International private banks fight to manage assets of Asia’s wealthy
The industry faces stiff challenges, with the largest players better positioned for long term survival
With global bank revenues under pressure, the competition to manage the assets of the new mega wealthy from emerging Asia is fierce. Leading players continue to launch new initiatives and hire more wealth management staff, hoping that fees from managing these assets will offset declines elsewhere. However, with costs rising, return on investments shrinking, talent hard to come by, and much Chinese capital still tied up on the mainland, it seems unlikely all will succeed. However, the rewards for those that do make it will be sizeable.
At the end of 2015, there were 5.1 million high net worth individuals in Asia Pacific with a combined wealth of US$17.4 trillion, according to consulting firm Capgemini’s world wealth report, which assesses a high net worth individual to be one with more than US$1 million in investable assets.
“These sorts of amounts get global banks excited,” said Toby Pittaway, partner at consulting firm Oliver Wyman.
Conversations with bankers support this view. “Asian billionaires are BNP wealth management’s primary source of growth of assets,” says Andy Chai, the company’s head of wealth management for the Hong Kong market, who added that the bank’s wealth management division in Hong Kong had been hiring “more or less [without interruption] since at least 2011”.
They are not the only ones. David Shick, head of private banking for greater China at Julius Baer, said it has “increased the number of relationship managers for greater China by 33 per cent so far this year to service the massive rise in the region’s affluent class”.
Credit Suisse said it increased the number of new relationship managers by 100 just last year, and plans further recruitment on top of that. However, it remains to be seen whether all those new staff will have enough assets to manage.
“Of that large pool of wealth in emerging Asia, a much lower proportion than elsewhere is invested in traditional wealth management products, and just 10 per cent of it is booked into Hong Kong or Singapore,” said Pittaway. “This has meant the large global players who have flooded into Singapore and Hong Kong are competing for a comparatively smaller pool of assets than are in the region as a whole.
“Furthermore, 90 per cent of Chinese wealth is onshore, which makes it a lot harder for non Chinese banks to get,” he said, adding that some banks, including UBS and Credit Suisse, are looking to build up their capacity on the mainland.
Banks are also facing higher costs related to compliance, as well as low rates of return on assets globally, which may not be attractive to clients who have built a multibillion dollar business from scratch in 15 years.
“In the last decade we have been dealing with margin tightening and rising costs, and that was during the up cycle. Now that is over, it is going to get more and more challenging every year,” said Shick.
A further challenge is financial technology, or fintech. “The rapid change in technology means that private banks are not able to keep up,” said Adam Reynolds, Apac chief executive at Saxo Capital Markets. “Because of the cost, banks can’t afford to invest in technology apart from for compliance, where they are obligated to, and so they are being undercut by robo advisors when serving the segments below the absolute wealthiest,” he said.
However, Anton Wong, head of the key client group for Asia Pacific at BNP Paribas Wealth management, is not concerned. “We don’t think of ourselves as being the ones who are undercut,” he said.
“There are a lot of good companies are out there developing effective new pieces of technology, and what we do is embrace them. Who is better placed to deliver innovations than large global banks?”
Different banks are adopting different solutions for dealing with the challenges. Those with an investment banking division argue that it offers additional benefits for their business.
“Most of our Asian clients are entrepreneurs who already have a commercial relationship with us, and so servicing their private wealth needs is a natural extension of this,” said Desmond Liu, regional head of private banking in North Asia for Standard Chartered.
Shick at Julius Baer, which focuses on private banking, disagrees. “Complexity drives up the cost of doing business. Being specialised is better,” he said.
“We are in a competitive landscape so you have to play to your strengths,” said BNP’s Chai.
Recent years have seen those banks that have not been able to do so being forced to leave the industry.
This year, Barclays sold its Asian private banking arm to Singapore’s Oversea Chinese Banking Corporation, and DBS bought Societe Generale’s Asian private banking business in 2014.
“I anticipate a move towards a handful of global players who have the capacity to operate successfully,” said Pittaway.
This helps explain why banks are so keen to expand. “In this negative interest rate environment, if you don’t have the scale it is very difficult. We are growing for a reason,” said Shick.