Billionaires’ business empires a key to growth for transaction banks
Banks are targeting the mega-rich private clients of their wealth management arms to help drive their corporate and transaction services businesses by banking more of the companies their wealthy clients own.
Transaction services is seen as a gateway business for banks to win more corporate and investment banking business from corporate clients, but banks’ wealth management arms can hold the keys to securing that entry point.
The family offices of wealthy families or indeed ultra-high-net-worth individuals (UHNWI) often own or have controlling stakes in hundreds of companies worldwide, making them a prime and singular target for banks in their hunt for business.
“If you look at some of the wealthy family-controlled business empires of the world... one fellow that I know has over 100 companies and probably in eight or 10 sectors and across geographies,” says the chief executive of corporate banking at one of the world’s largest banks.
“This wealthy individual said to me: ‘I’ve been a private banking client of your bank for years, but you only bank three of my companies.’ So instead of us roaming around [for new clients], it certainly makes sense for us to focus more of our energies on this guy for a while.”
At the extreme end, a multi-billionaire such as Warren Buffett, who, through Berkshire Hathaway, owns and is invested in well over 100 companies – from insurers and newspapers to private-jet companies and condiment makers – might be the perfect target on paper.
The reality, however, is that banks might have more success in being able to expand the business they do by looking down the billionaire scale.
Across the board, banks are intensifying their efforts to maximize their banking relationships across businesses to drive revenues, profits and shareholder returns.
Banks’ return on equity has shrunk substantially since the financial crisis, due largely to sliding investment banking revenues, particularly in advisory, and sales and trading.
Transaction services, which tends to compose businesses such as cash management and payments, trade finance, card and custody services, is seen as one of the truly scalable banking businesses that can deliver bumper revenues, profits and returns over the longer-term. Its value to a bank can multiply if, as result of the transaction banking relationship, it can generate other lucrative ancillary banking business.
Christine Novakovic, head of corporate and institutional clients at UBS, Switzerland, says that one of the ways the bank has been looking to leverage its global strength in wealth management is by offering its ultra-high-net-worth and family-office clients corporate banking services.
“At this end of the scale, their needs are often similar to the needs of our corporate and institutional clients, and where we can add value is by providing them with the infrastructure and platforms to transact easily,” she says.
Novakovic adds that, combined with the healthy and stable revenue stream the transaction banking business can deliver, UBS is focusing on cash management in particular because it is “the product that makes you the prime relationship bank with a client”.
“It’s the perfect entry point and perfect anchor product for a bank,” she says.
As one the world’s largest wealth managers and particularly for UHNWI clients, UBS arguably has an advantage over other banks in the relationships it has with some of the world’s wealthiest individuals and business owners.
However, it would be the first to admit it doesn’t have the global scale and scope of corporate and transaction banking capabilities that big international commercial banks have.
Indeed, banks such as Citi, HSBC and JPMorgan, for example, can boast large global private banking businesses too, as well full-scale investment banking capabilities.
Similarly, Credit Suisse is one of the world’s largest wealth managers but, for example, was ranked outside the top-20 best international cash managers for non-financial companies globally in Euromoney’s 2013 Cash Management Survey.
Nevertheless, Michael Eidel, head of global finance and transaction banking at Credit Suisse, says transaction banking is a core part of its corporate and institutional business, which sits within its private banking and wealth management division, and that there is plenty of collaboration between businesses in Switzerland and beyond.
“We increasingly look for opportunities to broaden our transaction banking services for our clients,” says Eidel, who adds that since the financial crisis the bank has invested more in areas such as cash and product management, and compliance.
Outside of Switzerland, Eidel adds they see “good opportunities in trade finance” too.
Leading international commercial banks that have big international private banking and wealth management arms are perhaps best-placed to pursue transaction banking growth among wealthy individuals’ business empires.
However, as Vincent Lecomte, co-CEO with Sofia Merlo of BNP Paribas Wealth Management, points out, UHNWI and wealthy family offices tend to use more than just one private bank or wealth manager.
“We are happy when they only have one unique bank, but the most likely case is that they have two or three, and particularly in Asia,” says Lecomte. This would make it more difficult for one bank to secure most if not all of the transaction banking business across the company portfolio of one of their mega-wealthy clients.
BNP Paribas was early in recognizing the power of combining its wealth management and corporate banking capabilities, as three years ago it created what translates as the “house of the entrepreneur”, says Merlo.
This business, which was first launched in France before being rolled out in Italy, has corporate bankers and wealth managers working together to provide wealthy entrepreneurs with all they need.
However, as Merlo explains, BNP Paribas takes a one-for-all-and-all-for-one approach to generating banking business.
“We work to bring the wealth management business to our corporate clients, corporate and investment banking business to our wealth management clients, and both businesses together to win new business,” she says.
Lecomte says “it’s part of our DNA to work with other parts of the bank”, adding that there are some services in particular where wealth management, and corporate and investment banking divisions work together, such as yacht and private-jet financing.
“There are only a few players that can offer such services,” he says.