With poor economic growth and high unemployment rates, Spain may not seem like an attractive or lucrative market. However, both HNWI numbers and wealth are expected to grow significantly in the next five years, giving private banks fertile ground. Valentina Romeo digs into WealthInsight’s latest country report
Similar to other Southern European economies such as Italy or Greece, Spain is not living through its greatest economic phase.
The country has been one of the most heavily hit victims after the global financial crisis, with current unemployment rates at 26.3% and government debt at 98.8% of its GDP.
Though Spain’s GDP grew by 1.3% in 2014, growth fell to -1.8% between 2010 and 2012, significantly affecting the country’s ability to grow its financial and infrastructure projects.
"Spain and Italy’s economic woes will take longer to repair themselves following the euro crises, and no imminent signs of growth are therefore seen among the wealthy," says Oliver Williams, analyst at PBI’s sister company WealthInsight.
In 2013, wealth in Spain fell 28%, equating to a reduction of private wealth of 1.4trn in absolute terms, according to the first Europe wealth report by Swiss bank Julius Baer.
The main obstacle for growth in Spain is its geographical position in Europe, the WealthInsight report explains, which means that it will only achieve its full potential once Europe shows positive growth.
Latest figures from the National Institute for Statistics (Istat) project that Spain will experience "positive growth" in each quarter of 2015, following the small, but positive growth of the previous year.
The Spanish market is indeed attractive, not only for local development, but also to foreign institutions and investors, as it holds $968.8bn in HNWI wealth.
In the last 12 months, large global investors such as Bill Gates, Warren Buffet and world’s second-richest man, Carlos Slim, have largely invested in Spanish infrastructure, financial firms and real estate contributing with over 1.7bn.
Nevertheless, according to Banco de Espana, Spain lost more than 7.6bn of direct investments in the first 11 months of 2014.
Wealth to reach $1.3trn in 2019
There were 228,736 HNWIs in Spain in 2014, increasing by 8.4% between 2010 and 2014, WealthInsight’s database can reveal.
Lower-tier millionaires (wealth of between $1m and $5m) were the largest HNWI wealth band in 2014, accounting for 31.4% of the total wealth of HNWIs in Spain, followed by mid-tier millionaires with 27.5%.
Affluent millionaires (wealth of between $30m to $100m) accounted for only 1.3% of Spanish HNWIs in 2014, but held 20% of HNWI wealth.
WealthInsight also expects the Spanish HNWI population to increase by 32.7% between 2010 and 2019. HNWI wealth will see a significant percentage increase, growing by 31.4% to reach $1.3trn by 2019.
Case of Catalonia
WealthInsight analysis, in particular, shows that the state of Catalonia holds the second-highest number of millionaires in the country, at a figure of 48,900, which is 21.7% of the overall millionaire population.
Catalonia also has Spain’s highest regional population of 7.3m, which is 15.8% of the overall populace.
Commenting on the possibility of Catalonia getting its strongly debated independence, Carlisle says: "Spain is very concerned about the situation with Catalonia and its HNWIs, with the country losing some considerable income for taxes from this section of the population if the deal goes through in the future.
"The Spanish government will also miss out on the tourism the region attracts, with Barcelona being a key strategic area that Spain would like to keep within its borders."
Spanish HNWIs have experience in investing and are getting increasingly familiar with investment strategies, especially if they generated wealth from the financial services sector, with 11.2% of HNWIs making their capital this way.
However, in 2014 media was the primary industry through which Spanish HNWIs acquired their wealth, and was the primary source of wealth for 17.4% of local HNWIs, according to WealthInsight.
Other important industries for HNWIs in Spain included fast-moving consumer goods (FMCG) with 8.8%, technology and telecommunications with 7.9%, and construction and engineering with 7.3%.
Carlisle notes that the Spanish wealthy privileged investment funds are a separate class of investment for 2014.
"Liquidity breakdown of the Spanish HNWIs was predominantly in this fund category, reaching $319.5bn and 33.0% of all liquid investments," he says.
