Private Banking: Strong Growth in 2019 Unlikely to be Replicated in Next 12 Months
Hungary’s private banking sector, where many of the country’s high-earners deposit their savings for safe keeping, saw its total assets under management rise to a record high of HUF 5.720 trillion (EUR 17.3 billion) at the end of last year, a very healthy 21.9% increase on the 2018 figure, according to the latest industry analysis by Blochamps Capital, a Budapest-based, private banking advisory firm. István Karagich, founding chief executive of Blochamps Capital, talked to the Budapest Business Journal about the sector and his hopes for the future.
BBJ: This growth in assets makes the sector look good. Is it sustainable this year, leaving out the possible concerns of the coronavirus for the time being?
István Karagich: 2019 was an excellent year for some private banking service providers, which have set the bar high. Some funds closed with a yield above 30%, but, of course, not every portfolio was like this; some gave returns of just 3-10%. It’s a difficult task for private bankers in 2020, because their clients expect returns at the upper end, yet these clients are risk averse. You know, high returns entail high risk! But overall, my expectation for 2020 growth in assets under management (AUM) is around 15%.
BBJ: So, what was behind this growth?
IK: The main driver, for the last two-three years, has been net new assets, meaning money transferred by clients into their private banking accounts. This was mainly from company dividends. Previously, growth was led by yields from funds invested.
BBJ: Who makes the grade as a private banking client in Hungary? I mean, what are the entry thresholds, and how do these compare with wealthier countries?
IK: The average entry threshold is more than HUF 70 million, so around EUR 220,000. It was lower earlier, but it should rise further. In Germany and Austria, entry levels are typically between EUR 0.5-1 mln, and in the United States, more like USD 1 mln. In Switzerland, CHF 1 mln.
BBJ: How is the sector now in Hungary? How many are competing in this rather small market?
IK: There are 14 active private banking service providers now in Hungary, that’s two or three down on when we spoke in 2018. We estimate there are between 18,000 – 20,000 individual high net worth individuals (HNWI) as clients; that’s not really changed much in the past two years. But many clients hold multiple accounts, so there are nearly 44,600 accounts in total.
BBJ: And the market leader, is that still OTP?
IK: Yes, OTP holds some 23,170 accounts, more than half of the total in the country. And that’s about 1,370, or 6%, more than two years ago. OTP alone manages about HUF 2.116 tln, or nearly 37% of total market assets. MKB is in second place, with an AUM of about HUF 690 bln, just one third that of OTP. In third place is Raiffeisen, with HUF 620 bln in AUM.
There are 396 employed in the private banking sector and, on average, each banker manages almost HUF 14.5 mln (EUR 43,000) in assets.
BBJ: What are the main trends that you’ve seen in the private banking sector in the last 12 months?
IK: In private banking here, we very often lag the international trends, but you know the basis of the wealthy people is completely different. The high net worth individuals are a much smaller group than, for example, in Poland or Austria.
Within Hungary, these 18,000 – 20,000 HNWI include a small elite comprising just 2,000-3,000 people. The remainder today have less ability to get dividends from their companies because they don’t have government contracts. They have a working company, but they have to work very hard to get dividends out of their companies.
The majority have lower dividends than previously. Maybe they just sold their companies. A lot of company buy-outs have happened in the last three-four years. A few, concentrated groups have come up, like magnetism. But if they buy 10 different companies, these magnets, it means that 10 different private banking clients have lost, forever, their ability to get growth from dividends.
They still have the money from the company sale, but this money will only work as a portfolio investment. All in all, these company dividends may be boosted, but it is being concentrated in fewer hands.
BBJ: A year or so back, you were predicting more mergers and consolidation in the private banking sector. What about now?
IK: Yes. I thought that HSBC would be one of those banks coming here. They were very close. Last year they made it public that they are again interested in Hungary. Right now, it seems they’re coming again, but in which form, no one knows. Buying an existing service provider would be a very reasonable way, but no one knows. A year ago, it was behind closed doors and chit chat, but right now, it seems much more serious.
My other bet was the Chinese line. In the last three years, four different Chinese banks have come to Hungary, and it seems that the second biggest is coming as well this year.
BBJ: They are doing what, general commercial banking?
IK: I think for them, Hungary is just a bridgehead for entry into Europe. It seems Hungary is a very good first step for them.
BBJ: I know it’s early days, but I have to ask: in what ways do you think the coronavirus crisis could affect private banking?
IK: You can never know. In this phase, I think, I hope, the world will answer this problem. The easy answer is that maybe the coronavirus will attack older people, and maybe the Hungarian private banking clients are older, but I don’t think we will see a big effect. These people are very much separated, and they try to hermetically close themselves away from these dangers. I think we had a big slice of luck in that in the first four weeks, the virus was concentrated in China, and the whole world and Europe had enough time with these modern societies to prepare to handle this. But, yes, economies everywhere will be hurt.
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