Asia private banking debate: Costs and competition to drive Asian consolidation

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By:
Helen Avery
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The region is seen as the growth engine for private banks, but it is not without its trials.

Online extra: The investment opportunities the CEOs are touting for Asia’s wealthy clients
Asian private banking debate: Participants

EXECUTIVE SUMMARY

• Costs of real estate and hiring are the biggest burdens

• Global players target ultra-high-net-worth clients

• Succession planning is a focus for Asia’s clients

Consolidation among private banks in the region is inevitable

How are some of the global regulatory pressures/challenges affecting you as a private bank in Asia?


TSS, DBS Bank
There has not been much impact on our business as we already have in place robust client review processes when onboarding our clients. We have also invested heavily in training to ensure that our relationship managers have the necessary technical knowledge, regulatory awareness and personal effectiveness skills to help them stay compliant and do their jobs well.

BS, Citi We have always been part of a highly regulated region, having been in Asia since 1902. None of what is being asked of us is new and therefore we don’t consider the impact on our business to be material. The challenge will be for the new entrants to the industry in Asia.

AC, JPMorgan The increased regulatory requirements have changed a great deal in the past few years. These are going to drive costs, change cost attribution and enhance management focus to make sure we fully comply with the highest standards.


MC, BNP Paribas The increasingly stringent regulatory pressures are obviously affecting the cost-income ratios of private banks. This has also created a shortage of experienced talent in functions such as compliance, when most private banks need to make additional hires to address such demands.

FdF, Credit Suisse The key regulators are more and more applying global rules and business is becoming more challenging. But the level playing field is an advantage to us. Being Swiss we have had to have high internal standards.


KS, UBS
The regulatory environment governing the financial services sector including wealth management has become increasingly stringent globally. In light of this, we have identified no compelling evidence that clients are favouring one jurisdiction over another. Nonetheless, clients will demand ever higher technical and market knowledge. All of these factors will require large new investments in education, compliance and technology. Those providers with relative adaptability, scale and resources will be the likely winners on the reconfigured playing field.

What are the biggest cost pressures in Asia, and how has your firm reacted?


TSS, DBS Bank
Costs for wealth management have gone up, but our cost-income ratio has stayed low and even decreased as we have been able to grow our market share and assets under management, while increasing relationship manager productivity. We have spent tens of millions on innovation and training to drive higher productivity and help our RMs best meet client needs. For example, we recently announced our collaboration with IBM to use Watson, a cutting-edge cognitive computing innovation.

BR, HSBC People and infrastructure costs associated with regulatory change are the key ones.



BS, Citi
The biggest cost pressures that we have seen in Asia relate to talent compensation. For a large established player like us, it is less of a problem. It becomes a big cost for the new entrants to the market, and therefore the need to recruit is urgent and less discriminating. At 60% I believe we have one of the lowest cost-income ratios in the business.

LJ, China Merchants Bank In China, it is the cost of fixed assets that has mostly pressured our firm. Since initiating the private banking service in 2007, we have set up private banking centres in well-developed areas with large customer bases. However, the pressure of cost has since relaxed and our firm became profitable in 2010.

MC, BNP Paribas The costs of recruiting and retaining front-line talents are a key challenge, along with the additional hires for compliance. In response, we are strengthening our training platform to enable more internal promotions, as well as improving the efficiency of our process.

KS, UBS The continuing ferocious war for talent has resulted in compensation levels for wealth managers in Asia being among the highest in the world. The increasingly prescriptive regulatory requirements [are costly] – adherence to which will require substantial investment in education, compliance and technology. Real estate costs in Asia are also among the highest. We will continue to invest and grow in the region. But we constantly monitor our cost-to-income ratio to ensure our business grows sustainably.

What are the current challenges with generating revenues?


BS, Citi To be successful in this business, a number of factors coming together results in the perfect formula: client acquisition, relationship deepening, product innovation, platform and talent. We have been working towards having a better balance in our investments business. Traditionally our clients have transacted more on the capital markets side, and over the past two years we have been focusing our clients on increasing their managed investments allocation. This provides the client with a number of advantages that discretionary management provides and provides us with transparency, a better annuity stream and lower risk.

