Small firms shine in private banking rally
Private banking is back in better health. After several years in the sick-bay following the excesses of the late 1990s, 2004 looks like the year the industry returned to its feet.
In US dollar terms, there was a 13.1 per cent increase in assets under management during 2004 for the 52 banks that provided comparable data for the Scorpio Partnership private banking Benchmark study.
While this latest aggregate figure marks a slowdown from the increase posted at year-end 2003, the asset growth in 2003 and 2004 has translated into a phenomenal 30.4 per cent increase in profits for the Benchmark sample group in US dollar terms.
The key winner in terms of improving its asset base was a mid-sized player, Italy’s Unicredit Private Banking, which saw a 34.3 per cent rise. First among the top 10 institutions was ABN Amro, which posted a 22.5 per cent improvement. But UBS, which ranked first overall, came in at number eight in the percentage change comparison with a 16.19 per cent improvement in its assets under management.
It was the smaller institutions that achieved the best growth in managed assets during 2004, followed by the larger players. The rate of growth for wealth managers with less than $20bn under management was double that for those with $500bn or more. The upper-mid-sized players – with $100bn to $500bn under management – experienced the slowest relative growth rate.
Net new money is the oxygen of the private banking industry. While growth of assets under management is mainly driven by improvements in equity markets, this tells only part of the story about the success of a bank’s growth strategy. These gains can just as easily disappear if markets turn down. Net new money is a much keener determinant as it measures the attractiveness of a wealth manager to winning business from clients and prospects.
By this token, 2004 has also been auspicious, with net inflows well up compared to 2003. For the comparable institutions that provided figures for 2003 and 2004, there was a 61.6 per cent increase in US$ terms in net new money from year-end 2003 to year-end 2004.
After several years of overall decreases in private banking employees, hiring turned the corner in 2004. Total employee numbers at the institutions that provided comparable data increased by 3.8 per cent. This suggests a broader confidence in the wealth management sector.
Client-facing staff numbers also posted an overall increase in 2004, with a number of the larger banks notching up much higher growth rates. However, it is critical that institutions employ client-facing employees that are able to develop sustainable wealth management relationships, rather than focusing on short-term product sales. This will be a key factor for the strategies of most global operators in the next two to five years.
While estimates of total global high-net-worth wealth vary, it is clear that the global wealth management industry remains highly fragmented, with a lack of deep penetration by even the very largest players. Scorpio Partnership estimates that this year’s Benchmark institutions, which represent the key global players, have accessed no more than 20 per cent of the potential global private banking market, which is in the region of $30,000bn. However, based on market share analysis, it remains massively fragmented. The largest player, UBS, has only 4.5 per cent of the estimated market and most private banks are in the low double digit basis points of market share.
Based on this fragmentation and continued positive returns experienced by most operations, the potential for the industry is substantial if it can keep its health robust. Nevertheless, there will be institutions that are finding the current times difficult with limited flows of new assets. These firms will have to re-examine their positioning in the market and determine whether they really are a viable option going forward.
Ted Wilson is a consultant at wealth management strategy think-tank Scorpio Partnership
