SG Lays claim to open architecture crown

The French banking world is one where hatchets are seldom buried. Few at Société Générale have forgiven the smaller Banque Nationale de Paris (BNP) for having the temerity to try and seize control of not just Paribas, but also SocGen, in an audacious three-way merger bid back in 1999. BNP was successful in buying Paribas, but narrowly failed with SocGen. There has since been talk of Michel Peberau, chief executive of BNP Paribas, launching another bid for his arch rivals. At this level of French finance, things have a habit of becoming extremely personal. As well as competing directly in French retail banking, the two institutions are increasingly jostling for the attention of banking distributors in cross-border asset management and securities services. Speak to any senior SocGen manager, in asset management, securities services or private banking and the story is the same. The other bank is not a rival, it operates in a different market, and there is nothing to be feared from coming up against it. But the pure passion with which the defence is conducted, suggests there are fierce battles for market share still to be fought, both in France and beyond. The chief executive of Société Générale’s private banking division does not disappoint. “We think we are one of the leaders of the world in net growth of new assets,” says Pierre Mathé, holding court in the private dining rooms of the SocGen tower in La Défense, with his words disappearing into a cloud of pungent cigar smoke. “But we never compare ourselves with BNP Paribas. For us, they are simply not a competitor.” Independent consultants’ figures show BNP Paribas as harbouring double the private banking assets of SG. But such findings are dismissed by Mr Mathé. His “rivals” calculate managed assets in a different way to SG, and similarly to Deutsche Bank, collect and manage funds for a mix of mass affluent individuals and very high net worth clients. “Their organisation in France is focusing on the affluent segment,” says Mr Mathé, “However, we are segregated between mass affluent, wealth management and private banking at SG.” Those clients with around ?150,000 to invest are supervised by advisers attached to the bank’s extensive retail branch network, which handles ?80bn for its mass affluent clientele. They are given a higher level of advice than the normal retail client, but their business still belongs in the bank branches, and for very good reasons, believes the bank’s hierarchy. Only the seriously wealthy, ?1m plus brigade are handled by Mr Mathé’s private bankers. “So if you add ?80bn to our ?60bn, in the broader sense of private banking, we really represent ?140bn, which puts us in the same bracket as ABN Amro in terms of size. BNP Paribas has just ?110bn in France and globally, using the same ways of counting.” Persuading those clients who have moved from a mass affluent to a high net worth profile to move away from the branch networks, to accept a more specialised level of advice, with a much broader range of products is not quite as straightforward as it might seem. Mr Mathé has many examples of seriously wealthy clients who want to see only their manager in a small-town branch, who have no interest in structured products, open architecture, or diversification into private equity. He talks about a client of an SG branch outside Paris who inherited ?20m, but continues to bank at her local branch. “The branch network proposed she should meet SG Private Banking in Paris,” recalls Mr Mathé. “She just said: ‘What is that? I have no such need, no special expectations. I love the customer relationship manager I have in may branch, and would like to stay with this person’.” Despite Mr Mathé’s best attempts at persuading the lady to reconsider, she refused to change. “Why should we impose on her to come to our private banking subsidiary in Paris?” Asks Mr Mathé. “It would be a mistake to do this. So she is staying with ?20m in the retail branch, invested in some SGAM active products, managed by our internal funds house, and some money market products, which she is happy with. It would be a big mistake for us to destroy the link, the personal relationship with the account manager.” This is a clear argument for segmentation of clients. But it does not mean that the different departments do not co-operate. In fact, SG Private Banking relies on its “family” of business lines to develop initial contact with most clients. building the Business As well as a constant stream of referrals from retail branches in France, Mr Mathé is building on his bank’s historical links in Africa and South East Asia, as well as Eastern Europe where SG has recently bought banks in Romania and the Czech Republic. His team gathered ?6.4bn in net new assets during 2005. But managed assets grew 14 per cent from ?48bn to ?60bn partly due to market returns. “Very few private banks have had the same result in the last two or three years,” contends Mr Mathé, with most of his growth coming from Europe and Asia. “Asia is one of our success stories, as we considered in 1997, that in the next 20 years, there would be more growth in the Asian area than in Europe or the US. “More growth means more wealth creation. But the private banking area is not so mature, so this is the market we can penetrate more easily, with our differentiating offer.” Although SG started from scratch in Asia in the late 1990s, up to 20 per cent of its private banking assets are now generated from this region. “We are already on target for 1,000 clients in India for the middle of this year,” he claims. The business model, which drives this differentiating offer is based on advice first, before any product sales. “We offer products at the end of the day, not the beginning,” says Mr Mathé. “What is interesting for us is advising the client on total wealth – his projects and his problems. We want to have a global relationship with the client.” Once the bank thinks it understands the client, and has arrived at a global asset allocation, it will only then try out some product ideas. If these work, they are repeated systematically before the relationship becomes any deeper. The second part of the model involves explaining to clients that the private bank is not in the business of selling in-house products. “In fact we are in opposition to them,” claims Mr Mathé. So although SG’s corporate and investment banking division is the world leader in provision of equity derivatives, Mr Mathé’s team will also look to rivals such as Commerzbank, Citigroup and ABN Amro to provide structured products for private clients. “We use equity derivatives and products of SGCIB which are very good, but not always the best in terms of pricing. Our teams are looking at client needs with customer relationship managers all over the world,” he says. “This means we can offer our clients a proposition for very specific needs.” According to Mr Mathé, less than 6 per cent of his private clients’ assets are channelled into funds managed by the in-house manager SGAM. He says: “We are really in the open architecture mindset.” His private banking advisers use a computerised fund selection system with access to a database of 15,000 products globally. “I read very often about other banks telling everybody they are in an open-architecture mindset, but what is the percentage of product sales they do with other fund companies and other investment banks? “I know that for some banks, open architecture just means there are some products from competitors on the shelf, but they are not used or proposed systematically by the bank. The client knows the difference: which is the real open-architecture system?” Optimal size While Mr Mathé jokes that the optimal size for his franchise will be that of Swiss private banking leader UBS, he knows that a boost in assets will mean profits can leap at a greater rate. “This business is very specific, it is not a global market like securities services or asset management,” he says. “It is a very fragmented market. There are regional or local market rules in this type of business. Industrial rules, which are completely necessary for custody business or asset management, do not operate in the private banking sector. The cost of staff in private banking is always two-thirds of total expenses. It is a business based on people, not an industrial business.” Yet the question of critical mass – whether it is more efficient to manage assets of ?100bn or ?200bn – is evolving gradually. Once there was very little difference in margins on a profit and loss sheet between two vastly different sizes of operation, but this has changed. “The question of critical mass, which was not a problem 10 years ago, or even five, is becoming a crucial question in this area today,” believes Mr Mathé. “We are at the crossroads of new regulations, which are being reinforced year after year, regarding money laundering, the anti-terrorist struggle and questions about the duty and quality of advice for the client. All these new regulations – and we have not seen the end of them – demand more and more qualified staff in terms of compliance officers and others, working in a new organisational structure. “New investment in IT systems means costs and expenses in the private banking area are increasing strongly,” says Mr Mathé. “So you need more and more assets to maintain profitability.”