AC, JPMorgan We actually see very favourable momentum. Also, we continue to see an interest in products that we have specifically tailor made to match our clients’ sophisticated level of investment needs.


LJ, China Merchants Bank
We have enjoyed continuous rapid growth in our private banking business in China over the past six years. By the end of 2013, our private banking customer base was over 25,000, with total assets under management of nearly Rmb570 billion [$94.2 billion]. What challenges us the most is from within the business: being the biggest nationalized private bank in China and being able to win more clients and better respond to customers’ needs. 

BR, HSBC We are fortunate to have a wide array of relevant products and services and a goldmine of corporate relationships where we can do more to assist the business-owning families on the private side. Given that, revenue growth is less of an issue for us than expanding sufficiently quickly to capture that opportunity.

FdF, Credit Suisse If you want to generate revenues you have to be an integrated bank in Asia with strong investment banking capabilities. The wealth here is primarily with first generation entrepreneurs who need capital to grow their business first and foremost, then expertise in unlocking part of the wealth tied up in the business. If you just do pure private banking you will be challenged in Asia. You also need to invest.

MC, BNP Paribas The margins for flow products are getting very thin, and this has been a traditional business model for many private banks. In a crowded market like Asia, we need to address this with highly differentiated value propositions to improve margins.

From which sector (ultra high net worth/high net worth/affluent) is your firm expecting the biggest growth in revenues, and in any regions in Asia in particular?

TSS, DBS Bank We expect our growth next year to come from the UHNW segment, and from our treasures private client segment, which targets HNW individuals with $1.5 million to $5 million assets under management. We also expect growth in China and Indonesia, which are both key markets for us.

BS, Citi Focus for us continues to be UHNW as well as the level above that, which we refer to as mega-wealth.



AC, JPMorgan
We aim to grow both our ultra-high-net-worth and high-net-worth businesses prudently. Hong Kong and Singapore offer a lot of business opportunities and will remain fundamentally attractive.


BR, HSBC
Hong Kong remains key and we are intent on maintaining our position and growth rate in this key market. China is also growing strongly for us and presents plenty of opportunity.


LJ, China Merchants Bank
There are many provinces in China with more than 10,000 HNW individuals. Each region of the country, including the eastern coast, the midwestern region and the Bohai Economic Rim, presents a different development trend in the private wealth market. The majority of HNW individuals are business owners, and they have increasingly diversified demands. They account for 60% of the HNW individuals. Besides business owners, other HNW individuals include professional managers and investors, and ‘others’ includes housewives and celebrities. Among this group, professional managers are seeing both their wealth and numbers steadily grow – they make up 17% of HNW individuals today. Professional investors account for 14% of the HNW population. The others (housewives, retirees, entertainment personalities and professional athletes) account for 9%.

MC, BNP Paribas UHNW is the key sector for us in Asia.



FdF, Credit Suisse
60% of our business is UHNW clients, a lot of whom are first generation entrepreneurs. We track how much business the private bank brings to investment banking, and this has been almost doubling annually in last two years.
 

KS, UBS The HNW and UHNW segments are an important and growing segment for UBS in Asia Pacific. The domestic businesses will become increasingly important. Asia remains the growth engine for onshore markets both for the industry and for UBS Wealth Management. And China is one of the most important sources of new business opportunities for UBS.

What are some of the big challenges facing business owners?


TSS, DBS Bank
Succession planning: many family businesses are still owned by the first or second generation of the founding family. And in China the one-child policy means many successful Chinese entrepreneurs have only one child, who might or might not wish to be a successor to the family business. The decision to corporatize or go public becomes more acute.

Concentration of assets: this means finding liquidity solutions as well as diversification or hedging solutions. And [they need] access to expertise and capital and global opportunities as they grow their businesses.

BS, Citi Many of these founding business owners are reluctant (or appear to be reluctant) to relinquish the reins to the next generation and have worries about their legacy (and this could be in the form of values as well as the business itself), so we see wealth transfer and philanthropy posing the most challenges.

Also the lack of clarity with regards to wealth transfer is proving troublesome for many families, as evidenced by some of the headlines we have seen in the recent past. For clients in the real estate business, central bank restrictions and rising interest rates could pose some challenges and risks.

