ahvan iim indore - consulting competition chanakya

NSB Bank - India Entry Strategy for Wealth Management

Chanakya, Ahvan 2012

Hoshin Kanri, IIM Indore

Peeyush Kumar | Sayan Maiti | Vaibhav Rastogi

Evaluating India’s Potential

Internal & External Analysis

STP Prioritization of

Regions Key Initiatives

Recommended Strategy

Agenda

Hoshin Kanri, IIM Indore Chanakya 2012 | 1

Environment Scanning

Comparison of India vs. existing locations of NSB Bank

Analysis of NSB Bank and its services

Analysis of Competition

Evaluation of Entry Options

Segmentation of Customers

Characteristics of products for different segments in India

Lifetime Revenue Opportunity of segments in Indian context

Regions prioritized on the basis of opportunity size and existing competition

Priority listing shows the regions of high attractiveness and underexploited regions

Key initiatives that can be undertaken

Entry Strategy

Sustaining Growth

Attracting and Retaining Talent – HR Strategy

Risk and Mitigation Strategies







Environment Scanning

No. of HNWI individuals

Medium Term-High Long Term-Low

Indian Market is very small as compared to developed market

Growth in No. of HNWI individuals

Medium Term-Low Long Term-High

India boasts a growth of 20.8 % In other developed market it is around 2-3 %

Wealth of HNWI

Medium Term-high Long Term-High

U.S scores highest and

India is among the

least scorers

GDP Growth

Medium Term-Low Long Term-High

India - 5.8 US- 2.4 Japan- 1.5 U.K. 2.3 In US $ Terms






Environment Scanning…Continued


Demography


India 73 % of HNWI are

under 50 vis a vis 23 % of U.S.

Competition

Medium Term-high Long Term-Low

India scores low on competition as compared to developed nations In India major players are Kotak, HDFC, ICICI, HSBC, Axis, Deutsche, BNP Paribas, Morgan Stanley

Existing Portfolio of HNWI Individuals

Medium Term-high Long Term-Low

India seems to be best

with 8% total investment in

equity market vis-à-

vis 43% of U.S.

Taxes and Regulation


Country Rank

India 72

US 3

Japan 36

UK 16






Comparison of India vs. existing locations of NSB Bank

0

2

4

6

8

10

No. of HNWIindividuals

Growth in No. ofHNWI

Wealth of HNWI

GDP Growth

Demography

Competition

Existing Portfolioof HNWI

Taxes andRegulation

India

North America

Western Europe

Japan


India does well as compared to NSB Bank’s existing locations in most of the parameters






Analysis of NSB Bank and its services


Operates in highly established wealth management destinations

125 year old heritage

Wealth management contributed to 75% of revenues in 2011

Customers include ultra-high-networth and high networth clients, serving over two hundred thousand individuals

Significantly higher employee cost as compared to competitors

Operates in Western Europe, North America and Tokyo

14.35% CAGR growth in revenues from 1997 to 2009.

Negative growth in revenues in 2010 and 2011.

NSB BANK Service Offerings

Offers clients a distinct value proposition, focusing on structured advisory process, sophisticated products and services.

Their wealth management services include portfolio management, financial planning, insurance, and tax planning, among others.

Focus on providing the best quality service which is evident as they hire only the best and their employee salaries are among the best in the industry.

Assuming that NSB banks falls in the Global Investment bank category, the market position of similar banks in India is poor as they use an institutional approach to serve clients and are focused on UHNI and HNI’s only.






Analysis of Competition


Universal Banks

Wealth Management

specialists

Global Investment

banks

Brokers/ Dealers

Family Office Others

Major Players Kotak,

HDFC,ICICI, HSBC, AXIS

Deutsche Bank, BNP Paribas,

Citibank Morgan Stanley

DSP Merrill Lynch, ICICI

Direct

Client Associates

Independent fund/ Insurance

advisors

Present Market

Position Strong Medium Weak Strong Weak Medium

Analysis of competition in the segment

Competition intensity increasing as many global players like NSB planning to enter the market.

Existing players are increasing their operations aggressively.

Existing players looking to use cross selling to sell more products.

Fragmented industry ( If a company can penetrate 2% it will mean 25000 crores assets under mgmt )

Scope of M&A limited due to early days in the industry

Future Challenges

Expected entry of public sector banks into the wealth management sector can change the market dynamics. Given their brand equity, reach, old corporate relationships and ability to invest in top-of-the-line technology platforms, public sector banks will be a formidable competitor, particularly in the mass affluent segment. Developing and retaining advisors will be critical to succeed in the country which has high rates of attrition. As people are the source of competitive advantage, it will become increasingly critical to retain key talent in wake of increasing competition.






