The natural optimism of the seasoned Asian private banker has been hard to dent. It has withstood the implosion of BSI in Singapore, the private banking operation found culpable of anti-money laundering failings, and the continuing problem that Asia has the some of the lowest private banking margins in the world – a factor in the withdrawal of some banks from the region.
In fact, ABN Amro’s recent sale of its business to LGT Bank has been spun into a benefit by some rivals. One less competitor for a market that bearish analysts describe as one of the most overbanked in the world – but also undoubtedly home to some of the deepest pockets among the new generation of Asian super-rich that may require private banking help in the future.
“There’s opportunity as others exit,” says Julius Baer’s head of Greater China private banking David Shick. “There’s less pressure on the cost side.”
Shick, one of the less effusive among his Asian private banking peers in Singapore and Hong Kong, admits that margin compression has been “quite severe” and that “each year the competition is getting more intense”. But he also says those competitive forces also mean that western banks have the conditions to thrive given “the size and scale to play in this market”.
Julius Baer has $75 billion (CHF76 billion) of assets under management (AUM) in APAC, which makes it the region’s fifth-largest private bank, according to the latest rankings from Asian Private Banker.
Fellow Swiss banks UBS and Credit Suisse, Asia’s largest and third-largest wealth managers respectively, also believe size will be an advantage. When Credit Suisse slashed its overall profit targets for Asia Pacific at a recent investor day, the original targets for APAC wealth management were kept in place.
UBS, the world’s biggest wealth manager, is hiring aggressively, and particularly in China, where the bank has vowed to double its overall headcount between 2016 and 2021.
“Everything we see in Asia is that the strategy we are driving is working and accelerating,” said Credit Suisse chief executive Tidjane Thiam last month at an investor day, explaining why he still believed his bank can more than double its APAC wealth management pre-tax profits between 2015 and 2018.
Credit Suisse’s strategy is founded on a belief that an explosion in Asian wealth over the coming years will deliver a boon for private banks, particularly large ones that can link their clients to global networks and investment banking services.
Similar sentiments are shared among the big US banks with smaller Asian operations, where executives insist they can also find opportunities in a crowded market. The Wall Street giants cannot rely on the brand recognition that helps win them business in Europe and the US – one banker recalls a meeting with a Chinese billionaire who had never heard of Goldman Sachs – but they have another big selling point.
Andrew Cohen, JPMorgan’s head of international private banking, says balance sheet is “critical” for the bank’s Asian business, adding that the fastest growth came from clients “monetising an asset” with its help or dealing with new “situational needs” in fast changing market conditions. JPMorgan is the ninth-largest investment bank in Asia with $65 billion of AUM.
Citigroup also uses its large balance sheet to support lending at its private bank in Asia, which is the second-biggest after UBS. The Asian banks may not have the same sort of global scale, but executives at Singapore’s UOB and Bank of Singapore say that their much smaller businesses have a local advantage.
“We have a huge franchise in Asia, so we understand the Asian businessman very well,” says Yeng Fang Ong, head of UOB private bank, which has an AUM of about S$30 billion (CHF21 billion).
“The bank was founded 80 years ago. A lot of the clients – the first generation – have been with us since then. The bank and the clients grew together.”
Bank of Singapore chief executive Bahren Shaari says that knowing the market better also helps Asian banks avoid costly compliance failings. With diverse national markets, Asia has become a compliance headache for banks expected to know the source of client funds.
An EY survey in 2016 found that 39% of firms in the region said compliance was the main focus of their strategic budget, far higher than the 11% of Europeans and 9% of North American firms that ranked compliance as the top priority.
“If you have not seen things in life, if you have not known clients over the years . . . [how can] you know who you can believe and what you need to check further,” says Shaari.
“You need people who are here, not only here as in being sent over here, but people who built up their careers here. So they understand the dynamics of Indonesia or China.”
Ong stresses that European banks are not her “direct competitors” because it is common for clients to have relationships with both European banks and Asian ones. EY found that APAC had the highest percentage of clients with relationships at more than five wealth management firms.
Fifteen per cent of private banking clients in the region dealt with more than five banks, and 29% of APAC’s very richest clients had relationships with more than five.
But this also has a negative impact on profitability. While ensuring that everyone gets a slice of the pie, Asian clients’ tendency to bank with several institutions is one of the reasons that the market’s margins are so low.
Pre-tax profit margins in Asia-Pacific private banking are 21 basis points of assets under management – compared with 25-26 basis points in Europe, according to research from the Boston Consulting Group.
This means that every $100 million of client funds generates pre-tax profits of $210,0000 in Asia, but between $250,000 and $260,000 in Europe. It is little surprise that EY found Asian private banking was ripe for further consolidation.
Julius Baer’s Shick says that the retreat of ABN Amro from Asian private banking was “just the start”. He predicts three or four rivals will follow in the next five years. Shick believes that once consolidation happens, the tide will turn on the sector’s profitability. Until then, Asian private bankers will have to keep the faith. Luckily, they’re good at that.
Copyright The Financial Times Limited 2017