Private banks poised to capture Asian clients

Private banks in the Asia-Pacific region are attacking two lucrative markets. The first and foremost is for high net worth individuals, dubbed the wealth management “white space” by consultancy Oliver Wyman.

The second is the ultra high net worth market, requiring banks with strong balance sheets to provide structured finance for wealthy families growing their businesses.

“The so-called white space is still materialising in Southeast Asia. This is a model that DBS and Citi first established and it is now being appreciated more by domestic banks in the region,” says the consultancy’s Singapore-based head of Asian wealth and asset management, Toby Pittaway.

Banks such as Malaysia’s Maybank, Indonesia’s Mandiri and Thailand’s Kasikorn are all investing heavily into managing assets of private clients in this $1m to $5m wealth space.

The second growth strand combines technology and the financial muscle which banks are increasingly flexing in the region.

“Asian clients want to interact digitally and access their accounts from their mobile. This is different to the traditional European face-to-face model,” says Mr Pittaway. “Technology is clearly important, but the balance sheet is also a big differentiator.”

Ultra high net worth clients and business owners are placing a lot of value on access to structured finance, using their existing wealth as collateral. “Some more advanced commercial banks use that to their advantage over other balance-sheet-lite Swiss banks,” says Mr Pittaway.

Credit Suisse – seen by many as having fallen behind market leader UBS in Asian wealth management – is now resurgent, showing particular prowess in this discipline, he says. “They are working with ultra high net worth entrepreneurs in the Philippines, Singapore and Indonesia, using structured finance, treating them as investment banking clients. The management of money for a fee is a relatively small part of this proposition.”

Private banking is now viewed by the bank as investment banking for private individual customers, confirms Francois Monnet, head of Greater China private banking at Credit Suisse, discussing the transformation of the industry.

“Their wealth is fundamentally linked to their business. Being an entrepreneur, they know how to manage risk and make returns better than a private banker.”

To help these entrepreneurs achieve their ultimate financial goals, the banks need to work with them when they are establishing and growing their business, not only after they have sold it and have assets to manage, believes Mr Monnet.

Relationship building prior to reaching the IPO or liquidity event stage, well before asset allocation and portfolio management techniques are brought to the table, could increasingly become the differentiator between private banks in the Asian region.

“It’s extremely powerful for us to accompany the client and cater to their needs in the entrepreneurial zone – this differentiates our work in an emerging market from a mature market,” he says.

Across the divide at major Swiss rival UBS, the message is similar, if not so exaggerated. “Pre-IPO, we help clients look for strategic partners,” says Francis Liu, head of ultra high net worth business for North Asia at UBS Wealth Management in Hong Kong. 

“The needs for investors are not just managing their financial assets, but the ability to contribute to business positioning and business innovation, pre-IPO.”

The ultra wealthy individuals requiring this range of structured services are also digital natives, so share the communication needs of clients lower down the scale.

“Utilising technology and leveraging the balance sheet are not mutually exclusive,” says Credit Suisse’s Mr Monnet. “The way people are consuming financial services has been totally disrupted by the digital world. Asia is at the forefront of this.”

But the introduction of this technology must go hand in hand with the developments of skilled relationship managers, rather than a digital system replacing a human one. “Technology has to be relationship enhancing,” says Mr Monnet. “It must bring the client and relationship manager closer together, offering a self-service option that needs to be augmented by the relationship value of the private banker.”

When it comes to managing assets, relationship managers must provide much more than an execution price, he says. They must be able to raise their game to advise clients. “If Apple misses its profit estimates, what does this mean for the holding and portfolio value?”

Mr Monnet compares the US industry with Apac. Both are broadly similar in terms of assets held, but banks are able to employ up to 20,000 advisers in the US, whereas in Asia the market leader UBS has more than 1000 and Credit Suisse has 520.

“With this model, how are you going to gain scale if you don’t automate and digitise?” 

Currently, the Southeast Asian market is proving easier to access with this model, because clients, banks and the talent that works for them are attracted to the two major hubs of Hong Kong and Singapore.

But Mr Monnet acknowledges that there must eventually be a concerted push towards the onshore wealth management opportunities in China and neighbouring nations, requiring massive new resources.

“North Asia is much bigger than Southeast Asia,” he says. “The trend will be for the banks to go onshore, but this needs significant investment and is subject to approval from regulators.”

These factors vary hugely from country to country. In China, for example, the law will allow the wealth management industry to develop with an emphasis on products, rather than advice and with much more of a retail rather than true private banking ethos, he believes.

This re-invention of private banking in an Asian mould must be taken seriously by the European and American banks if they are to succeed.

“Wealth in Asia is different, it is entrepreneurial,” said Paul Hodes, regional head of managed investments and consumer wealth management for Citi, addressing an audience of private bankers at a recent FT event in Singapore. 

