Private bankers need new strategies to make themselves relevant to Asia’s wealth creators.
The Asian-wealth tiger is roaring in earnest. Decades of rapid economic growth have yielded a regional crop of millionaires whose collective net worth surpassed counterparts in North America in 2015, according to Paris-based Capgemini. Asian private banking assets under management (AUM) swelled by 9.5% last year, outstripping global growth of 5.3%, Boston Consulting Group reports.
Then why are so many banks packing up and leaving? Barclays, Coutts and ABN AMRO, among other venerable houses, have sold or shuttered Asian private banking operations in recent years. “Yes, it is an extremely large and attractive market, but it’s not easy to convert that into a profitable business model,” says David Wilson, a Singapore-based director at Capgemini Financial Services.
The reasons are various: The industry’s return on assets averages 60 basis points, or 0.6%, in Asia, compared with 78 in North America, BCG’s most recent industry study found. Competition is surging from Chinese and Singaporean banks, whose tendrils reach deep among Asian wealth creators. And the regulatory headaches afflicting everyone in finance since 2008 are multiplied by the region’s varying jurisdictions.
Yet overshadowing these tactical challenges is the strategic one of enticing Asia’s emerging-wealth elite to use private banks in the first place. Even now, no more than 20% of the region’s high net worth individuals use a private banker, a recent Ernst & Young survey found; in North America, it’s more than 70%. The main reasons Americans and Europeans flock to the industry—tax optimization and preservation of wealth earned generations ago—scarcely exist as yet in Asia, says Jan Bellens, who leads EY’s Asian banking practice. Private bankers need to make themselves relevant to an Asian population that’s in the thick of creating its wealth, a process that requires both imagination and investment. “Until now, it has been mostly international private banks bringing the Swiss model to Asia,” Bellens says. “What we will see over time is what it means to run a truly Asian private bank.”
Asia’s rich differ from the rich elsewhere in important ways. While they may not be younger physically, their wealth usually is. “Our typical customer is the founder of a company, aged 50–60, who is preparing to pass that company on to the next generation,” says Siew Meng Tan, head of Asian private banking for HSBC, which is number four in the region by AUM, according to data compiled by Asian Private Banker.
Culturally, these entrepreneurs are inclined to plow profits back into their companies or seek outsize returns through real estate and other investments proffered by Asia’s notorious shadow-banking trusts. Rainy-day nest eggs are historically cash. “You see a dumbbell asset-allocation approach,” says Tjun Tang, who heads BCG’s Asian financial-institutions practice out of Hong Kong. “On the one hand, lots of cash; on the other hand, a set of high-risk, high-return potential investments.” Mostly missing from the picture is the traditional stock-in-trade of private banks: prudent, diversified securities portfolios aimed at stable single-digit returns.
Asia’s rich entrepreneurs like to be hands-on wealth managers, leaving private banks in an uphill struggle to pitch their standard “give us the money and leave us alone” discretionary mandates, according to Tan.“The private banking clientele in Asia wants to be more involved in its own investment decisions,” she says. That clientele also skews toward the digital native, adding urgency to the drive toward online interfaces.
Private banks in Asia must keep an eye on the changing competitive landscape, too. Global brands still dominate in AUM: UBS, Citigroup, Credit Suisse, HSBC and Julius Baer hold the most. But aggressive rivals from Singapore—DBS and Bank of Singapore, which this year won Global Finance awards as Asia-Pacific’s Best Private Bank and Best Private Bank for Entrepreneurs, respectively—are breathing down their necks, backed implicitly by the authorities in the city-state. “The ambitions of Singapore banks are linked to their government and regulators, who are very keen on creating an ecosystem for growth in finance,” Bellens says.
Chinese houses are small players in private banking for now, but are growing voraciously. China Merchant Bank, the leader of the national pack, expanded AUM by one third in 2016 and set a target for 20% annual growth over the next five years.
Experts say Asian private banking may be approaching the right size to achieve smoother long-term prosperity—with global giants and rising regionals in separate rather than competing niches, and weaker players squeezed out through consolidation. “Domestic players can develop client relationships earlier. Global players service clients’ desire for diversification,” says Caroline Burkart, a director at London-based industry-watcher Scorpio Partnership. “There is room for both.”
Global incumbents seem to be focusing on the richest of Asia’s nouveau riche. HSBC increased its private banking threshold to $5 million; and others will move up to at least $2 million, Capgemini’s Wilson predicts. Several factors increase their chances of landing these bigger fish. Many Asian founders are nudging toward retirement age, increasing the need for the intergenerational transfer advice that private banks have honed for centuries. They are also increasingly cashing out of their businesses. Hong Kong’s stock markets have led the world in IPO volume for two years running and are on track to repeat in 2017. Sellers often turn to a global bank for underwriting, then park part of the proceeds with that house’s private bankers.
The banks hope so, anyway. “The focus for us is to serve business owners as corporate clients and keep them on for a share of the private wallet,” says Tan. Credit Suisse made similar plans in 2015, when CEO Tidjane Thiam took over the stumbling Zurich-based giant: “Credit Suisse will grow profits by serving the large and growing segment of wealthy entrepreneurs in emerging markets,” the bank declared as point one of its new global strategy.
One more plus for big-name multinationals is that Asia’s ultra-rich, keenly aware of legal and political risks at home, are eager to move some wealth to havens abroad. Fully 75% of high-net-worth Chinese want to invest outside their own country, compared to 53% of peers worldwide, Capgemini found.
Meanwhile, global private banking franchises are experiencing a windfall from Japan, where two decades of deflation kept 50% of rich individuals’ assets in cash, twice the global average, Wilson says. So-called Abenomics, which has reintroduced a bit of inflation and nearly doubled Japanese stock prices over five years, has rekindled some spirits. Cash holdings were down to 34% in early 2016, Capgemini found.
The ambitious private banks of Singapore and mainland China are well positioned to concentrate on clients with a mere $1 million or so in disposable wealth. Their commercial arms nurture lending relationships as these individuals grow their businesses and make early investments in real estate. “Many Asian HNWIs hold physical assets, and local banks have the advantage of knowing them through this retail link,” Tang says. Singapore private banks are known for cost-consciousness, which may hinder recruitment but helps turn a profit from relatively low-end clients, Bellens adds.
One looming question: Who will win the great digital race, and how? Everyone agrees the industry needs fewer white-glove concierges and more clever software, but it’s an expensive transformation still in its early stages.
A second issue, unique to Asia, is whether multinational private banks will push onto the Chinese mainland or keep waiting in Hong Kong (and Singapore). Eventually they will have to push, Bellens argues: “The game will shift to accessing the mainland Chinese entrepreneur on an onshore basis.” In June, HSBC became the first foreign firm allowed to buy a majority stake in a Chinese securities brokerage. But as the tentative nature of this long-awaited toehold indicates, the regulatory obstacles are formidable, and some experts doubt that a push into Shanghai or Shenzhen will be worth the cost. “At the moment, there are enough avenues for rich Chinese individuals to transfer wealth offshore,” Scorpio’s Burkart concludes.
Asia will likely remain the most dynamic region of the world in wealth management for the foreseeable future, but thriving there in private banking will not be easy—or cheap.