The outlook for private banking in
Central and Eastern European may be becoming slightly less rosy
after a slowdown in rates of personal wealth accumulation during
2007. But the region, and Russia, still represent an attractive
wealth management market.

While the drivers of individual wealth in the Central and Eastern
European (CEE) region remain positive over the next 18 to 24
months, the outlook for high net worth growth is becoming less
certain, according to new research by business consultancy
Market-Dynamics Research and Consulting (MDRC).

These economies have generated very high rates of HNW growth since
eight states joined the EU in 2004, followed by two in 2007. In
that period, the increase in HNW numbers and assets have been
driven by high levels of GDP growth, the free availability of
credit, development of the local real estate and, most importantly,
liberalisation of their previously restricted local markets.

Separate research from Boston Consulting Group (BCG) calculates
that wealth management as a percentage of total banking revenues in
the CEE is twice as high as the global average of 12 percent.
Stephan Dertnig, a BCG managing director in Russia, estimates that
500 households alone generate 40 percent of the wealth in
CEE.

In addition, 35.7 percent of regional assets under management come
from people in the ultra HNW bracket, those with more than €100
million ($147 million) of assets. This compares with 3.7 percent
from people with a net worth in the €20 million to €100 million
range, 7.3 percent in the €5 million to 20 million range and 9
percent with €1 million to €5 million of total wealth.

According to MDRC, the individuals who have benefited most from the
opportunities presented by a conversion to liberal economic systems
have been professionals, especially lawyers and accountants,
property developers and the owners of medium-sized local
businesses.

Its research into the HNW sector in the CEE countries shows that,
ultimately, it is the free availability of local credit that is one
of the most important catalysts for HNW growth. But will the
current credit and liquidity crisis in the world banking sector
adversely impact on the CEE and slow the growth of HNW
wealth?

For its analysis, the consultancy has revisited its assumptions on
GDP growth, GDP per capita, inflation, employment, taxation, salary
levels, property values, construction activity, local stock-market
performance and business confidence for each of the ten countries
in the region, to give an up-to-date measure of HNW numbers.

The consensus view, MDRC finds, is that the underlying prospects
for regional growth remain positive into 2008/09. But while the
drivers of individual wealth also remain positive over the next 18
to 24 months, the outlook for HNW growth “is less certain”.

At the margin, any significant reduction in the supply of credit to
the small/medium corporate sector or for property development will
adversely influence the growth of HNW wealth.

Since MDRC’s last CEE regional study in 2005, a clear dichotomy has
emerged between the “best” and the “worst” countries – at least
from a wealth management perspective, the consultancy notes.
Overall, MDRC finds that HNW growth rates in 2007 are proving
generally lower than in 2006, with a slowdown seen in the second
half of last year.

Of the leaders, Poland, the Czech Republic, Slovenia and Slovakia
will show the highest growth rate in HNW individuals in the CEE
sector. These countries are structurally the most “attractive
wealth management markets”, it says.

In contrast, the Baltic states of Latvia and Lithuania are likely
to see GDP growth in 2007/08 at over twice the EU average, but the
rate of HNW growth in these countries has slowed and is now back at
2004/05 levels. The wealth management markets in these countries
are weak, MDRC notes. Although the HNW segment in Estonia is
expected to grow at a faster rate than its Baltic neighbours,
market attractiveness is no higher.

GDP in both Bulgaria and Romania is forecast to grow at around
three times the EU average, but net HNW growth is relatively low as
consumption of wealth continues to outpace the rate of HNW
investment.

MDRC finds that the most difficult country to assess is Hungary.
The austerity measures introduced by the current government, a weak
currency, highly volatile stock market, very high public sector
debt and GDP at one-third of that of its neighbours point to an
economy in transition. In the short term, Hungarian HNW growth will
be low and the wealth management market is relatively unattractive.
However, there are sufficient indicators to suggest that the wealth
sector in Hungary will grow in line with its closer neighbours. At
the same time, consumption of wealth by HNW individuals is high and
is one driver for the high level of HNW cash deposits.

MDRC’s findings are echoed by Pictet et Cie private banker
Christopher Mouravieff-Apostol, who believes that CEE countries and
the former Soviet states should not be regarded as a single entity.
Indeed, these various states are likely to experience a rapid
divergence over the next few years, he declares.

The banker, head of Russia and Eastern Europe at Geneva-based
Pictet, contends that Central European markets are becoming far
more closely aligned with Western Europe in terms of the
sophistication of banking products. There are many similarities
between CEE and Russian/Commonwealth of Independent States markets,
in that clients are often young entrepreneurs.