Clients and clampdowns drive banking revolution

Bankers at Citi boast of having had a “good Brexit”, efficiently switching assets between currencies. On the morning after the referendum, relationship managers had spoken to every single private client before lunch was even served. Many of these foreign millionaires were channelled into London real estate, selling at a 20 per cent discount after the sterling plunge.

Currently there is a pot of 72,000 families with net worth of €30m ($32m) plus in Europe and Africa to focus on. The bank expects this to grow to 92,000 within 10 years. Each year Citi’s private banking revenues and assets are surging by approximately 10 per cent, nudging the $375bn barrier.

Also key to Citi’s growth strategy is the conversion of these transaction-led clients to embrace regular fee-based discretionary management, with assets allocated to fixed income, illiquid alternatives such as real estate, plus infrastructure investments and companies involved in disruptive innovation. Private equity funds are also proving popular, with hedge funds now taking a back seat.

The bank says current opportunities for clients are greater than ever “in investing history”, particularly in fixed income, bank loans and direct lending investment opportunities, with a 10 per cent yield once more realistic.

But Citi bosses are always looking at the bottom line and how to keep this efficient machine, employing 800 people in Emea, running smoothly. After all, compliance costs are surging steadily and competitors are being forced out of some tight margin markets due to profitability pressures.

The way Citi sees it, most posts are under regular review. Where it can, it will hive out activities and staff to outlying centres including Warsaw, Belfast and Dublin.  

“There are very young, ambitious, vibrant, knowledgeable, conscientious professionals in Poland and Ireland, who don’t want to move anywhere, who are looking for the type of intellectual challenge we can provide,” says Luigi Pigorini, chief executive officer for Europe, the Middle East and Africa at Citi Private Bank.

As part of this rationalisation, combined with the ongoing digitisation of services, Citi plans to close three of its four high-profile, lifestyle-led branches in London, including Cabot Place in Docklands, St Paul’s and Hanover Square in Mayfair.

Closer to home

Competition is clearly heating up in Europe. While Citi is holding its own in Asia, the market there is not as easy to exploit as many Western institutions first anticipated. This means France’s Société Générale and ABN Amro from the Netherlands, both of whom pulled out of Asia due to lack of scale, are doubling down closer to home. Asian players such as DBS are also stepping up their London presence.

Ten years ago, even five, there were enough adventurers out there to search out exotic, often non-compliant customers in far-flung territories. Now most are sticking to their home stomping grounds. 

HSBC is a good example of this trend, firmly in growth mode, having shaped up internally to ensure greater co-operation between retail, wealth management, commercial and private banking. The bank is today concentrating on booking customers into its flagship locations in Hong Kong and London, rather than being present in a range of smaller offshore centres around the world. 

Its managers are looking at business that will be sustainable in the future, rather than onboarding maximum assets today. This revised approach should help prevent the recurrence of legacy problems relating to tax evasion, which have dogged the bank in previous times.

Hollow ring

But regular claims from the private banking industry, that it has somehow re-invented itself and reshaped its business model, while generally true, sometimes have a slightly hollow ring. 

The old secrecy-led model heard the bells toll back in April 2009. That was when Switzerland, under US pressure, signed up to the new world order dictated by the G20 and OECD.

Credit Suisse agreed to fines of $2.6bn in 2014, after pleading guilty in the US to helping clients evade taxes. Yet the Swiss giant is once more under investigation regarding client tax matters, this time in the Netherlands, France and the UK.

“The developments likely emanate from past practices, but their persistent emergence tends to prolong negative past reputation of Swiss private banking,” believes Zurich-based strategic consultant Ray Soudah, founder of MilleniumAssociates.

The problem among the banking giants with tax has been the flipside of the product pushing coin. Private banking divisions of universal banks are hamstrung by targets for increasing assets as well as offloading structured investment products.

Regulators and tax authorities have played a part with their clampdowns, but the real private banking revolution will come from the clients. A new class of entrepreneurial customers differentiates itself from tariff-skimming politicians and tycoons in two ways.

Firstly, they look to banks to help boost their existing businesses rather than sell them “smash and grab” products. And secondly, their social conscience fuels greater and more genuine interest in philanthropy and impact investment than tax dodging.