Asia's banks see rich pickings in private wealth assets

Local banks are snapping up European wealth management units in Asia but talent shortage, fintech disruptions pose challenges.

In a megabucks deal two weeks ago, OCBC Bank snagged the wealth and investment management business that Britain's Barclays Bank has in Singapore and Hong Kong, for a cool US$320 million (S$430 million).

Those businesses will add assets under management of US$18.3 billion - as of Dec 31 last year - to OCBC's private banking unit Bank of Singapore, which has US$55 billion of assets under management. The private bank would become the seventh largest in Asia, just after DBS Bank, coming in sixth with assets under management of US$75 billion.

This is just the latest in a slate of deals involving private wealth assets, where private banks in Asia are changing hands as often as their bankers change fancy cars. Societe Generale sold its Asian private banking business to DBS for US$220 million in 2014, and its Japanese private banking arm to Japan's Sumitomo Mitsui Banking Corporation in 2013.

Bank of America's wealth management business outside the United States - including in Singapore - went to Swiss private bank Julius Baer in 2012, while Credit Suisse snapped up HSBC's Japan private bank in 2011.

OCBC also acquired the coveted Asian private banking arm of Dutch giant ING in 2010, in a deal worth US$1.46 billion. How is the private wealth landscape in Asia shaping up with these deals and are Singapore banks benefiting from the surge in activity?

TOUGH MARKET OUT THERE

On the surface of it, it may seem puzzling that big banks are giving up their private wealth business in Asia. After all, Asia's private wealth is growing the fastest in the world. Asia expects almost 27,000 new ultra-high-net-worth individuals over the next 10 years - about 35 per cent of the expected global total increase, a survey by property consultancy Knight Frank found.

Private wealth in the Asia-Pacific, excluding Japan, soared 15 per cent in 2014 - compared with less than 12 per cent the previous year - to reach US$33 trillion, said a 2015 report by the Boston Consulting Group (BCG).

That is somewhat closing in on Western Europe - BCG includes Switzerland and Britain - where private wealth grew 7 per cent to US$40 trillion in 2014.

On deeper inspection, the reasons become clearer: Most of the banks giving up the Asian private wealth assets are European banks. They are still struggling to recover from the global financial crisis of 2008, which left in its wake a string of regulatory compliance and other rising costs.

European banks continue to restructure and realise the only way is to brutally cut costs and let go of businesses with less than stellar results, many of them in Asia.

Mr Craig Loveless, a partner at law firm Norton Rose Fulbright, which has been working with foreign banks looking for such Asian assets, said those which have left "may have had taxpayer bailout, so there's a desire to retreat to their home markets".

One requirement to get government bailout was for banks to divest of their assets. The Royal Bank of Scotland (RBS) for instance, had a £45.5 billion government bailout during the financial crisis.

It sold its international private banking business Coutts International to Swiss private bank Union Bancaire Privee (UBP), which agreed to the deal last year. UBP also bought Lloyds Banking Group's international private banking arm in 2013.

Mr Michel Longhini, private banking chief executive at UBP, said it is a similar story in Switzerland, where foreign banks are exiting as they have needs back home and are facing high cost ratios as well. UBP was able to spot opportunities there too, buying part of the offshore business in Geneva from major Spanish bank Banco Santander in 2012.

Singapore Management University finance professor Annie Koh said another push factor is that the European or other global banks are finding it challenging to achieve sufficient scale in Asian or Middle Eastern markets to be profitable.

She said shareholders in their home countries are getting impatient for higher returns, "taking into consideration higher risks of these emerging markets".

It is also costly to run a private bank in Asia, partly owing to the nature of clients here and the stiff competition. Mr Evrard Bordier, chief executive of Swiss private bank outfit Bordier & Cie Singapore, explained that private banking in Asia has been built on two premises - fee-sensitive clients who also prefer to maintain control over their assets.

In Asia, it does not cost anything to have a private banking account, which leads to clients who are not used to paying for a banking relationship. That means the bank has to generate fees from transactions made by clients.

Mr Bordier said: "This model is flawed because the client's interest is not at the heart of building a robust portfolio - instead, making commissions and gaining retrocession fees plague the private banking and client servicing model." He said in Europe, people are used to paying for service with custody fees - a norm for private banking clients - and they give more assets to the bank to manage, which also means a more stable income stream.

