Make retail prime focus, veteran says
Retail, not corporate, clients hold the key to the future for Asian banks, says Dick Kovacevich, former chairman and chief executive of US bank Wells Fargo.
'Right now, I think Asian banks are taking a lot of deposits and lending the money to commercial clients,' Kovacevich said.
'They should focus more on consumers and small businesses before it becomes obvious [that it is the way forward], and when it's maybe too late.'
Kovacevich, who held the top jobs at Wells Fargo for nearly 25 years, said wealth accumulation in Asia was picking up as the growth of the middle class translated into increasing demand for consumer products such as personal loans, insurance and mutual funds, and boosted the debit and credit card businesses.
In some parts of Asia, such as the mainland, most of these products are still mainly distributed by non-bank financial institutions because of regulatory requirements, although changes are in the air.
There are certain changes, however, that Kovacevich does not expect to happen in the Asian retail banking sector any time soon. These changes include an increase in lenders' exposure to investment banking, which is quite limited at present.
Asia, in general, had yet to segregate the investment banking and commercial banking businesses, as in the US, Kovacevich said. He said Asian commercial banks usually did not generate more than 10 per cent of their revenue from their investment banking arms.
Kovacevich said it would be dangerous for banks in general to allow their investment banking arms to generate the bulk of their business.
He said individual banks should never overshoot the share of investment banking in the overall industry.
In the US, for example, investment banking traditionally made up 5 to 6 per cent of the financial industry, and banks would be looking for trouble if their own share of investment banking was higher.
'If you have anything more than that, you are taking more than what the market is giving you,' he said.
'I think investment banking in Asia will grow bigger, but I don't think Asian banks will ever make investment banking 30, 40 or 50 per cent of their business, like some US banks do ... I don't think they will be comfortable with the Goldman Sachs model, with the Citibank model or with the JPMorgan model.'
Risk taking exercised with discipline was the only way to stay afloat in the banking industry, Kovacevich said.
He said one of the most important decisions in his 40-year banking career was the one he took against going overboard in expanding the investment banking business in the period that eventually led up to the global financial crisis.
Banks should avoid businesses where the culture of risk taking and rewards 'makes no sense', he said, using the example of the culture of excess in investment banks in 2008.
The subsequent collapse of Wall Street banks and the resulting controversy over executive pay have been plagued the entire banking sector in the US and the rest of the Western world, manifesting itself in political debates and protests like the Occupy movement.
For the banks that are disciplined enough to grow judiciously rather than push too hard and fall flat on their faces, the reward will be the opportunity to snap up assets at bargain prices and grow their market share and scale.
'The bad players will disappear,' said Kovacevich, who was known for spearheading hundreds of acquisitions for Wells Fargo in tough times. 'And the good players always stay.'
Investment banking's traditional share of the financial industry in the US. In some big banks, it has grown to half their business