Increased regulation a boon for Indonesia

Twenty-two banks offering priority/wealth management services were allowed to revert to normal operations following a one month ban on offering priority/wealth management services to new customers. Citigroup however, was ordered by Indonesia’s central bank from May this year to stop offering wealth management services to new clients for a year and from issuing credit cards for two years.

This follows an investigation into allegations that one of the senior relationship managers at Citi’s wealth management division stole millions of dollars, and another investigation into the death of a client during a meeting with debt collectors. The investigations by the central bank “unearthed violations of internal bank regulations and exposed weaknesses in the application of risk management,” says a central bank press release.

While Citi was unavailable for comment, other banks believe the enhanced regulatory oversight by the central bank has had a positive impact. “Since the enhancements were introduced earlier this year, the regulatory environment for the wealth management market in Indonesia is now more robust when it comes to the management of clients’ investments and their risk profiles,” says Chan Kwee Him, country head for Indonesia at DBS Private Bank.

“This has raised the bar for the wealth management industry to further lift service standards, improve risk management and put clients’ interests first,” he adds.

“With stronger protection in place, we expect Indonesia will experience an exponential growth in the wealth management business,” says Bambang Simon Simarno, senior vice president, deposit, investment and insurance head at PT Bank UOB Buana, a subsidiary of Singapore’s United Overseas Bank.

BUSINESS AS USUAL

Lanny Hendra, general manager of wealth management, Standard Chartered Bank, Indonesia, says that while the ban temporarily impacted the whole wealth management industry, and to an extent foreign banks, it is back to business as usual. On the whole, the sentiment regarding the wealth management industry in Indonesia is very strong, she says.

Indeed, fuelled by robust economic growth, wealth within Indonesia has been increasing by leaps and bounds. According to a recent report published on Asia’s wealth market, Indonesia will experience the fastest HNWI (high net worth individuals) growth rate among Asian countries of 25 per cent between 2010 and 2015. The report, co-published by Swiss private banking group, Julius Baer, and CLSA, the Asian independent brokerage and investment group, states that by 2015, the number of HNWIs in Indonesia will increase to 99,000, with a stock wealth of $487bn. The report estimates that HNWI wealth will grow at approximately 21 per cent without currency gains or around 30 per cent per annum, taking into account rupiah appreciation.

“Indonesia’s strong fundamentals and secular growth are fuelling the growth in the wealth management industry,” remarks Sameer Chishty, head of Bain & Company’s wealth management practice in Asia.

“Indonesia has been enjoying an unprecedented economic boom not seen since its independence in 1945,” states Kwee Him of DBS Private Bank. “The new wealth creation has spread from Jakarta to many other provinces covering the whole archipelago.”

DBS, he says, has enjoyed a healthy double-digit percentage growth in revenue in their wealth business in the first six months of 2011. “We are confident we can achieve an annual revenue growth of at least 20 per cent provided China and India can maintain their steady growth,” says Mr Him.

Commenting on the types of products and services HNWIs in Indonesia are investing in, Mr Him notes that typically, local equities and real estate make up a greater part of Asian HNWIs’ portfolios. “Some of these investors may subsequently increase their exposure in other investment instruments such as offshore foreign exchange, equity, real estate as well as hedge funds and private equity,” he says.

“Since the global financial crisis, we’ve also observed that more clients prefer investments which they can exercise more control over whether to buy or sell, and which can be liquidated more promptly should the markets turn,” adds Mr Him.

Simon Simarno of Bank UOB Buana, which started offering wealth management services in Indonesia in 2008, states the bank offers its clients a comprehensive range of services and products including capital-protected index funds, multi-currency and unit-linked products, as well as onshore mutual funds investing in equities, bonds and money markets. “Indonesian HNWIs are mostly interested in equity funds, which account for approximately 70 per cent of the total open-ended funds asset size in Indonesia,” he says. “We have also noticed an increased demand for unit-linked bancassurance products.”

As such, Indonesia’s wealth management industry is limited to onshore investment products since in an effort to protect the banking sector and their customers from external maladies in light of the recent financial crisis, the regulator no longer allows banks to provide offshore solutions.

“Before the Lehman crisis, we could offer offshore mutual funds to our customers, but now we cannot. We also cannot structure products linked to equities, only currency,” says Ms Hendra at Standard Chartered. Standard Chartered has been offering wealth management services in Indonesia for over a decade.

Such restrictions combined with the lack of depth of the capital market, limits the range of onshore investment options for Indonesian HNWIs. As a result, most HNWIs prefer keeping a large chunk of their wealth invested in offshore financial centres.

“HNWIs have long had very strong business ties with markets like Singapore where they have the opportunity to invest in a range of sophisticated financial instruments. Hence they keep a substantial chunk of their wealth invested in property and other financial products there,” says Bain’s Mr Chishty.

However, he points out that due to the growth momentum in Indonesia, investments are increasingly moving onshore. Wealth management service providers, he says, have a tremendous opportunity to innovate.

“Currently, too many products in the market are undifferentiated. Banks have the opportunity to broaden their product range through offering innovative insurance and investment products. They can also provide value added services such as financial planning advice.”

LOCAL PLAYERS ON THE RISE

As in most Asian markets, foreign banks such as HSBC, Citi and Standard Chartered were the forerunners in Indonesia’s wealth management industry which started out in the late 1990s and early 2000s. However, recent years have seen leading domestic banks such as Bank Central Asia and Bank Mandiri bringing tough competition.

Budiman Tanjung, head of preferred, private & wealth management at PT Bank CIMB Niaga, a locally incorporated bank where Malaysia’s CIMB Bank holds a majority stake, states that local banks have stolen a march over foreign banks in the wealth management space. “Earlier, the wealth management market was dominated by foreign banks. But as the market developed, local banks started taking the lead. Right now, foreign banks’ advantage is being rapidly eroded. Local banks have stepped up their game and with their vast distribution network, are in a position to capture the market,” he says.

“Local banks have indeed positioned themselves very strongly and created a very viable wealth management proposition,” says Bain’s Mr Chishty. However, he believes domestic and foreign banks are equally positioned.

Ms Hendra of Standard Chartered Bank contends that compared to local banks, foreign banks offer a much more varied set of investment options to HNWI customers. “Local banks offer savings, time deposits, credit cards and a limited range of mutual funds. We complement those products with a more sophisticated set of offerings, including advisory services.”

She acknowledges the presence of strong local wealth management players and believes that it will benefit the industry in the long run. “Competition is good. It helps in improving customer service, products and driving innovation.”

The number of HNWIs (high net worth individuals) in Indonesia is expected to rise to 99,000 with a total wealth of $487bn, according to a report by Julius Baer and CLSA

Indonesia will experience the fastest HNWI growth rate among Asian countries of 25 per cent between 2010 and 2015, according to Julius Baer and CLSA