Grabbing a bigger slice of the world wealth pie

Jean-François Mazaud, Head of Société Générale Private Banking

Private banks must prioritise those regions which make the most business sense

With a disconnection in 2014 between the generally sluggish growth of global economies and the growth of wealth (3 per cent in Western Europe), the private banking industry remains attractive on fundamentals but presents significant and accelerating challenges such as regulatory pressure, legal and reputational risks, a changing client mix, and the emergence of new competitors. 

The cost of doing business and the critical size required for a private banking operation to be profitable are increasing, putting pressure on margins but at the same time offering new opportunities for growth through the acquisition of new clients, as well as new assets from existing clients. 

The relationship with the client is the prism through which we see our business and growth will come from the way in which we address this relationship. It has become necessary for private banks to take a step back and look carefully at each region in which they operate to decide whether it makes business sense to be there. For example, capturing growth in Asia is more challenging than it seems, with only regional banks and a small number of international players having the critical mass for their activities to be profitable. 

A private bank cannot be successful everywhere and choices need to be made in the light of whether the needs of clients are being properly met, the critical size of the business, and the dispersion of managerial time and resources. Players have understood that it is more rewarding and efficient to concentrate on their strengths. Société Générale Private Banking has withdrawn from Asia and North America in order to refocus on pursuing growth in what we consider our core markets: Emea. 

Opportunities for growth are closely linked to the business model of the private bank and whether it is part of a universal banking model, with access to a retail bank and/or an investment bank. A private bank needs to be a leader in its domestic market and those with a strong base are better off if there are synergies to be exploited with local retail and investment banking activities. 

In France, the bulk of market share goes to private banks that can capture the strength of a retail network. With our relationship with clients as the driver for a rethink of our domestic structure, 2014 saw us form a partnership with the Société Générale  retail network in France based on increased proximity and additional expertise delivered to our clients and operating as a single unit for the whole country. 

However, growth need not depend on a single strategic approach. International clients are increasingly interested in access to investment banking solutions that can be made available to them through their private bank, such as private equity, M&A, primary markets or real estate. Similarly, as wealth grows in emerging markets like Africa or Eastern Europe, the private bank that can reach local HNWIs through a local retail bank has a growth engine in-waiting – the route we have chosen with our deployment in Morocco, Croatia and the Czech Republic. 

Rogério Pessoa, Head of Wealth Management at BTG Pactual 

Realising which markets are best suited to organic growth and which to M&A is the key

Despite the recent economic slowdown since the 2008 crisis, the private banking industry has managed to grow at a decent pace especially in emerging market countries and notably in Asia and Latin America. 

But when considering if an institution is in a position to grow its private banking business one has to consider several factors: will it be a pure private banking growth strategy or part of a broader, overall financial institution growth strategy?  Should growth come from organic expansion or through acquisitions of potential targets? Should you opt to maximise domestic, local growth before engaging in regional/international expansion or could both be pursued at the same time?

Growth potentials can derive from a number of opportunities. Economic growth potential combined with a sound institutional, regulatory framework and thus overall wealth creation is a must. Buoyant capital markets and M&A activities generating liquidity events are a plus. New developing markets, local or international, are also an opportunity. Entrance into a new segment may also be a driver. 

Lastly, there are singular opportunities due to specific changes in a country’s regulatory and institutional framework allowing for new entrants. These drivers combined with the overall growth strategy of the firm and current maturity of its businesses should lead to the correct answers. In addition, in the case of growth through an acquisition, a similar cultural fit between merging firms plays a decisive role. In the case of BTG Pactual Wealth Management growth has derived from a combination of these factors.

Having captured a significant market share in the mature markets of São Paulo and Rio, from 2006 we opted to organically build a network of domestic local branches covering most regions in Brazil. We opened seven regional offices with an initial focus on wealth management that later transformed themselves into outposts for the different commercial divisions of the bank. 

The strategy relied on the belief that these once overlooked markets would become increasingly sophisticated following stabilisation and consequent growth of the economy and that proximity to these new companies and entrepreneurs would prove a competitive advantage.  

Before engaging in regional or international expansion, one should carefully study the individual characteristics of target countries. In Latin America for example, organic expansion in most countries that were led by global banks has seldom worked. 

Enormous barriers to entry meant several banks failed to attain minimal critical mass and subsequently exited. Thus acquisitions have had a better chance to succeed. 

BTG’s acquisition of firms in Chile, Colombia and Peru in 2011-12 allowed us to rapidly capture market share in wealth and asset management as well as  investment banking in those countries. But market-friendly economic policies, combined with similar company culture, partnership framework and work ethics were also defining factors.

The Swiss BSI acquisition announced in 2014 and expected to close in the first half of this year represents a unique opportunity to access a developed mature private banking market undergoing massive regulatory change. Switzerland is shifting from a model based on secrecy to a more service-oriented framework and consolidation is expected to occur as regulatory challenges become increasing burdensome to smaller financial institutions, banks and family offices alike. A number of new players will become important in this arena.

Michael Benz, Global Head, Private Banking Clients, Standard Chartered Bank

Private banks must become more relevant to clients by understanding needs and emotions which shape their decisions

Across our footprint of Asia, Africa and the Middle East, which count as some of the fastest growing wealth pools globally, private banking’s potential is clear. 

China, in particular, is a market of keen interest due to its robust wealth creation and the gradual internationalisation of the renminbi. The Chinese entrepreneur is often characterised by diversified business interests with a preference for lending, and they require funds offshore for business expansion and a cashflow outside China. Their greater appetite for risk-taking also translates to demand for more sophisticated investment products in international markets. 

Finding a foothold in China’s onshore private banking industry requires not just a strong balance sheet, but also leveraging existing platforms, capabilities and expertise from across the bank’s network.

We see Africa as another exciting growth region with its favourable demographics – sub-Saharan Africa is home to some of the world’s fastest growing economies while high net worth wealth and population are on up. With family businesses making up some 50 per cent of the private sector in South Africa, entrepreneurship is a key driver of wealth creation. The rising number of global Africans also means an increasing desire to differentiate between offshore and onshore wealth. Universal, international banks that are able to offer solutions for incorporated and personal wealth, both offshore and onshore, are thus well placed to succeed. 

Yet, a growing private banking pie does not necessarily translate to easy success. The commoditisation of transactions and executions, for instance, has meant an urgent need for private banks to reduce their dependency on transaction revenue. Moreover, it is estimated that only 10 to 20 per cent of the potential HNW market has been captured by private banks in Asia Pacific. This means there is a disconnect between client expectations and what the industry is delivering.

Private banks must further professionalise relationships by focusing on the context of the information and advice they provide to clients in order to create value for sustainable success. Private bankers need to not only understand financial needs but the experiences and emotions of their clients which shape their behaviours.

Take Asia’s first generation of wealthy as an example: their investment behaviour tends to be driven by their entrepreneurial, wealth creation instinct. Their priority to put business before private wealth has seen them achieving double-digit returns through reinvesting capital into their companies – which is not a realistic expectation to have from an investment portfolio. Private banks need to take this into consideration when managing return expectations and given their specific risk profile, provide guidance on non-correlated investment opportunities. 

On the other hand, the next generation tends to be keener on capital preservation. Their appreciation for longer-term investment is due in part to a wider range of investment choices and reduced volatility and risk due to the rapid economic development across Asia, so diversification and buy-and-hold strategies become more relevant.

Beyond having best-of-breed solutions, it is ultimately about creating relevance. Understanding clients’ behavioural inclinations will allow private banks to have the right conversations, in order to provide them with tailored advice and targeted solutions.