Why the Wealthy in Asia Are So Different From the Swiss
A bit over a year ago stranded in Geneva by the Iceland volcanic ash cloud that was disrupting my return trip to Singapore, a Swiss private banker friend told me over lunch about his professional goals.
“My mission is to grow my rich customers’ wealth over the very long term so that they can pass it on safely to the next generation. So we are reluctant to provide our customers with loans guaranteed by their assets,” he said.
After another flight cancellation I had dinner near the “Vieille ville” at the Molard, this time with a French banker at a major global Bank.
“Our Wealth Management department is pushing credit development as a product really hard. Mr. B has just been appointed Global Head for that. We need to do this in particular for Asian high net worth individuals (HNWI),” he confided.
Three days later, after a back wrenching cab ride from Paris to Madrid where planes to Casablanca were still taking off, and a delayed Casablanca-Dubai-Singapore flight, I was in our Singapore office approving a complex IPO-related equity consolidation deal.
But minutes later I declined another credit application. It was for a loan to an entrepreneur who was not yet a customer of my bank and who wanted to borrow against the value of the shares in a company he majority controlled.
This captures the difference between the Swiss, European/International and Asian Private Banking models.
Swiss Banks, principally the traditional Swiss unlimited responsibility partnership banks that have shaped Private Banking culture, are very conscious of the risks of leveraging the hard earned wealth of a wealthy family and focus on growing it safely.
This is driven of course by the long established traditions of families tracing their origins 5 to 8 generations back, where there is sometimes less inclination to have a hands-on approach to managing wealth.
And Swiss banks have been outstanding at developing discretionary portfolio management that precisely serves that culture.
In Asia, wealth creation is much more recent, so the first or second generations at the helm want to enjoy all the many, but more, risky opportunities of their emerging markets.
They are very knowledgeable about properties, start-ups, IPOs, infrastructure development et al. They constantly direct their private bankers to seize every opportunity and are very price sensitive about their Private Bank services.
So leverage in Asia, as a proportion of the assets under management, is higher than in Europe. A rough estimate of this ratio is 20 percent on average in Asia versus 10 percent in Europe (Switzerland included), and even less in Switzerland.
Why does the difference in the model matter, especially for us Risk people?
Because higher leverage can lead to higher risks if the central safeguards of Private Banking credits are not respected - such as diversification, non-concentration and investment grade quality of the pledged collateral. Private Banks should never lend unsecured.
In times of bubble exuberance, as was clearly demonstrated in the lead up to the first Asian Crisis of 1997, bankers and customers can get carried away with unwarranted leverage. This happened then in marginal property deals and related share loans such as the one I declined.
Also as time will pass, successive generations of Asian HNWI will probably modify their approach and become more “Swiss,” more concerned to preserve wealth than risk it.
Finally it matters because Switzerland, a small country of 7.7 million people, manages almost 40 percent of all the offshore wealth of the world - defined as wealth deposited in a country different than the one where its owner resides.
Jean-Christophe Steven is the Regional Credit Officer, Eastern Hemisphere, for Standard Chartered Private Bank. The views, opinions and information reflected in the article are his own.