Investment funds were spread throughout Europe, with 45.9% of HNWI foreign wealth being invested across the continent and North America, with emerging investments being made in the Asia-Pacific and Middle East regions.
Overseas investments by Spanish HNWIs were mainly held in fixed-income (32.7%) and cash (29.4%), while real estate had the lowest level in 2014 (3.5%), WealthInsight also reports.
Due to the effect the banking and housing industry had on the Spanish economy, the private banking industry shifted to becoming a lot more efficient in terms of costs. The number of private banks in the market also got streamlined.
Following the 2008 financial crisis, many private banks in Spain suffered setbacks when compared to private banks in the Asia-Pacific and South America. For this reason, M&A activity has been predominant in the peninsula throughout 2014.
Carlisle says: "Like much of the European market, Spanish banks have struggled to cope with the additional resources that have had to be acquired to comply with Basel III regulations as well as the loss of some US HNWIs through the FATCA regulation."
As a primary trend, many large domestic private banks have acquired similar companies to increase the size of their portfolios.
A prime and recent example of this was the acquisition of Spain’s Barclays assets, which were bought by La Caixa in 2014 for £633m.
La Caixa, the second largest private bank in Spain, says the deal included 270 branches and approximately 555,000 clients. The deal set the grounds to bring in a further 4,000 private banking clients to the bank, representing approximately 2.6% in additional market share.
As of February 2015, CaixaBank Private Banking handles a portfolio of 50bn, mostly from local clients with average assets of 1m.
The bank’s current market share stands at 13%, with average annual growth of 11% in 2013. The bank also handles the fair amount of 326 UHNWIs.
As many Spanish HNWIs have confidence in the five major domestic banks (Santander, La Caixa, BBVA, Bankinter and Sabadell) foreign private banks in the country are increasingly losing market share.
However, in January 2015, Mirabaud, a Swiss financial institution with more than 200 years’ experience in wealth management, asset management and intermediation, launched its operations in Spain.
In October 2014, Credit Suisse appointed at least five private bankers in Spain and has plans to hire more to "cope" with the increase in pace of economic growth in the country.
Miguel Matossian, chief executive officer of the firm’s Spanish unit, said in a press release: "The trend in the country is very positive, with the stock market up, new IPOs and private-equities funds investing. We are seeing new wealth creation."
The Swiss giant nearly doubled client assets in Spain during the country’s recession, and its private banking and wealth management arm had $1.4trn assets under management as of June 2014.
Moving to a new model
An increasing number of Spanish HNWIs favour deeper engagement in interactions with wealth managers, firms and advisors, leading to an overall movement from discretionary to advisory models.
Most importantly the so-called ‘baby boomers’, that constitutes a large proportion of the Spanish HNWI wealth, presided over a period of rapid economic growth and are about to retire from active business life.
In this regard, traditional business models, based mainly on asset-management services, should shift to a new model that fits new clients’ needs. The leading products and services should be based on wealth planning, corporate and real estate advisory, and financial investment solutions.
Several private banks have tried to adopt innovative ways across digital platforms to engage with its valuable clients.
At CaixaBank, in some instances, the lender has adopted communication techniques used in social media, which their clients are accustomed to, and adapted them to private banking.
For instance, CaixaBank launched The Wall in 2012, based on the online Linea Abierta channel, which is a transactional platform. Customers can use The Wall to hold conversations with their advisers either via video calls or written messages.
This approach suits busy customers who may not have time to visit branches or to call advisers. New, secure technology allows them to complete, for example, Mifid-related documents online. It can also provide customers with new investment recommendations and customised portfolio tracking reports.
The Linea Abierta portal also provides a self-planner only for private banking customers, allowing them to simulate different scenarios for their own financial investments.
Juan Gandarias, general manager at CaixaBank Private Banking, tells PBI about the increasing importance of the technology element of the clients’ relationships.
"Undoubtedly, providing customers with greater control over their finances changes the nature of their relationship with their adviser, and in some instances, new technology enables clients to undertake some tasks without advisory assistance."
He adds, however, that "no matter how advanced technology platforms become, they cannot replace the trust placed in an expert adviser who delivers bespoke advice and expertise".