Private banking offers rich pickings for S'pore banks, but it's an expensive business

As economies slow, one business that continues to thrive is private banking. It may be counter-intuitive and while the rich may fret along with the masses over the lousy economy, they have other concerns, like wealth preservation. This instinct especially in uncertain times makes them rich pickings for banks desperate to boost fee income when sales of mortgages and corporate loans falter.

Bank lending in April fell again, the seventh month of consecutive contractions marking the longest-ever period of declines on record, preliminary data from the Monetary Authority of Singapore showed.

OCBC Bank in its 2016 first-quarter results said that private banking income grew but was offset by lower insurance sales which led to lower overall wealth management income. Its private bank unit also saw assets under management rise by US$2 billion during the quarter.

Private banking customers are "substantial", explained OCBC chief executive Samuel Tsien during the bank's Q1 results briefing.

Another reason why banks love private banking is that the business requires less capital since these customers are not big borrowers.

But it's not an easy business to capture, and gaining market share is very expensive.

Amid recent headlines of some staff exits at the Singapore and Hong Kong offices of UBS, the largest wealth manager in Asia and the world, the casual observer may not have noticed that the Swiss banking giant is expanding its presence in Greater China.

It opened a branch in Shanghai in March, the bank's second ground-floor presence in China. The first was a sub-branch in Beijing in October 2014.

To locate its branches on the ground floor shows UBS's intent of attracting Chinese consumers. Typically, private banks are discreetly sited away from street level so as not to draw attention from the hoi polloi. But UBS has no such qualms in its aim to be the pre-eminent global wealth manager in China.

As UBS said, China will continue to post higher growth than any other comparable global economy, and rapid wealth creation there will present huge growth potential for its wealth management business.

Last month, UBS opened an office in Kowloon, Hong Kong. The Kowloon office, its first outside of the Central Business District, already has 50 employees; a number it expects to double by the end of the year.

UBS said the Kowloon office will offer management services to first and second-generation entrepreneurs and other client segments in Kowloon and the New Territories.

Hong Kong billionaires typically live in the Peak and Mid-Levels areas.

UBS is going down market in targeting entrepreneurs, a group which Singapore's three local banks also focus on as they try to expand their private bank business.

Wealth management fees are a fast-expanding source of income for Singapore's three banks, an SGX My Gateway report noted earlier this year.

DBS Group, OCBC and United Overseas Bank earned a combined S$1.52 billion from wealth management last year, compared with S$527 million in 2010.

DBS had the highest fee and commission income from its wealth management services of $599 million. Its wealth management fees accounted for 24 per cent of last year's total fee and commission income, up from 22 per cent a year earlier.

Wealth management fees made up 31 per cent of OCBC's total fee and commission income last year, the same as in 2014, while UOB's wealth management fees made up 22 per cent of its total fee and commission income, unchanged from a year earlier.

DBS and OCBC in particular have taken the acquisition route to grow wealth management income aggressively.

Both were bidders earlier this year for Barclays private bank in Singapore and Hong Kong with OCBC ending up with the prize. OCBC bought the assets booked in Hong Kong and Singapore, amounting to US$18.3 billion and with them 1,800 clients.

DBS had in 2014 acquired Societe Generale's Asian private banking business; this made it in 2015 the sixth largest private bank in Asia, according to Asian Private Banker,

Even as the Singapore banks take aim at the private wealth market in Hong Kong and Singapore, they should not forget opportunities nearer home.

Last month, Credit Suisse announced the setting up of a wealth management team in Thailand as part of its Asian expansion strategy. The bank said the team should grow to 12 people by year-end.

Thailand has a sizeable wealth pool that is comparable to other major regional economies such as South Korea or Singapore, it said.

According to a 2015 Asia Pacific Wealth Report, there are some 91,000 rich individuals in Thailand with more than US$1 million in investable assets, owning US$456 billion of investable wealth.

It's interesting that the three local banks have not made much headway in Thailand though all have had presence there for decades.

A staple for the local banks are the Indonesian wealthy. But it is far from clear how they are doing versus their international rivals.

Private banking is a tough business and market share is only gained via expensive acquisitions, whether organic or inorganic.

Clients do not like to move, especially in today's banking climate where onboarding is an onerous process.

The Singapore banks will have to step up their game, and also pay heavily in order to make headway. Pity the long-suffering shareholders.

This article was first published on June 08, 2016.
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