JEDDAH — Since 2010, the GCC market has doubled its total private wealth from $1.1 trillion to $2.2 trillion for an overall compound annual growth rate (CAGR) of 17.5 percent, making it an even more lucrative market for local and global private bankers, a new study by management consultancy Strategy&, formerly Booz & Company, disclosed Monday. The study estimates that at present, there are between 1.5 million and 1.6 million wealthy households in the GCC with total investable assets of around $2.2 trillion. Most of the region's private wealth resides in Saudi Arabia (44 percent), but the UAE has made notable gains with its share of GCC's private wealth increasing from 24 percent to 30 percent from 2009 to 2013. Together, Saudi Arabia and the UAE control 74 percent of the region's private wealth, up from 71 percent in 2009. Dr. Daniel Diemers, Partner with Strategy& in Dubai, said: “High-net-worth individuals (HNWIs) continue to account for the largest chunk of the region's wealth at 41 percent, followed by ultra-high-net-worth individuals (UHNWIs) at 34 percent. However, the affluent segment has been growing the fastest over the last five years at 21 percent CAGR, more than doubling in absolute dollar terms from $261 billion in 2009 to $560 billion in 2013. However, during the same time frame, wealth creation for the region's HNWIs, at 76 percent, and UHNWIs, at 94 percent, was hardly anemic.” According to the study, the growth of affluent households from 2010 to 2013 was strong, with total households increasing about 50 percent, from an estimated range of 850,000 to 880,000 in 2010, to a range of 1.25 million to 1.325 million. The UAE has created the most affluence in the GCC, growing its share of affluent households from 16 percent to 26 percent from 2009 to 2013. Jihad K. Khalil, Senior Associate with Strategy& in Dubai, said: “Powerful macroeconomic and socio-demographic forces are propelling the growth of wealthy households in the GCC. One key driver has been the strong rebound in global equity markets as increasingly aggressive allocations among the region's wealthiest helped them recapture value destroyed during the crisis. From 2009 to 2013, global equities saw 50 percent gains. Of the $1 trillion net increase in wealth during the period, we estimate that the global equity rally's impact on existing wealth accounted for around 40 percent of that gain.” “The other 60 percent of the $1 trillion in net new wealth was driven by the GCC regional GDP growth, which rose steadily at an average rate of 10 percent per annum as the oil price rose and then was sustained at near-record levels through 2014. Governments have used this windfall to spend generously on megaprojects, infrastructure, and job creation — all of which helps to produce more income for wealthy individuals and create a generation of newly affluent citizens and expatriates,” he added. The study showed that geopolitical events also intensified the migration of new wealth to the region. Since the start of the Arab Spring and in its aftermath, many regional wealthy households migrated to the more stable countries like the UAE. These households also moved a significant portion of their wealth to either regional or foreign banks based in the GCC countries to which they relocated. The UAE has benefited from this regional phenomenon the most and seen the largest inflows from the wider Middle East and North Africa region. In addition, sluggish macroeconomic growth in the Western hemisphere, paired with turmoil in the international financial services industry has contributed to some degree of capital being reallocated to its countries of origin, including the GCC. The study identifies key issues in the regional private banking industry, despite the surge in regional private wealth. • Although the rally in equity markets has been a boon to wealthy clients, the private bankers derive little additional revenue from these gains. In fact, when funds stay put and asset allocations are not shifted due to unchanging risk appetites or views on market direction, private bankers will see their commission income reduced as fewer re-allocations or new subscriptions occur. • The second issue is intensified competition and lack of differentiated offerings. As wealth expands in the GCC, more local and global players have entered the private banking market with largely undifferentiated offerings. This can be a liability for these players, as GCC investors have become more selective and demanding. Local private banking players have been unable to evolve their client offering into the upper HNW and UHNW segments or starkly differentiate themselves in the market. • Private bankers also face an array of customer service issues that affect the top and bottom line. These issues are in the form of (i) legacy costs associated with old operating models and outdated branch-based coverage strategies (ii) unsophisticated advisory which lacks in tailored distinct offerings based on customer segmentation and life-stage needs (iii) and inflexible reporting systems that are outdated. “While most of these issues are not new, there is an urgent need to address them and find solutions as competition increases and wealthy clients become more demanding. Clients want better reporting, improved accessibility and increased transparency. To deliver on these demands and create a truly customer-focused experience, private banks will need to continue to invest significantly in technology while in parallel aligning their objectives and operating models to be more client-focused and digital,” Khalil added. The other challenge that is becoming more visible in the industry is the increasing regulatory pressures. Local GCC regulators are getting stricter, managing the capital markets in ways that could potentially put some drag on growth. This could hamper the ability of GCC banks to design more efficient and streamlined offerings and service-friendly operating and engagement models, as well as prevent them from being at par with international best practices. — SG
