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Private banking: A wave of consolidation

Regulatory pressures mean private banking is less and less lucrative; the bigger players will benefit.

As Société Générale finally sells its Asian wealth management business, it looks as if the ball is now rolling for consolidation in the industry globally. Already in 2013, some 60 transactions took place worldwide, with almost $760 billion of clients’ assets shifting hands, according to data from Scorpio Partnership.

The costs of doing business are proving too much and banks are realizing that the cash cow they thought private banking would be after the credit crisis is not as easy to milk as they imagined. The prices of the deals speak for themselves. According to Scorpio, purchase prices have fallen to just 1.22% of managed assets, from 3.7% in 2008, when having a private bank was seen as better than having an investment bank.

Although senior private banking officials have been lamenting the cost of ‘knowing the client’ since 2001, it seems that it is only now they are committing themselves to the due-diligence process and closing accounts that no longer meet regulatory requirements. The banks, whose reputations are still shaky from the credit crisis, cannot risk being found to be harbouring tax evaders. And given the lingering ill feeling towards the world’s 1%, no bank in its right mind will want to be seen to be underhanded.

It spells the end of the Swiss boutique banks, an end that has been a long time coming. Switzerland’s reputation as a place for secrecy is no longer relevant in a transparent world.

The boutiques are damned if they do and damned if they don’t. Not only do they suffer from the escalating costs of due diligence and regulation, more so than the banks with scale, but the whole essence of transparency will likely result in less sharing of wallet.

Whereas in the past high-net-worth individuals might have spread their money across five or so banks for discretion and some secrecy about their assets, now they are forced to disclose their entire wealth to every bank with which they deal. So why bother having five banks? And which bank will most likely get the chop? Probably the smaller bank that cannot provide all the services and products that the client needs.

The larger global players will be the beneficiaries of the high cost of regulation, like it or not, as it sweeps away smaller rivals, and luckily for them it looks as if they will be able to buy up the smaller players at deep discounts.