Big banks such as UBS, Credit Suisse and
HSBC are all looking to increase their private banking operations
in Japan this year but the going promises to be tough. Resistance
to the arrival of foreign institutions may mean progress is
limited, with regulators and the Japanese people themselves
unfamiliar with typical private banking procedures, warns an Asian
wealth expert, Heinrich Wegmann, the former head of Credit Suisse
Japan.

The banker, in a briefing for Swiss wealth consultancy Arvetica,
said that “the overwhelming majority of the Japanese public is not
interested (in having) any financial relationship with a foreign
institution,” implying that these banks would be forced to divide
up a “limited number” of interested customers.

Nonetheless, the Western private banking industry appears to
believe that opportunities remain within Japan, which has the
second largest population of high net worth individuals (HNWIs) in
the world after the US.

Japan takes the lion’s share of personal high net worth wealth in
Asia, despite the rapid development of countries such as China and
India. The country was responsible for 43.7 percent of the total
private wealth of $8.4 trillion in the region at end-2006,
according to the Merrill Lynch/Capgemini Asian wealth report. By
comparison, China took a 20.6 percent share and India 4.2
percent.

In recent months a number of private banks have been setting entry
strategies for Japan. Credit Suisse has just announced plans for an
increase in private banking personnel in Tokyo as it aims to
achieve 6 percent year-on-year growth in terms of its wealth
management division’s net new assets. Japan is among the regions
set to be targeted by the bank, which is looking to open an onshore
operation in the country this year.

This strategy is similar to that favoured by Wegmann, now a board
member at Nomura Switzerland and Vontobel Holding, who said that he
was not looking to encourage any bank to do offshore business in
Japan. “Very often Japanese people and also the regulators assume
that if a Japanese individual deals with a foreign bank outside
Japan… that this is flight money, tax evasion, etc,” Wegmann
warned.

Other banks already have established onshore presences in Japan.
Last July UBS opened its third wealth management office in Japan in
Nagoya, joining existing branches in Osaka and Tokyo. Mitsubishi
UFJ has set up a joint venture with Merrill Lynch in private
banking, while France’s SG Private Banking has also set Japan as a
priority in North Asia.

HSBC has begun a Japan-based wealth management expansion first
rumoured last year with the launch of insurance products as part of
a new Premier service aimed at mass-affluent individuals. It has
opened two dedicated offices in Tokyo’s upmarket districts of
Akasaka and Hiroo to serve investment needs of wealthy individuals
with financial assets of at least ¥10 million ($93,000). HSBC says
it aims to set up five more such outlets, called HSBC Premier
Centres, in Tokyo and Osaka within this year before expanding into
Japan’s other major cities.

Stuart Milne, HSBC country manager for Japan, said it is necessary
to establish favourable relationships with customers to succeed, so
his bank intends to offer its service on a long-term basis.

Still, banks are dealing with a market that is “very difficult to
tap”, with regulators keeping a close eye on banking activity,
according to Wegmann. In 2004 Citigroup was forced to close its
Japanese private banking operations because of a number of
regulatory violations.

Despite such stumbling blocks, Wegmann does acknowledge that “the
potential is huge”. Speaking about the private banking market as a
whole, the banker pointed to relationship management as a key area
for the industry to focus on, not least in Japan, a country that,
he noted, “does not know the concept of private banking as we know
it here in Switzerland. The most important lesson in private
banking I have learned is you have to be reliable in what you are
telling and proposing to your client.”

Citi success

One of the most successful banks in Japan’s wealth management
sector has proved to be Citigroup, despite its private banking
rebuff four years ago. Citi’s fourth-quarter earnings statement
showed that Citi Global Wealth Management generated $953 million of
revenues internationally. Of these, the Japanese market accounted
for no less than $411 million, or 43 percent. In the fourth quarter
of 2006, by comparison, Citi recorded zero wealth revenues in
Japan.

Much of Citi’s revival in Japan is due to its purchase of Nikko
Cordial, a major Tokyo brokerage, along with the development of
wealth management via its consumer banking presence in Japan.