International finance houses have Ireland in their sights, writes Simon Carswell, Finance Correspondent.

ONE STATISTIC in a new report published this week on the growing number of "ultra wealthy" in Ireland explains why international banks are scrambling to set up Irish private banks and wealth management divisions.

Irish investors and companies made €41 billion in capital gains in the three years to 2007 from land, property and equities, according to the report by DKM Economic Consultants, which was commissioned by Investec Bank.

The study also found that most top Irish chief executives were more inclined to keep large sums of money in cash on deposit now than 12 months ago.

The proportion of executives identifying bank deposits as the preferred option for their cash rose from 5 per cent in 2007 to 15 per cent this year.

In other words, wealthy Irish investors are flush with cash but haven't yet decided where to place it yet. They are happier to keep a larger part of their wealth "liquid", wait for markets to improve and investment opportunities to arise.

Hefty cash balances excite private bankers and wealth managers. This is what has attracted international banks such as HSBC, Goldman Sachs, Merrill Lynch and Citigroup to the lucrative Irish HNWI (pronounced Hine-wee) or high net worth individual market.

Swiss bank UBS invited a group of wealthy and prominent business people to a lunch in Dublin on May 1st and the "soft" launch of its Irish wealth-management operation.

For obvious reasons, most international banks keen to tap the wealthy Irish market are promoting their stall by selling the international opportunities they can offer, while suggesting that Irish investors have lost out more than their international counterparts. Irish investors are "too over-weight" on investments in Irish property and equities, they say.

Mark Duffy, a wealth manager with Investec, says Irish investors who were "overly concentrated" in these areas could have had to shoulder losses of up to 30 per cent over the last 15 months.

Mike Geoghegan, group chief executive of HSBC, at the launch of its Irish private bank in Dublin last month, referred to the losses incurred by many Irish investors on contracts for difference (CFDs) as stocks fell last year and said investors were now looking for new products and markets outside Ireland.

Clearly, he feels HSBC can provide them. "You have quite a small stock market so to get out and across borders makes sense."

Declan Sheehan, the bank's head of wealth management for the UK and Channel Islands, says Irish investors do not want "the helicopter approach" where wealth managers arrive in Ireland on a flying visit with products and services to offer. This is why HSBC decided to set up an Irish private bank with eight managers, he says.

"The Irish economy and wealth has grown considerably and investors are looking for alternatives on the investment side outside of Ireland. They are looking for a more international offering," he says.

The domestic players have upped their game as well.

Bank of Ireland Private Banking, one of the long-term players in the Irish wealth market, set up a business within its business to target wealthy individuals worth at least €5 million who were not already customers of the bank.

Seán Ó Murchú, who is running the business, says the private banking market is more competitive due to the large amount of cash accumulated by investors over the last year. "There has been a build- up of cash because there is no value in some markets. Individuals have ended up in cash positions almost by default," he says.

The Dublin-based private equity group, Quinlan Private, has also grown, from its roots in Dublin and Irish wealth management into the UK and US markets, bringing Irish private investors as well as overseas institutional investor onto its big ticket property deals. The firm has assets of more than €10 billion under management.

AIB Private Banking has also tapped the property market, identifying investments in Germany and Asia where asset values and borrowing costs remain low and rental yields are growing.

Recognising the need to diversify the products they offer to investors, Irish wealth managers have teamed up with international banks and private equity firms.

The private clients division of Davy, a key growth area for the firm, has piggy-backed on investments with private equity giant Blackstone, while Dublin-based Claret Capital, which manages investments on behalf of wealthy Irish people has invested in international deals and funds managed by Merrill Lynch.

Corporate finance firm Key Capital has teamed up with Deutsche Bank to offer products, services and perspectives to its investors.

For the banks, wealth management and private banking operations are very attractive at a time when wholesale funding is expensive - they generate substantial fee income and require little capital to service. Large "sticky" customer deposits also provide financial strength on the balance sheet.

Anna Lalor, analyst with Goodbody Stockbrokers, says: "Private banking is based on relationship banking. It would be less cyclical and banks would get recurring income coming through it."

David Odlum, financial analyst at NCB, says private banking is a "high-margin business" that needs less funding. "Banks are now focusing in on areas that do not require much capital," he says.

Given that the Irish baby boom arrived after many other European countries, a disproportionately higher share of the population is entering the "high income years" between the ages of 35 and 45 and they are saving more for retirement, Odlum says. Pensions are growing at a rate of about 20 per cent a year, he says.

Irish Life Permanent, the market leader in the pensions and investments market, clearly recognises this. It is planning to launch its own private wealth management business, Irish Life Private, headed by Dervla Tomlin, in the coming weeks to tap the growing wealth market.

The group considered buying Dolmen Stockbrokers, whose private client business accounts for about two-thirds of its business, to target this market further, but shelved its planned acquisition due to the credit crunch.

David Drumm, chief executive of Anglo Irish Bank, which also has a private banking division to serve many of its wealthy property developer clients, says private banking is "an add-on business" which allows a bank to broaden its relationship with their customers.

He says high net-worth customers do not want products constantly thrown at them but are drawn to structured products where they can understand he mechanics of a deal.

Customers are happy to "spread their wealth around" other private banks in the market, he says, and the rising number of new players reflects the growing level of Irish wealth.

"It tells you about the wealth that is there. They realise there is an inherent and embedded wealth in the system and they are going after it."