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Private banking a tough sell in rising Asia

Publication Date : 08-04-2014

 

A decade ago, Asia was the promised land for private banks. The region's booming economies were churning out millionaires by the dozen, each needing a wealth adviser to help manage his newly-minted riches. Private banks, in response, came prospecting for a cut of the fortune.

Now, the gold rush is over. In the wake of the global financial crisis, private banks are bowing out of the Asian market as quickly as they came into town.

The latest is Societe Generale, which sold its Asian private banking business to DBS for US$220 million last month.

It follows Bank of America, which hived off its wealth management business outside the United States - including in Singapore - to Swiss private bank Julius Baer in 2012. Dutch giant ING Groep divested its Asian private banking business to OCBC in 2009, while HSBC offloaded its Japan private bank to Credit Suisse in 2011.

This is despite the fact that the number ofmultimillionaires and billionaires in Asia is growing by 7.5 per cent a year - faster than any other region. The assets of Asia's wealthy could surpass Europe's by 2020, says PwC.

Yet many private banks have found out the hard way that these numbers are not necessarily translating into profits.

As Asia's private banking scene consolidates, it is becoming clear that in order to survive and thrive, private banks need one of two traits: significant scale and expertise, or a special niche to offer to clients.

Asian challenges

Some of the struggles private banks face here are the same globally. One is rising costs: tighter financial regulations around the world require heavy investments in infrastructure and technology.

But Asia poses some unique challenges too. For one thing, banking talent here is scarce and expensive to retain.

Credit Suisse's Asia-Pacific head of private banking, Francesco de Ferrari, paints a stark picture, noting that the latest surveys estimate 6.5 million millionaires in Asia.

"If you consider, just for simplicity's sake, that you need one relationship manager (RM) for every 65 clients, you'd need 100,000 RMs. But in Singapore I think we have a bit more than 4,000 who are licensed and in Hong Kong probably the same."

Meanwhile, Asian clients have different needs and expectations from those in Europe and the US. Private banks from the West are used to serving clients from "old money" - descendants of ultra-wealthy families.

Here in Asia, the bulk of the wealth is new. Self-made millionaires present two challenges for private banks: first, they have to be convinced of the merits of lower-risk investments that help preserve their wealth, but yield lower returns than they are used to.

UBS Wealth Management's South-east Asia and Asia-Pacific hub chief executive Edmund Koh notes that Asia's wealthy "make their own money from their businesses, which could be growing at about 25 per cent annually".

"When they come to a wealth manager, they have to change their expectations about investment returns, as the objective is to preserve wealth for future generations," he says.

The second challenge is that such clients want banks to offer much more than just wealth management advice.

Given how recently Asian economies have boomed, many clients are still in their first stage of wealth and looking to grow their businesses, says de Ferrari.
"They need a bank that can... lend money to them and partner with them," he says.

Once the client's company expands to the next stage of wealth, it will likely need investment banking services such as issuing securities or mergers and acquisitions.
The third stage is where the client starts to think about issues like his family legacy, succession planning and philanthropy.

In the fourth and final stage, the client's wealth is more liquid. This is where most private banks find their comfort zone.

But to come in at this tail-end of a person's wealth journey and try to build a relationship is difficult, de Ferrari says.

"It's a lot more challenging than if you had accompanied the client from the beginning.

"That's why running a successful private bank in Asia requires a successful corporate and investment bank."

The need for scale

This helps to explain why some of the Western private banks that are still in Asia seem to be struggling.

According to data from research firm Private Banker International, ABN Amro's assets under management (AUM) in Asia-Pacific dropped 17 per cent between 2010 and 2012, Coutts' fell 18 per cent and Standard Chartered's slid 24 per cent.

Even HSBC, which runs one of the top five private banks in the region, has suffered, with AUM in Asia-Pacific falling 23 per cent between 2010 and 2012.

