Global banks that hoped to turn Hong Kong into a platform to serve wealthy mainland Chinese clients are finding it tough going as markets have soured, and some have even begun to lay off staff to reduce costs.
Last week, Wall Street bank Goldman Sachs quietly laid off five Hong Kong-based employees, including a vice-president-level employee and four less senior people in its private-wealth management division, according to people familiar with the matter.
Also recently, historic Swiss private bank Julius Baer cut several private banking staff in Hong Kong. In total, about a dozen people either voluntarily left or were forced to leave the bank.
Earlier this year, Julius Baer said it would buy Bank of America Merrill Lynch's wealth management unit outside the US as part of a global expansion strategy, and expects to slash 1,000 jobs from the combined entity.
"We constantly [do] performance management [of] our people, but we are not downsizing," said a spokeswoman for Julius Baer in Hong Kong. Goldman Sachs declined to comment.
For private banks to maintain a profitable business, each relationship manager needs to attract and maintain at least US$150 million in assets to manage, according to Kenny Lam, a McKinsey partner who specialises in private banking.
Bankers who fail to bring in enough assets to manage often face the risk of being laid off after performance reviews that are usually conducted on a semi-annual or annual basis.
At Goldman Sachs, the minimum amount for an individual to open a private banking account is believed to be about US$10 million. The requirements at other banks are relatively lower.
The dismal investment environment, which has led to much lower than usual trading activities, and the fragmented market - exacerbated by increasing competition from newcomers - has made this year especially tough for private banks to make money.
"The costs remain high while the revenue has dropped. Profit margin has dropped to the lowest point in the last five years, based on our estimates," Lam said.
Moreover, some potential mainland Chinese customers have become reluctant to open investment accounts at foreign banks as the euro-zone crisis has flared and global economic uncertainty has increased.
Also, as the Chinese economy has slowed and it has become harder to raise funds through initial public offerings, more of the entrepreneurial class has had to invest in their businesses rather than give funds to a private banker to manage.
Even so, many private banks are still trying to gain access to mainland wealth through their bases in Hong Kong.
According to the Global Wealth Report 2012 issued by Swiss bank Credit Suisse this week, mainland China already had 964,000 US dollar millionaires by mid-2012, and that number is projected to nearly double to 1.9 million by 2017, with household wealth to total US$38 trillion.
In contrast, according to a survey by HSBC of 1,600 people in Hong Kong issued yesterday, one in five reported a decrease in wealth in the six months to July.