AC, JPMorgan These would be the unique challenges associated with preserving wealth and passing it on to succeeding generations. Philanthropic giving is also on the rise as they think of giving back to the communities.


BR, HSBC
In Asia, there are large numbers of businesses where the business-owning family has not planned adequately for the passing on of business and personal wealth. There have been some high-profile media incidents around failure of family governance and there are more cases bubbling beneath the surface. Helping clients in this area is a key area of focus for HSBC.

LJ, China Merchants Bank In China wealth preservation has become the top wealth management objective, and the need for wealth inheritance planning is more pronounced. Wealth preservation has replaced wealth creation as the primary wealth management objective. Some 30% of our respondents cited wealth preservation as most important, followed by quality of life and children’s education. Wealth creation dropped to fourth place from the top spot in earlier surveys. According to our interviews, many HNW individuals have established their businesses and are now focused on ensuring future living standards for themselves and their families.

MC, BNP Paribas Wealth transfer will be the main challenge for business owners and family businesses.



KS, UBS
They are often interested in corporate activities for their businesses such as large asset sales, M&A, IPOs and other large capital-raising activities and are looking for banks with the capabilities to execute. Another important topic in Asia is that of succession planning and smooth transfer of wealth from one generation to the next.

FdF, Credit Suisse Access to lending and balance sheet to grow their businesses. There are more opportunities than funds that get to them. Secondly a lot of these investors are still mainly served by stockbrokers so are not receiving access to sophisticated products and services. The other challenge for them is that they are domestically focused and will need to partner with financial institutions that help them globally diversify.

Do you expect consolidation within private banking in Asia? And if so, in what fashion?


TSS, DBS Bank
Yes, with the margins in Asia generally thinner than global averages, we have found that scale has become an increasingly important factor in running a sustainable private banking business in Asia.

We do expect consolidation in the market – apart from the boutique banks, several of which have already closed their Asian businesses, some of the global/European players with smaller private banking businesses in Asia might also choose to exit or restructure their businesses.

BS, Citi We have already seen a slowdown in the number of newcomers to Asia as they begin to realize that it can be expensive to operate here. It is never easy for an institution to admit they made a mistake in establishing a business. As they come to the realization that costs cannot be rationalized, the process to exit is still a slow one where the first approach is restructuring, which often happens slowly and over time.

AC, JPMorgan The business is consistently re-engineering itself and there will be continued consolidation in the industry. Some unprofitable marginal players might exit or merge.


BR, HSBC
The cost of doing business as a private bank is rising and consolidation and/or exit is inevitable. We have already seen some of this in Asia. Some private banks in the region have been run at a loss, but this isn’t sustainable. Scale is important if the intention is to offer a full service.

MC, BNP Paribas Yes, and we see that happening now. The trend is both for domestic players to consolidate with big universal banks and the boutique banks to merge into a bigger platform.


KS, UBS New entrants to the wealth management market in Asia have tended to underestimate the cost of establishing an Asian business. High costs arise from the downward pressure on return on assets caused by lower risk appetite in the region and the increase in operating costs.

We expect that the industry will undergo further consolidation. Many banks are likely to review their plans for expansion. The commitment of newcomers to Asia will depend on the depth of the current profit squeeze and on whether or not they have the appetite and the war chest to fund a campaign over the long term.

FdF, Credit Suisse We still have a number of players who are so pressured in the old world that they want to come to Asia as the solution to their revenue issues. But they don’t last long. The biggest issue is that the cost-income ratio average in Asia is in the mid 80s. That means that the big players will make money and most of the other players do not. Consolidation is inevitable and is already happening.

LJ, China Merchants Bank [There is not consolidation in China] but there is intense competition. China’s banks need to respond to HNW individuals’ increasing demands for cross-border asset allocation. China’s banks should consider expanding their footprint to the countries and overseas investment markets preferred by Chinese HNW individuals. In addition, if China’s private banks can seize the opportunities that lie in the domestic market by leveraging the customer advantages that accrue from the same language, currency and culture, and a deep understanding of their lives and wealth management needs, they can better satisfy customer demands and gain a stronger competitive position in the overseas market.

View discussion of the investment opportunities the CEOs are touting for Asia’s wealthy clients