When Japan's Financial Services Agency ordered Citigroup (C ) to close its private banking division a year ago, rivals in Tokyo were in no position to gloat. Sure, Citi's exit caused more than a bit of schadenfreude -- the shutdown followed FSA accusations of legal and regulatory violations, such as misleading some clients about their investments and giving loans to others that were used to manipulate stocks. But despite the troubles, at least Citi had a private banking business to lose. Others had barely made a dent in what should have been a booming trade, given the 1.4 million Japanese worth more than $1 million each. Citi "was the only really serious player in the business," says Yoko Ogimoto, a financial industry consultant at Nomura Research Institute Ltd. in Tokyo.
Now those rivals are getting their acts together. With the lights out at Citi's private bank -- it finally wrapped things up in October -- institutions are stepping up services for Japan's wealthy. Switzerland's UBS (UBS ) has doubled staffers in its Tokyo private banking business to 75 over the past year. France's Société Générale (SCGLY ) has expanded its Tokyo private banking team to 100 from 50 since 2003, and says it had roughly $2.5 billion in assets by yearend. Standard Chartered PLC (SCBFF ) has opened a branch in Tokyo's swanky Marunouchi district targeting upper-middle-class customers. And in September, Merrill Lynch & Co. (MER ) announced a 50-50 joint venture with Mitsubishi UFJ Financial Group. The new unit, to open in May, will combine MUFG's reach as Japan's biggest bank with Merrill Lynch's wealth management knowhow, targeting clients with at least $1 million in assets. "We think there's a fundamental shift beginning in Japan," says Robert McCann, president of Merrill's Global Private Client Group. "People are moving from being savers to investors, and there's a need for higher returns to give people the quality of life they want in retirement."
Merrill hopes to do better with the venture than it did in its last high-profile move into Japanese retail circles. In the late 1990s, the New York firm acquired failed brokerage Yamaichi Securities, but by 2001 closed the operation with losses of $500 million after failing to lure enough middle-class investors. "We learned from that mistake and repositioned our business" to focus on wealthier individuals, says McCann.
Japanese banks and brokerages are entering the fray, too. Mizuho Financial Group Inc. launched a private bank of its own in October, targeting accountholders with assets of $5 million or more. Sumitomo Trust & Banking Ltd. opened an operation last spring that offers investment opportunities through other Sumitomo subsidiaries. And in April, Nikko Cordial Securities Corp. announced a tie-up with Switzerland's LCF Rothschild Group, which will offer financial services to wealthy Japanese clients.
There should be enough business to go around. Japan's economy is recovering, and millions of wealthy baby boomers are nearing retirement. The Japanese are gradually realizing that deposit accounts with near-zero interest rates are a poor investment. And ongoing financial deregulation should make it easier for financial institutions to offer services such as trust management and investment advice.
Still, it may be tough to make private banking pay. One concern is a shortage of employees with private banking experience capable of providing the kind of service that is expected by Japan's wealthy elite. "It takes a lot more than plush offices," says John Sequeira, a partner at Bain & Co. in Tokyo and a former private banker. And it can sometimes take a half-dozen or more meetings before Japanese clients can be convinced to hand over their hard-earned yen. "This is something that generally takes longer in Asia, but especially so in Japan," says Rudolf Flury, head of wealth management at UBS in Tokyo.
Even if potential customers open accounts, turning a profit could be troublesome. Brokerage fees represent 20% to 30% of the profits earned by private banks internationally, but Japanese preference for long-term investments (with less-frequent stock trading) may make that a difficult ratio to achieve. "There's an opportunity in Japan, but it's going to take time," Sequeira says. Nonetheless, Citi's rivals are lining up to seize the opportunity.
By Ian Rowley