The potential revenue pool for onshore private banking in China could increase as much as seven-fold by 2025, according to a report by UBS which expressed optimism for the onshore industry’s rapid evolution.

In 2019, onshore private banking generated 69 billion yuan ($10.7 billion) of total revenue in mainland China, according to UBS Global Research, in a market that is home to around 2.2 million high net worth individuals (HNWI).

And in light of market opening by China, UBS believes that private banking domestically is not only set for a major profit boost but also a «potential key enabler of a diversified and open financial sector».

Seven-Fold Surge Maximum

UBS forecasts that the potential revenue pool of private banking in China could total 178-480 billion yuan by the end of 2025. This marks a fairly wide-ranging increase of 158 to 596 percent in the coming five years.

According to the bank, this will be dependent on asset allocation and penetration rates coupled with success of discretionary mandate fees, product distribution and margin lending.

Limited Penetration

While Chinese wealth continues to experience phenomenal growth – wealth of HNWIs is projected to double from 2019 to reach 116 trillion yuan by 2025-end – private banking penetration remains limited, spelling a major opportunity moving forward.

Penetration of private banking services is estimated to be 31 percent in 2019 with 38 percent of assets currently under self-management by individuals themselves. By 2025 in UBS’s «Oasis scenario», penetration rates could rise to 50 percent.

Still, there is intense competition from the likes of independent wealth managers, brokers, trust and mutual funds, and, most notably, fintech – 46 percent of Chinese HNWIs surveyed by UBS for the report had a robo-advisor.

Heavy Distribution

Today, China’s private banking industry is heavily reliant on product distribution compared to global peers that have much more diversified revenue sources. This could potentially change as China’s new asset management rules seek to put an end to implicate guarantees – a common practice where mainland financial institutions promise payouts to investors.

Expanding the mainland product offering aside, this could boost gross margins at China’s private banks from 40-50 basis points today closer to Swiss private banking rates of 80-120 basis points. Income from discretionary mandates and margin lending could make up 19 percent and 15 percent, respectively, of the revenue pool in the future.

Still, distribution is expected to remain as the dominant medium-term driver and UBS estimates it will make up 60 percent of total revenue in 2025.

Opportunity for Global Banks

«UBS analysts believe international banks are hopeful of some success in the China [wealth management] market,» the report said.

Despite the optimism, prospects vary between global banks of different regions. According to UBS, European banks are committed to expanding local presence while U.S. lenders have «an attractive but narrow opportunity in the China market».

The report was based on a survey of 300 of China's HNWIs conducted by the UBS Evidence Lab with a skew towards younger individuals to provide a better view of the industry’s future.