Asia's Private Banks Struggle in Tough Market
Emerging Asia’s wealthy are getting richer twice as fast as their peers in other regions. For private banks, which generally seek clients with at least $1 million in investable assets, that sounds like a licence to print money.
Instead, the industry is struggling with rising costs, sputtering revenues and narrowed margins, raising questions about whether some of the banks flooding into the market will eventually have to drop out.
“I think it is bound to happen at some point,” says Vincent Duhamel, a former Goldman Sachs banker who is now the Hong Kong-based head of Asia for Lombard Odier, a Swiss private bank. “Some of our competitors are putting the cart before the horse. You go and hire 300 people and you don’t have the business to support that — it doesn’t work long term.”
According to a Boston Consulting Group survey released in May, investible assets in Asia excluding Japan grew by 17.1 percent last year, compared with 8 percent globally.
BCG forecasts annual growth of 11.4 percent to 2015, compared with 5.9 percent globally. That would raise emerging Asia’s total share of global private wealth to 23 percent in four years’ time, from about 18 percent at the end of last year. But the pace of growth has prompted a flood of private banks to enter the region or significantly expand their operations in recent years, including Rothschild, the European bank, Standard Chartered and Barclays Wealth from the UK, and Switzerland’s Julius Baer , BSI and Clariden Leu.
More are expected to join the rush, especially from Europe, where wealth is forecast to grow more slowly than the world average. But the newcomers are entering a market that has been coming under increasing stress since the financial crisis in 2008-09.
Tjun Tang, a BCG partner in Singapore, says that last year’s rapid increase in wealth, which in part reflects a recovery in regional stock markets, “masks important and lasting changes to the dynamics of the industry”.
Behind the scenes, revenues are being squeezed by a fall in trading revenues as risk averse clients shy away from complex high margin investment products. At the same time, regulatory reviews have sharply raised compliance costs.
Meanwhile, private bankers — often called relationship managers — have become simultaneously more expensive because of competition between employers and less productive because of the greater demands of nervous clients.
Together, these developments have forced up the average ratio of costs to income in emerging Asia from 57 percent in 2007 to 81 percent in 2010, according to BCG.
Setting up is also becoming harder because relationship managers are delivering less business when they are poached — the industry’s traditional way of starting or expanding a new business.
Jimmy Lee, Asia managing director at Clariden Leu, says an RM relocating 20 years ago could expect to take 80 percent of the assets he was managing. But the average has dropped to 30 percent as clients have tired of the professional merry-go-round.
“If you expect an RM to move and be paid more, then your business plan needs to stretch the repayment period,” says Mr Lee. “It has got tougher. You are squeezed on both sides.”
The squeeze does not affect all the banks equally. The private banking arms of the big operators, such as Credit Suisse , UBS , Deutsche Bank , HSBC , Standard Charteredand Citigroup , can share compliance costs with investment or wholesale banking colleagues.
Often, they can also rely on customer referrals from business banking colleagues, or from associated premium or priority retail banking services, whose customers are typically required to have at least $100,000 to invest but sometimes turn out to have considerably more.
The smaller “pure” private banks are hit harder by compliance costs, and often need to work harder to identify new customers. However, some say their greater focus on investment advice has helped them to retain wealthy clients, especially at the top end of the market, where customers with $30m or more to invest are willing to pay high fees for attentive personal service.
So far, the strains have had little impact on confidence. All those interviewed by the Financial Times, including some who asked not to be named, said a shake-out was possible. But all said they expected to continue to expand assets under management at double digit annual rates.
“I wouldn’t describe it as a cut-throat market at all,” says Shayne Nelson, global head of Standard Chartered Private Bank. Others put it more bluntly. “If you look at the numbers for the next five years I think there is cake enough for everyone,” says Mr Lee.