Evaluation of Entry Options


Option Pros Cons

Operate as a foreign bank

No major structural changes required – current operational model can be extended

•Higher priority sector lending targets (for foreign banks with 20 or more branches) – sectors in which NSB has no expertise •Limits on increasing number of branches and other regulatory issues

Enter India in partnership with a Universal Bank (Most preferred option)

•Leverage on the existing network of the bank •Access to existing customers of the bank •Less regulatory requirements •Develop market understanding before opening own branch

•Share profits with the partner bank who might retain majority control •In the long-term it is better to go alone

Wholly owned Indian subsidiary*

•Tax benefits announced by the government for subsidiarisation •No limit on branches

•High stamp duty and 30% capital gains tax when converting branches

* If the law comes into effect






Segmentation of Customers


Segment Age Typical Profession Preferred

Channels of service

Level of Service

Technology Adoption

The Young and Affluent

25-50 Years

INHERITORS - Businessmen

Online Standard Services

Expert SELF MADE - Entrepreneurs

PROFESSIONAL – MBA’s, IT and other service professionals

NRI 25-65 Years

Any profession in developed countries

Online + personal

Customized Services

Expert/ Proficient/ Conversant

Middle Aged Rich

50-65 Years

Occupying VP or above level in organizations, CXO’s,

businessmen

Almost entirely personal

Individual Services

Conversant / Beginner

Retired 65+ Years Retired from jobs or in the

twilight of their careers Entirely personal

Individual Services

Beginner






Characteristics of products for different segments in India


The Young and Affluent ( 76% )

Primary Motive – Building Wealth

Ease of Service – Provide services at arms length. E.g. Online services can be offered to this segment as its comfortable using the internet and is proactive in reviewing its investments regularly.

Standardized Services – Standardized structured based products can be provided to this segment.

More risk appetite – As this segment has more risk taking ability, the bank should try to keep on offering innovative products to this segment to retain them.

This segment will provide the highest revenue lifetime value to the bank.

Middle Aged Rich ( 15%)

Primary Motive – Accumulating Wealth, Retirement Planning

Exclusivity – As this class of customers are from the high strata of the society, individual level of services should be provided.

Personal touch–Provide personal attention to this segment as the customers in this segment are highly valued.

Retired (9%)

Primary Motive – Protecting Wealth, succession planning

Individualized attention – Such class of customers are small in size but have more wealth. So special attention should be provided to them.

Tax considerations & QOS – Since there is no tax levied on transfer of assets in India, the propensity to invest for such customers in low. Hence quality of service becomes the differentiating factor for this segment.

NRI

Primary Motive – Accumulating Wealth

Convenience – Again for NRI customers, convenience should be of paramount importance given the location constraints.

Regulatory issues– Given few cases of tax evasion, regulatory tightening is expected to happen in future.

Special attention – Along with young and affluent segment this segment is growing and hence care should be taken to provide both online as well personal attention






Lifetime Revenue Opportunity of segments in Indian context


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25 Crores

Size of the opportunity = Earning potential X number of potential customers

Out of bounds

Neglected segments with greatest potential in Indian context

Income 25 lakhs – 5 crores

per annum






Regions prioritized on the basis of opportunity size and existing competition


Problem

• Current regulation limits the number of branches that NSB can have • Data about HNIs in each city not available

Approach

• Luxury car brand presence used as an indicator of the attractiveness of the region • Luxury car brands have one of the best penetration levels amongst luxury goods • The top 12 cities were then graded as per the current level of competition for

example the presence of banks like Deutsche Bank and BNP Paribas increased the existing competition

• A final rank was arrived at considering the opportunity size and the level of competition already present

Results

• The 4 metros emerge as regions of “high” attractiveness • Cities like Hyderabad, Bangalore and Ahmadabad also score high on

attractiveness • Some highly attractive cities like Chandigarh do not have significant

competition – opportunity to be the first mover in such cities






Priority listing shows the regions of high attractiveness and underexploited regions


City Attractiveness based on luxury car presence*

Foreign Competitors present Overall Rating

Delhi/NCR High High High

Mumbai High High High

Chennai High High High

Hyderabad High Medium High

Ahmadabad High High High

Bangalore High High High

Chandigarh Medium High Low High

Ludhiana Medium High Medium Medium

Indore Medium High Low Medium

Kolkata Medium High High Low

Pune Medium Low High Low

Jaipur Medium Low Low Low

*The dealership information for luxury brands like BMW, Mercedes, Audi, Rolls Royce, Bentley and Jaguar were used to calculate attractiveness






Key initiatives that can be undertaken


Build Trust Invest in brand building exercises to improve trust Invest in education programmes to educate

customers about different asset classes, its risks and benefits

Invest in advisors Invest in employees through various training and

benefits to improve productivity and retention of advisors Retaining advisors will help in retaining customers in

the long run

Joint Ventures and partnerships Given the reach of incumbent players, partnerships are a

good way to reach to the new customers. NSB can provide the capital and expertise and the local incumbents can provide the systems to reach customers. Effective use of technology should also be used to

increase reach, particular to the technologically expert customer.