Only those private banks right at the top in terms of scale are doing well. The largest, UBS, managed US$215 billion in assets in 2012, up from US$182 billion in 2010.
Citi is next, with US$210 billion in 2012, up from US$179 in 2010, and Credit Suisse had US$117 billion in 2012, up from US$84 billion in 2010.

Citi Private Bank's Singapore and Indonesia region head Jessica Poh says: "These days clients are looking for banks which can support them and their businesses.

Families also look beyond their own borders for opportunities and to become more global."

UBS' Koh says evolving client demands also call for heavier investments in talent and technology, which can only be supported by bigger banks. Clients now want more, round-the-clock information that can translate into investment returns.

UBS, for instance, has a team of chief investment officers who "look at political, economic, social, technological developments in the world by the minute, hour and day and give you a real-time call on it so you can take advantage of the global investment opportunities", he says.

The local edge

While scale is key to attracting new clients, the local touch is essential in building client relationships. For many of Asia's wealthiest, the banks they first transacted with are likely to be local.

In Singapore, the home-grown lenders are relatively young and small, but are among the fastest growing in the region.

Since 2010, the assets DBS manages for clients with at least S$1.5 million each have grown about 21 per cent every year, to S$69 billion last year.

Bank of Singapore (BoS), the ING unit that OCBC bought and renamed, has more than doubled AUM from US$22 billion at its launch in 2010 to US$46 billion at the end of last year.

UOB, the third major local lender, does not have readily available standalone numbers for its private banking business.

It helps that these local players are among the few providing mortgage financing - a big draw for Asian clients, who moved to cash in on the recent property boom.

This has helped BoS to draw more clients, especially in 2010 and 2011, notes its South-east Asia global marketing head, Bahren Shaari.

But even as the local property market cools, he is confident that BoS' other niches will still draw prospective clients.

"We have an extra edge in emerging markets. We have a 140-strong in-house research team that has consistently helped clients identify investment opportunities," he says.

BoS clients have been placing more funds into discretionary accounts - 30 to 40 per cent more each year - which the bank can use to trade on the clients' behalf without consulting them first.

DBS wealth management head Tan Su Shan says having Asian roots is an advantage today. "I won't pretend to be a European or Swiss bank (or) an American bank. I'm a proudly Singaporean bank with a strong Asian franchise."

After the 2008 crisis, wealthy clients realised they needed to have alternative banks to diversify their risks, she says.

"Singapore banks come out tops in the world when it comes to safety so that's a very strong pull. And as Asia grows, they want to be able to co-invest with an Asian bank that gives them the kind of insights that maybe a Western bank cannot."

Non-Asian entrepreneurs are also expanding into Asia and this is another source of clients for banks in Singapore, where English is a first language, she adds.
The need for focus

THAT is not to say the other players are simply giving up. Banks such as ABN Amro and Coutts say they are still committed to Asia and plan to grow by becoming more focused and investing more here.

ABN Amro has sold its wholesale and retail banking businesses in Asia to focus on private banking, and has moved its private banking Asia head, Hugues Delcourt, to Singapore.

He says the Asian business has already regained ground, with AUM up 30 per cent since 2012.

Coutts has hired a slew of senior executives in Asia in the past couple of years to strengthen its business. These include a head of products and services for Asia, a head of fixed income, a chief economist, a head of wealth planning, a head for the Indonesia market, and seven new bankers.

"I see more opportunities than challenges," says Coutts Asia general manager Michael Blake.

"The industry is facing a long anticipated move towards consolidation. Those firms that remain committed to the region will be rewarded over the next five years."

AT Kearney partner Henri Guedeney agrees, saying small players with below US$20 billion in AUM will find it increasingly difficult to generate profit due to the rising costs of operations.

"Mid-sized private banks (will need) to start specialising and focus on areas where they can demonstrate a clear proposition," he says. "Very likely, there are a number of international players for whom private banking is not a core business and who have sub-scale operations, and will follow the same path as Societe Generale."

 

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