High-net-worth investors: Putting the heat into private banks

Italy's private banks are facing fierce competition from foreign rivals to capture high-net-worth clients. Daniel Sheehan talks to both sides of the battle about how the market is waking up to the potential of structured products

A failure to compete with counterparts in neighbouring Switzerland and Germany when it comes to securing European high-net-worth clients is a criticism that has often been levelled at Italy's private banks. But the sector is undergoing something of a revival, with several foreign and domestic banks establishing a foothold in the market. Structured products are playing their part in this fightback, and form an increasing proportion of high-net-worth portfolios.

The private bank market in Italy is still underdeveloped, says Alessandro Ricci, equity derivatives manager with the European division of US investment bank Lehman Brothers in London. This means a lot of upside potential exists for the sector, and for the role of structured products within it, he adds.

Gianfranco Venuti, director of financial services and e-marketing with Bipiemme Private Bank in Milan, concurs. "We must improve the private bank and structured products environment in Italy," he says. "Especially now we are facing a lot of pressure from overseas private banks."

An increasing number of private banks in Italy are offering structured products, Venuti says, adding that clients' portfolio weightings in alternative investment strategies such as structured products are also on the rise.

With the retail structured products market weighed down by regulatory burdens, it is the clients of private banks who have sustained overall structured products sales. "The mobile big investors have not been affected by the regulatory concerns holding back the retail market," says Giuliano Raso, head of investments with Melior Banca in Milan. Venuti agrees: "Our clients have not suffered from the regulatory hold-ups seen in the retail space, and the larger investors are still choosing from a wide range of underlyings and payouts."

Foreign legion

Many market participants say it is foreign banks that have made the most headway securing high-net-worth clients in Italy. UBS Wealth Management, for example, is one of the more established private banks in Italy. With headquarters in Milan, the Italian private banking arm of the Swiss banking group currently has EUR14 billion under management in Italy.

Estimates say that, on average, only 2% of clients' portfolios are allocated to structured products. "Depending on the client's appetite for structured products the proportion can be as high as 4% or as low as 1%," says Francesco Spelta, Milan-based executive director at UBS Wealth Management. However, derivatives-based investments are starting to play more of a role in Italian portfolios, he adds.

Spelta says private bank clients in Italy are starting to see the attraction of structured products. "The private bank market has evolved, in terms of regulations, investors and distributors. The market is waking up to structured products' potential," Spelta says. Although demand isn't quite there for exotics, hybrids look like they are the new frontier, he adds.

For now, UBS provides its clients with fixed-income, equity and commodity-linked structured products. The bank also provides bespoke products for its biggest clients with portfolios in excess of EUR20 million.

"Our role is to propose products from UBS investment bank and other issuers to our client base," Spelta says. "UBS operates under full open architecture, but a large percentage of our business is naturally directed towards UBS investment bank."

Citigroup is another foreign bank that has been busy building a private bank operation in Italy. The bank has two branches there that focus on servicing high-net-worth customers.

Citigroup's approach is very different to that of UBS. First of all, Citigroup's private bank clients in Italy have much smaller amounts invested than those at UBS. On average, clients' portfolio sizes are in the region of EUR300,000 to EUR500,000, or what Citigroup calls mass affluent investors, says Mario Spreafico, director of investments with Citigroup Italy in Milan.

Also, rather than focusing on bespoke offerings, Citigroup releases a new product each month to its private bank network. The average investment is around EUR20,000 - not very big by high-net-worth standards, but Citigroup has seen investments in excess of EUR50,000 in its latest releases.

The bank's product range is dominated by structured notes that are linked to underlyings or investment strategies that clients cannot replicate themselves, Spreafico says. "There is much interest in Brazil, Russia, India and China equity underlyings among high-net-worth investors," he says, while demand for soft and hard commodities is also robust. Earlier this year, a capital-protected note linked to the performance of agricultural commodities proved to be Citigroup's most successful issue in Italy.

Italian banks fight back

With the private banking sector in Italy now gathering momentum, local banks are hoping that they will be able to compete with the offshore players for the wealthiest Italian investors.

Bipiemme, for example, is just one Italian private bank that is trying to gain a foothold in the market. The bank is part of the BPM banking network, one of the largest in Italy, which also incorporates investment banking arm Banca Akros and the retail network Banca Popolare di Milano.

Bipiemme mostly issues vanilla products, which its customers find easy to understand. "We like our clients to be active participants in the products, so they can follow the strategy we have chosen for them," Venuti says. Bipiemme operates by taking a strong position on the market and then trying to exploit it to the advantage of clients, he explains. "Our investment advisers meet to discuss the direction of the market," he says. "Then the structured products are built to take advantage of the strategy."

The bank offers a mix of full and partial capital protection in its products. There has been a trend for products with 60% to 70% capital protection, with greater exposure to the product's strategy, Venuti adds.

In line with its aim of keeping things simple, Bipiemme structures only a small number of products. "We don't have a huge product offering, but we do tailor products to suit our individual client's portfolios," Venuti says. In fact, Bipiemme offers a bespoke structuring service for all its clients. The minimum portfolio size for clients is EUR500,000, and the bank adopts a slightly larger weighting in structured products than UBS, ranging between 4% and 5%.

Bipiemme uses the structuring services of its investment bank partner Banca Akros, as well as outside providers that include European banks. "We use all the major investment banks, depending on their respective strengths by asset class," Venuti says.

Milan's Melior Banca is another Italian private bank that is expanding its structured products capabilities. The bank's head of structured products, Giuliano Raso, says the emerging private bank is active in the structured products market at several levels. "We are present on all sides of the market, we structure our own products and buy from investment banks for clients," he says.

Melior has a complete range of capabilities on the sell-side, Raso says. "The next challenge is to increase the sales at all levels of the market."

Melior says the bank's ability across all asset classes gives it an edge over its rivals. "Very few private banks in Italy have our structured products capabilities," Raso claims. But Melior is unlikely to challenge either foreign banks or the big Italian banks when it comes to the number or size of clients, he admits. "We believe there is still a market for the niche player who can innovate on design and pricing," he says.

Melior currently issues just under EUR100 million of structured products to its private and institutional clients. A large proportion of Melior's clients are financial advisers, who distribute its products to affluent investors in the north of Italy.

The structured products that the bank distributes to its clients mainly feature partial capital protection. "We are seeing strong demand from high-net-worth investors for our 70% capital-protected offerings," Raso says. The bank also structures bespoke products across all major asset classes, but its expertise lies in equity, he says. For its retail bank clients, for example, Melior almost exclusively issues equity bond structures.

So, it looks like the Italian private banks are responding well to the pressure from the big foreign players and are building market share with innovation in pricing and structures. However, the real winners from the increased competition will be Italy's high-net-worth investors.