Transparency and Compliance The investments should be made transparent and compliant with the GOI regulations.

Bouquet of Products NSB has traditionally focused on its quality of service. In the Indian context, it should target customers with attractive segment focused products.

Increase use to technology & embrace mobility Technology should be used to improve reach and

improve processes Mobility solutions provide wealth management firms

with the ability to conduct business in locations that are not covered by the branch network.

Integrated view to advisors Provide advisors with a panoramic view of clients which will help in enhancing advisor productivity and enable advisors to deliver high-quality services

360 Customer

View

Portfolio View

Financial Profile

Transactions

Accounts

Customer Profile






Entry Strategy


Identify the key strengths and offerings of the bank

Identify the targeted segments ( which the bank wants to target) based on various parameters

Design products based on the customers needs

Identify and prioritize the regions in which to open branches and target customers

Identify the mode through which customers will be served eg. Online Banking, Personal Banking, Individual Banking

Evaluate the best way to make entry based on various parameters like regulatory constraints, tax structure etc

Evaluate performance based on medium and long term benchmarks

1

2

3

4

5

6

7






Sustaining Growth


Control the major drivers of cost

Front office including portfolio managers and product management, often comprises the largest component of cost, approximately 30-40% of revenue. Most of the control must be done here as back office costs like IT are mostly fixed and difficult to control.

Use Cost Management Frameworks to monitor costs and take appropriate action

Use cost management framework to balance profitability vs. growth and take appropriate actions.

Cost Cutting

Lending

Losing Ground

Investing

Pre

tax

Mar

gin

Revenue Growth Rate

Higher

Higher Lower

Penetration into tier I and II cities

Once major metros and cities have been covered use the expertise and knowledge to make inroads into tier I and tier II cities. Contrary to common opinion most of these cities offer better options due to less competition.

Source : Deloitte Achieving profitable growth in Wealth Management

Cross Sell structured products

Cross sell various investment products to clients to keep the client in house.

Design products for middle class

One of the major reasons which emerging markets is so attractive is the increasing middle class. To be successful in the future, NSB bank should also try to come out with products for the burgeoning middle class population in India which primarily keeps their income in savings accounts.






Attracting and Retaining Talent – HR Strategy


Demographics of HNIs are changing requiring change in the skills and profile of managers

Younger HNIs may prefer a team with a few young wealth managers

Poaching rampant in the industry as wealth managers bring clients with them

Apart from hiring, promote internal employees e.g priority bankers to wealth managers

Banks like Credit Suisse and UBS have their own training academies

For retaining employees job rotation and career progression are necessary

• Lateral Hires • Campus

Graduates • Internal

Transfers

Hire

• Internal Training

• External training/certifications

Training • Career progression • Job rotation –

exposure to multiple roles

• Competitive remuneration

Retention






Risk and Mitigation Strategies

Inflation - India is currently experiencing high inflation with food price rises hovering around 17% and Wholesale Price Index around 7.9. Inflationary concerns can force the Reserve Bank of India (RBI) to tighten monetary supply. This in turn will raise interest rates and impact liquid funds.

Withdrawal of stimulus - The economic recovery in India in 2009 was aided by the economic stimulus provided by government through interest rate subvention, reduction in excise duty etc. The fiscal deficit moved up to 6.7% of the GDP which is unsustainable in the medium run.

Regulatory changes - As wealth market is yet to developed India can see some major regulatory changes in future. This might impact the profitability of the bank.

Exchange Rate risk - Profitability of a company may decrease if currency depreciates.

Capital Market Volatility - High volatility may lead to uneven returns for individuals.

Risk related to Inflation, exchange rate can be hedged while capital market volatility can be mitigated though well diversified portfolio. In case of regulatory changes and Stimulus withdrawal, these can be diversified by entering other emerging markets like China.

Risks

Mitigation Strategies

Hoshin Kanri, IIM Indore Chanakya 2012 | 17 Evaluating India’s

Potential Internal & External

Analysis STP

Prioritization of Regions

Key Initiatives Recommended

Strategy

Chanakya, Ahvan 2012

Thank You

Contact Peeyush Kumar – [email protected]

Sayan Maiti – [email protected]

Vaibhav Rastogi – [email protected]






ahvan iim indore - consulting competition chanakya

Business

public sector

low long term

high long

capital market

bnp paribas

existing players

high attractiveness

opportunity