"With a transactional model, banks become more sensitive to market conditions and face difficulty in making profits that withstand market volatility. Hence, if not strategic or profitable, the Asian arm is sold off," he noted.

Yet another reason for exiting Asia is the increasingly stiff competition not just from other private banks, but also boutique firms, multi-family offices and even financial technology companies.

The wealth management sector is slowly but surely going through restructuring of its own.

Prof Koh said the bigger banks will start collaborating with independent advisers or boutique fund managers which have specialised desks in private equity, for instance.

OPPORTUNITIES ABOUND

All these have given Asian banks, including local players, the chance to seize the assets they need in order to overcome the very same reasons that are pushing out non-Asian players.

Of DBS and OCBC, Mr Loveless said: "They've got a critical mass here, which means they can probably better manage the costs and do things in a more profitable way than the foreign banks could."

Besides being on home ground, one of their biggest advantages is having the funds to back these acquisitions, said Mr Abdul Jabbar, head of corporate and transactional practice at law firm Rajah & Tann Singapore. This is the case for OCBC, which said Bank of Singapore has sufficient financial resources to fund its latest acquisition with its internal cash.

The local banks, along with foreign banks looking to shore up their wealth management business in Asia, will get a head start now if they make the right moves.

Mr Loveless said: "The European banks which are exiting the wealth management space here - for whatever reason - will one day want to come back into this market. It will be more expensive when they want to buy in because the market would have grown and the multiples to buy a private bank here would be that much higher."

Mr Jabbar noted that top-tier European banks have also been buying private wealth businesses in recent years, "to ramp up their economies of scale and to get a stronger foothold in this rapidly expanding market". He added: "Many, including myself, see consolidation as an inevitable conclusion for this market."

SINGAPORE'S PLACE IN PRIVATE BANKING IN ASIA

In the broader private wealth space in Asia, Singapore is in good stead to benefit from the growing wealth and weather the changes to come.

It is known as a premier financial hub with well-capitalised banks and a business-friendly environment that is seen to be at the forefront of several industries in Asia. Hong Kong may be its closest competitor in Asia, but in South-east Asia, Singapore is the financial centre.

Already, Singapore and Hong Kong accounted for 15 per cent of global offshore assets in 2014 "and are expected to gain in prominence", said BCG.

Mr Jabbar said: "Singapore, with the direction of the Monetary Authority of Singapore (MAS) and the support of the Government, had long ago decided that wealth management is one crucial driving force for our development as an international financial centre."

Wealth management has always been a traditional, conservative industry, but financial technology players are coming in to unbundle services and offer them to a wider range of clients while touting greater transparency.

The MAS has recognised the crossing of lines, and set up the fintech and Innovation Group, for instance, to work with industry partners to test-bed new financial technology solutions. The Government has also earmarked $120 million to arm Singaporeans with infocomm technology skills.

However, to deal with the changing landscape, there is a need to continue to attract top talent to commit to growing the industry here and to provide a rapid-fire response to changes.

As Mr Jabbar said, difficulty in finding the right talents - on top of the increased regulatory compliance issues - has resulted in various European banks pulling out of the Asian private wealth arena.

Private banks are already lamenting a shortage of relationship managers as the business has grown by leaps and bounds and will continue to do so.

With a projected compound annual growth rate of nearly 11 per cent, private wealth in Asia-Pacific, excluding Japan, will rise to an estimated US$55 trillion in 2019.

BCG added: "This pace should enable the region to overtake Western Europe and further narrow the gap with the world's largest pool of private wealth, North America."

Mr Loveless said: "To get the talented relationship managers who have business with the high-net-worth individuals is getting harder and harder, and these banks are now having to look at other ways to reach the market, such as invest in technology to reach their customers."

Singapore has to stay on top of the game, said Mr Jabbar. "We must also be able to compete on costs, and react swiftly to new challenges in the industry, even if it involves the creation of new policies or the re-examination of our tax laws, for instance."

Banks can also no longer operate in silos, and will have to work with other players to bring in new ideas.

Change is the new normal, as Mr Bordier puts it, where "private banks have to adapt or die, Singapore has to adapt or it will lose its positioning as a premier financial centre".

As private banking consolidates and new players emerge, the Singapore that embraces these changes and stays ahead of the competition will be able to offer the wealthy clients it seeks an array of services that would be hard to beat anywhere else.

This article was first published on April 20, 2016.
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