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October 8, 2019updated 07 Oct 2019 2:58pm

Bridging the Gulf: How Can Western Banks Serve Middle Eastern HNWIs?

By Jamie Crawley

In the second in our series on private banking in the middle east, Jamie Crawley asks if there are still opportunities in the region for western players with international expertise?

The Middle East, along with Africa, was deemed the “engine for global growth”, according to consultancy firm Oliver Wyman in its fourth annual wealth management report, Out of the pit stop – into the fast lane, produced alongside Deutsche Bank.

According to the report, private high-net-worth wealth in the Middle East and Africa region is expected to grow by 6% annually through to 2023, compared to 4% and 3% in North America and Western Europe respectively.

With wealth generation, growth in emerging markets is supported as more people are lifted into the middle classes, in turn creating opportunities for entrepreneurs and small business owners. Added to this, technological innovation can allow for rapid wealth creation, leading many wealth managers to believe their next generation of clients will come from this region.

“For us, the Middle East is one of the most important markets and plays a key role in our growth strategy,” Sobhi Tabbara, head of private banking at HSBC in the Middle East and North Africa (MENA), tells PBI.

“Today, the private bank has a global team of professionals looking after MENA clients across a number of offices in the Middle East, Europe and Asia. As we continue to invest in this business and as private wealth continues to grow in the region, we aim to increase our MENA book by up to 50% in the coming years and achieve double-digit revenue growth.”

Not just oil

One’s eye is immediately drawn to the UAE when evaluating the wealth management opportunity in the Middle East. According to Boston Consulting Group’s 2019 Global Wealth Report, personal wealth is expected to grow 8% by 2023, compared to 5.7% globally.

Tabbara adds: “The UAE is one of the eight scale markets for HSBC Group where we continue to invest, as highlighted by the Private Bank’s relocation to new offices in the Dubai International Financial Center (DIFC) this year.

“Since establishing an office in the UAE in 2015, we have doubled our revenues and client assets and built out our team. Now we aim to accelerate that growth and double our client assets and revenues again in the coming years.”

With wealth in the Middle East traditionally reliant on oil, there will be a desire for HNWIs in the region to gain international exposure as a means of diversifying. This is where they may seek the services of major western banks with a global presence.

Middle east private banks

Riyadh, capital of Saudi Arabia

Tabbara also singles out Saudi Arabia as an important area, though the Kingdom’s economy will still be deemed by many as too oil-dependent, despite ongoing plans by the monarchy to reform this.

The Vision 2030 plan was launched in Saudi Arabia in 2016 with the goal of diversifying its economy over the next 15 years through expanding sectors such as health, education and tourism.

While the extent to which the plan will come to fruition is questionable – particularly with regard to the Crown Prince’s goal for tourism to contribute 10% of the Saudi GDP – it does point towards a growing need for wealth managers with worldly expertise.

“Many MENA clients opt for a diversified investment portfolio. Increasingly, they are also looking to tap our expertise on Asia, and the allocation to EM bonds and EM equities is growing quickly for many MENA investors”, says Tabbara.

“Generating income is often an important requirement as well, and within Fixed Income, we have seen an increasing demand from MENA investors for fixed maturity strategies.”

Focussing on the UAE, analysis by GlobalData finds that HNWIs hold 62.7% of their wealth in liquid assets, such as equities, bonds and deposits. However, the research adds that wealth managers should be alert to the increasing prevalence of illiquid investments. These grew at a compound annual growth rate (CAGR) of 9.2% in 2014-18, and are expected to rise by 6.3% through to 2022.

Tabbara adds: “Real estate continues to be an important position in many MENA portfolios, even more so than for clients from other markets.

“But of course, every client is different and we cannot generalise too much.”

The whole package

Private banks are likely to find in the region financially savvy clients who prefer to be quite hands-on with their investments. However, this too has shown signs of changing as HNWIs grapple with the uncertain world around them.

“Middle Eastern investors often get involved in investment decisions as they have a strong understanding of markets,” Tabbara explains.

“That said, given the volatility in today’s markets, we have seen increasing demand for discretionary mandates that cover all asset classes. This allows clients to leave the selection and management of portfolios to the bank, within agreed parameters.”

As anywhere though, the wealth management industry in the Middle East should be alert to digital disruption, as robo-advisers obtain market share. Among these, there are some that are highly tailored to meet the needs of HNWIs. Sarwa, for example, charges fees which decrease as the client’s investment gets bigger. Seguro Private Wealth meanwhile combines investment and trading solutions with wealth planning strategies, such as tax planning and estate equity.

Where digital offerings will not be sufficient for HNW clients will be where there is a demand for a holistic service to take care of personal as well as investment and commercial interests.

“We see that despite technological advances, clients want to have a personal relationship manager available locally to meet them at short notice,” Tabbara says.

“That’s why we are planning to set up additional private banking offices in GCC countries. Middle Eastern clients also increasingly look for more than just private banking, i.e. banks that can also help with commercial and investment banking and structure solutions to pass wealth to the next generation.

“And MENA clients continue to be on the hunt for real estate opportunities in the region and globally, requiring banks that can help them find quality assets, and use their local knowledge to finance and structure such acquisitions.”

UAE offshoring

Switzerland is still a popular destination for HNWIs from the Middle East

According to GlobalData’s report, over half of UAE HNW investors’ assets are held outside of the country. India, Singapore and Switzerland are the three preferred locations. Equities are comfortably the most popular asset class, accounting for almost half of UAE offshore investments thanks to the potentially higher returns that they promise compared to bonds or funds.

This, combined with expats making up 49% of HNWIs, highlights the international makeup of client bases in the region. There is likely to be huge demand for firms with an international network and knowledge to meet global needs, not to mention the complex tax requirements investors will need to meet in reconciling diverse portfolios.

“A key trend is that clients have increasingly global needs,” sums up Tabbara. “A client may well be based in Dubai, hold real estate in the UK and have an account in Switzerland, while exploring investment opportunities in Asia and having children studying in the US.”

With the UAE leading the way, the Middle East looks well set to become an increasingly international part of the world, and its growing population of affluent and high-net-worth residents will look for global banking and wealth management brands to provide this exact type of service.

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