“As bankers, we think about stocks and bonds, but for clients, the wealth is about their company. It is not a retirement package, it is about how to hand the company down to their children. Their first access to risk-adjusted investments is not through mutual funds, but forex. The real opportunity for us is an advisory one.”

When it comes to discretionary management, the smaller Swiss and other foreign banks are carving out more of a niche. This is becoming wider now that China is struggling and more Asian investors want to diversify their assets to Europe and the US.

When everything Asian was in vogue, local banks were the ones holding the power. But in order to diversify portfolios away from RMB assets, Chinese tycoons and the high net worth investors lower down the scale are increasingly prepared to pay handsomely for investment advice on internationalising portfolios from foreign players.

“There is a definite value in putting some of the portfolio into overseas assets as a diversification play,” says Oliver Wyman’s Mr Pittaway. “This is broader than just a Hong Kong trend, but it is the international banks in Hong Kong which have benefited from these funds.”

Investors in mainland China have also not been slow to diversify. “The re-deployment of assets and the portfolio adjustment started two years ago,” says Alberto Forchielli, founder of private equity firm Mandarin Capital Partners. “Educated investors with more than $2m in liquid assets started offshore investments then; none of them is caught by surprise by the current stockmarket collapse and RMB devaluation, they were both long overdue.”

While the larger Swiss banks such as UBS and Credit Suisse are enjoying success in more structured investment-banking style transactions, their smaller cousins are much more geared up to running discretionary portfolios.

“Our Hong Kong, Singaporean and Chinese clients are considering that diversification is an absolute necessity today,” says Michel Longhini, head of private banking for Geneva’s Union Bancaire Privée, which recently purchased Coutts’ Asian private banking arm.

“This is really growing and it’s dramatically different to the old days in Asia.”

The challenge for these banks is to show their expertise is very different from the big brands that dominate the market. 

Wealthy clients looking for advisory business around big investment opportunities such as IPOs or structured products will typically head straight to UBS or Goldman Sachs, says Vincent Duhamel, head of Asia at Lombard Odier. 

Most smaller continental European institutions, he says, do not have a serious business proposition for Asia and are simply left “picking up the pieces after UBS”, because Asian investors prefer to spread their business across 30 or 40 private banks, in contrast to more concentrated European clients.

It is up to Swiss banks to show they have more expertise in discretionary management to avoid this tag, he says. 

“I can’t compete head to head with UBS or Goldman on structured notes and I don’t want to have a ‘spray and pray’ approach to our client base,” says Mr Duhamel. “Clients come to us to structure their family wealth and we can also help them manage the money.”

This entails a much more discretionary approach than the bigger players. “We are not going to let the relationship manager go off on a tangent on his own and do whatever he wants. We are responsible for each and every one of our RMs.”

Increasingly, Lombard Odier is partnering with onshore institutions in various Asian markets to improve its penetration of the continent. It cannot be accused of the hit-and-miss approach which so concerns Mr Duhamel.

So far, Lombard Odier has co-operated with JBWere in Australia, Kookmin in Korea, China’s Industrial Bank (CIB) and Thailand’s Kasikorn.

“We liked Kasikorn as an organisation. It is the top national bank in Thailand, if not Asia,” says Mr Duhamel. “We will use the skill set of Lombard Odier on a global basis, setting up the fund structure to offer in Thailand, with Kasikorn working on more specific client needs.

“They know their clients so much better than we ever will. But an entrepreneur who has built up a chain of shops in Seoul or Changmin may want to move abroad and diversify their business.”

This type of partnership is “reflecting that Asian clients want to manage money in their home location,” but with the benefit of an offshore platform, says Oliver Wyman’s Mr Pittaway.

The deal between DBS and French bank Société Générale, giving the Singapore-based bank access to clients in others parts of the world and control over a much greater swathe of assets on home territory is also a demonstration of this trend, he says.

“What is particularly interesting is the cross-border connection and how domestic and international firms might form partnerships,” says Mr Pittaway. “At the end of the day, there are only a small number of HSBC and Standard Chartered-style firms out there.” 

Portfolios and politics

Private clients across Asia are diversifying into new markets, both regionally and internationally. Many are spooked not just by China’s lack of expertise in dealing with its unchartered economic territory, but the political problems on their doorsteps.

“There is a lot of concern on the ground about politics,” says Carolyn Leng, head of private banking at Malaysian institution, CIMB.

“The ringitt and Malaysia are not attractive for foreign investments. People go to Indonesia, which is booming, even though it has its share of problems with corruption and the cabinet does not move as quickly as Jokowi [Indonesian president Joko Widodo] wants. But it has more stable politics.”

This concept of relative stability can easily tilt private client money flows towards a particular country in the region, she says. “The Philippines are hugely corrupt, but our clients are now investing there and Thais are putting money into Malaysia. There is concern about stability, but this is not affecting the income of the corporates.”

Today’s scenario is a world away from the Asian crisis of 1997, she says. “Then the corporates were high in debt, today they are high in cash.”