Private banking values at low-tide

The tidemark of the value of private banks appears to be reaching a rational level but it is likely to drop further in the next 12 to 24 months, potentially dipping below the 2 per cent mark for assets under management (AuM). The reason for this statement is, put simply, that while supply is overtaking demand, the buyers are becoming more critical about the quality of the supply. If the deals continue, as we expect they will, 2009 will be remembered for when the international pricing standard for private banking units hit the 2.2 to 2.4 per cent of AuM range. Deals including Julius Baer’s purchase of ING Private Bank (Suisse) and RHJ International’s purchase of Kleinwort Benson Private Bank from Dresdner were both in this range, as were a slew of other deals in the last six weeks around the globe. Notably, this is some way off the previous pricelines of 3-6 per cent of AuM (and sometimes even higher) during the past decade – for those in doubt, just recall the HSBC-Safra Republic deal. Indeed, our view is that the pricing rational is now suggesting a new stage of the industry maturity from a “market share at any price” attitude toward “a realisation of the value of market share”. This is significant strategically. Looking ahead, the interesting issues are what factors are driving the pricing adjustment and what will this mean for management looking at their wealth assets? At one level, pricing is being impacted by the forced seller situation. In the case of ING, the deals in Singapore (OCBC Bank purchased the regional private wealth business) and in Zurich are part of a broader group campaign to recoup E8bn in capital. To that end, private banking appears to be a well placed business to offload and the Dutch may have secured early mover advantage. Hitting the bottom line The secondary shockwave of the global credit crunch is now about to hit the private banking sector. Based on our analysis of the business models in private banking the dips in cost-income ratios in 2008-2009 will truly hit the bottom line for many in 2010. Many banks have seen a 25 per cent rise or more in their cost-income ratios with little correction. Put simply, the cost of running the wealth management business will look unattractive to many group boards and although many economies now appear to be on the rebound, ability to repair the significant drop in asset levels will take more time that many stakeholders have the patience for. This is not to state that all the private banking and wealth management businesses are about to hit the wall (although some will). However, many will still not be generating the return on investment that banking groups will be needing. Some of these will be folded into the retail wealth arms (this is already happening in the US and makes good business sense) but others will hold out, believing that launching a new ultra high net worth solution is the answer. Arguably, it is all about market timing. The savvy group stakeholders will consider they can sell a positive story to the market if they tidy up their wealth businesses and show a marginal uptick in AuM or, better still, profits which may cover over some of the more systemic issues the business models are facing. We expect the cadence of disposals both large and small to increase next year. The business models likely to be most impacted in terms of sales are both the multi-regional private banking businesses and the very boutique onshore private client asset management solutions. The former are proving to many executives that there are too many moving parts to manage efficiently, while the latter will have been unable to attract a critical mass of assets to sustain their cost base. A final reason for the further decline in multiples for the private banking business is the deepening insight into the validity of the segmentation assumptions of the banks on the block. Increasing insight into the bank’s commercial traction with clients, at a revenue level based on improving management information systems and comparables with other segments of the financial community, are increasingly showing the higher segments of the wealth management arena (the eight figure market and above) are much less commercially attractive in terms of margin or scale. Sebastian Dovey, managing partner and head of consulting at wealth management strategy think tank, Scorpio Partnership