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Citi Transaction Services | Citi OpenInvestor
Foreign banks, due to regulatory
barriers on how they can take
deposits, already have a client-based
bias toward mass affuent and high
net worth investors. With that in mind,
international banks, once approved
to sell funds, could offer an additional
layer of servicing, which could include:
• Manager selection
• Use of investments within a full
wealth management portfolio
• Additional post-sales support
While not entirely unknown in China,
these types of practices remain
relatively undeveloped, creating a
real business opportunity and
competitive advantage. Barriers
to implementing such a business
model are most likely to be found
in developing the on-the-ground
expertise and controls necessary
to attract and retain clients.
With distribution as one of the most
lucrative elements in China’s fund
management industry, the rewards
for a commercial bank that manages
to get a solution right are signifcant.
Bearing this in mind, we do not mean
to suggest that the likes of Citibank or
HSBC will be able to unseat domestic
counterparts quickly. Nevertheless,
with appropriate investments in
personnel, even the initial business
growth gains can greatly boost their
onshore presence and market share,
at least among foreign competitors.
Such a shift is not without challenges,
however. Getting all of the elements
right ahead of domestic competitors
has often proven to be a barrier in
the past. Servicing, after all, can be
learned and some smaller domestic
banks have already been making
investments in this area.
Exhibit 14: Big 4 Banks’ Share of New Fund Distribution,
2007 – 2012
ICBC, BOC, ABC and CCB consistently account for the vast majority of
fund distribution
Source: Z-Ben Advisors, Wind
0%
20%
40%
60%
80%
100%
having a place at the top of ICBC’s
new product list,
putting many
smaller managers in a painful position
when they seek to bring new products
to market.
Making matters even more
complicated, some of the major
distributors have announced caps on
the number of funds they intend to
sell in 2012. This is likely the result of
the success of their proprietary short-
term wealth management products
and the fact that the purchase of
products for which the bank serves
as custodian keeps the cash in-
house. Investing in products typically
involves a mere transfer of money
out of a deposit account and into a
fund product, all in the same bank. In
the event of a liquidity crunch, many
banks are able to earn more simply
by having that money sit in their
vaults or moving it to one of their
short-term products.
Foreign Banks as Distributors
In our view, foreign banks will soon
be given approval to sell mutual
funds to domestic investors. Even the
four largest foreign banks in China —
Citibank, HSBC, Standard Chartered
and Bank of East Asia — have nowhere
near the reach of the domestic big
four banks. Even many regional banks
in China have more branches and
staff than the foreign contingent.
This is not to say that foreign banks
don’t bring a value proposition to the
table. For domestic distributors, any
fnancial transaction is for the most
part a fre-and-forget operation: Make
the sale and provide minimal post-sale
follow-up. After all, fees are earned
only when the transaction is made,
leaving fund managers themselves
to foot the bill for post-purchase
servicing.
“With distribution as one of the most lucrative elements in China’s
fund management industry, the rewards for a commercial bank
that manages to get a solution right are signifcant.”