sukuk offerings.
We see increasing interest for Islamic financing in the region, For example, in Qatar, the estimate is that 25% of financing is done Islamically. Citi Private Bank has a murabaha trading programme that is specifically designed to provide Islamic investors with short-term investments and we are constantly looking at how to evolve our platform to respond to the needs of our Middle Eastern client base.
HUMBERT VINCENT BUEMI, HEAD OF THE UBS REPRESENTATIVE OFFICE IN BAHRAIN
High-net-worth investors in the MENA region have tended to be clients of private banks outside the region, such as in Switzerland. Do you see signs that this trend is changing?
The Middle East is indeed a growing region with a high concentration of wealthy families. Many of them prefer to book all or parts of their assets in established financial centres for many different reasons. A significant number of clients like to have their assets booked in Switzerland, the country having a long tradition and great experience in private banking.
With respect to UBS, I can say that the tradition of doing business with banks outside the region is unchanged. We are able to serve wealthy clients across time zones, markets and jurisdictions, with multi-booking capabilities around the globe. We have maintained a presence in the Middle East for more than 50 years and our office in Bahrain has been active for more than 40 years.
How can MENA-based private banks and wealth managers offer a distinct service compared to private banks in, say, Singapore?
We need to differentiate between private banks with asset-booking capabilities and private banks operating through representative offices.
As head of the UBS representative office in Bahrain for the past seven years, I am in charge of representing our bank on the ground. Our licence and regulations allow us to assume a promotion and liaison role. Clients are serviced by two booking centres in Switzerland (Geneva and Zurich), our regional hub in Dubai and international locations such as London, Jersey, Luxembourg and Singapore. While local banks rather focus on local investment services, we are able to do this on an international scale.
As a global firm, we offer wealthy entrepreneurs and families the full spectrum of our resources, ranging from access to global capital markets and advisory capabilities, to investment management solutions, wealth planning and corporate finance advice.
In the area of wealth management, there are two main approaches: on the one hand, discretionary investment mandates where the management of assets is delegated to a team of professional portfolio managers; and on the other, advisory mandates for those who prefer to be actively involved.
What are the main needs of high-net-worth investors in the MENA region and how can you meet them?
For decades now, we have partnered with local families and entrepreneurs in the Middle East, as they account for a large part of the private economy. Many family businesses will be handed over to the next generation within the next few years and these high-net-worth clients thus have growing, complex needs that range from fully comprehensive banking services to proper succession planning.
UBS is committed to meet those needs through our strategy, which centres on our wealth management business and our leading universal bank in Switzerland, supported by our asset management operation and our strong and focused investment bank.
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