Changes to regulation, emerging market performance, economies of scale, internal restructuring, clients’ perceptions of value – these are the factors exercising the minds of the leading global private banks as they look ahead to 2014, Paul Golden speaks to 8 private banks.
Private banking surveys conducted during 2013 paint a mixed picture of the industry’s prospects for next year and beyond. For example, the Scorpio Partnership global private banking benchmark refers to increased client confidence and strong inflows – yet also warns of rising operating costs. BCG’s global wealth report says the risk appetite of investors in both developed and emerging markets is gradually returning, while the PwC private banking survey suggests clients are underwhelmed by the communication they receive from their wealth managers.
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Credit Suisse
The relative optimism expressed by Mike O’Sullivan, CIO UK and EMEA Credit Suisse is based on an improved economic outlook. "In late 2012 Europe was still firmly in recession, the US was facing the possibility of deep fiscal cuts and there were expectations of a ‘hard landing’ for the Chinese economy."
The tendency for markets across the year has been to push higher on risk factors as opposed to the last three years where they sold off more quickly, adds O’Sullivan, who observes that risk assets (real estate, equities, some alternatives) have done well and that client risk appetite has increased markedly since the summer.
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By GlobalData"Equities will do well again next year and real estate will continue to benefit outside the supercharged markets of London, Tel Aviv and Dubai. The ‘surprise’ for 2014 will be a realisation that government bonds are more risky than previously thought – there will be a continuation of the sell-off in fixed income and by this time next year yields could be down to around 3.5%."
Possible tail risks include emerging markets suffering economic crises. "This has already been priced into some markets such as Russia and China, but India and South Africa remain vulnerable. There will definitely be more volatility in emerging markets in 2014," he says.
Coutts
According to Ian Ewart, head of products, services & marketing at Coutts, the change to the regulatory environment in the UK and the introduction of Retail Distribution Review (RDR) rules will have considerable implications into 2014 and beyond.
Internationally, while Hong Kong and Singapore have not adopted RDR language, he says there is a case to be made that similar disciplines and regulations are being introduced in everything but name. "This signals a move to an unbundled pricing regime for clients. The unintended consequence is that there is a whole tranche of customers who are unwilling to pay for advice and are increasingly driven to self-service through providers of data insight."
Ewart also refers to a move towards consolidation. "Given that we are still in the process of trying to repair much of the loss of trust in banks, the industry is vulnerable to newcomers or those who decide they have the tools to reinvent themselves as a wealth manager."
Societe Generale
The most significant trend in 2013 has been the restructuring taking place against a background of slow growth in Western countries, contrasting with fast growth in emerging markets and driven by the weight of regulation and compliance issues putting pressure on margins and costs.
That is the view of Societe Generale private banking head Jean-Francois Mazaud, who refers to a number of banks right sizing their operations, reducing the number of client geographies they follow and, in some cases, withdrawing from markets they do not consider to be key in order to concentrate on those where they have critical mass, coupled with a rise in client demands and expectations.
"When looking at the financial performance of the industry, my answer to the question of whether the industry has lived up to expectations this year would be ‘no’ for most of the players. However, with regard to the restructuring or repositioning movements underway in some countries and in some banks, I would say ‘yes’, as the industry seems less inclined to resist the changes which need to be made."
Mazaud is convinced that 2014 will be another year of heavy restructuring for the private banking industry, at least in Europe, probably with further consolidation ahead. "I believe as well that 2014 could be a year of growth opportunities, served by more supportive markets, the accentuation of risk-on appetite from our customers and gains in market share for the leading franchises."
BNP Paribas
This theme is taken up by Vincent Lecomte, co-head of BNP Paribas Wealth Management. "Next year will see a continuation or acceleration of current trends. Consolidation in most regions will continue as major players refocus on their core markets. We expect to see more competition, particularly in high growth regions such as Asia and with ultra high net worth clients. We also anticipate increased investment across the industry as banks continue to develop and retain talent, enhance their digital offerings and adapt their advisory models."
He describes the environment in which private banks operate as increasingly complex. "Regulation around tax compliance and customer protection and changing price policies are contributing to this complexity. In addition, competition for business is growing and we are also seeing more demanding clients with higher expectations in terms of quality of service, digitalisation and product innovation."
ABN AMRO Private Banking International
Scale is a vital consideration according to Jeroen Rijpkema, CEO ABN Amro private banking international. "Critical mass is becoming increasingly important in order to be able to achieve the right economies of scale. A private bank needs to manage a minimum of 15-20bn in a country, otherwise it is not sustainable to invest in or expect to see bottom line results."
Stricter regulation is one of the reasons private banks are looking at the size of their activities and considering whether to divest or close down sub-scale activities, he continues. "That is not always easy to explain to clients as certain rules or regulations, which will ultimately benefit clients and the industry, might come across initially as administrative and bureaucratic."
Deutsche Asset & Wealth Management
Salman Mahdi, head of key clients relationship management & corporate finance partnership at Deutsche Asset & Wealth Management reckons the rebuilding of the trust relationship between the client and their wealth manager is one of the key developments of 2013, alongside an increase in investors’ risk appetite.
"On the first point, the key drivers have been increased transparency and simplicity of investment products and ideas. On the second, the economic cycle has to a large extent driven demand for equities and a transition away from fixed income. Alternative investments are also being looked at more favourably – notably, we have seen very significant fund raises in private equity. Clearly, these trends continue to be driven by the low interest rate environment. During 2013 we saw a primary focus on developed markets, but as the year is ending we are seeing the re-emergence of interest in developing, high growth markets."
Wealth creation has continued unabated, with particularly strong growth in the ultra high net worth segment and Deutsche Asset & Wealth Management expects this to be the biggest growth area for the foreseeable future.
"For private banks, pressure on revenue margins continues," says Mahdi."In this environment, the challenge for the industry is to ensure the sustainability and longevity of client relationships, while also streamlining business models. Against this backdrop, we continue to believe that the universal banking model is best suited to provide a creative and efficient private banking offering."
His expectations for 2014 are for further momentum around delivering performance in a more transparent manner and improving the client experience, especially through enhancing the technological interface between clients and banks.
"Lending will remain an important lever to deepen client relationships. With the low interest rate environment likely to continue, we will see growing demand for greater portfolio diversification, with an emphasis on investments with yield generating potential. The renewed industry focus on business culture, ethics and values will become even more important."
UBS
UBS global CIO, Alexander Friedman highlights the importance of diversification in portfolios over the next five years. "It makes sense for investors to take stock of some of the structural shifts underway and re-orient their strategic portfolio holdings," he says.
RBC Wealth Management
The most significant change in private banking this year has been in the type of advice that clients are seeking, observes Philip Harris, head of private client wealth management UK at RBC Wealth Management. "We have seen a concerted move away from advisory services in favour of the discretionary model. I believe that this is a visible reaction to the gradual signs of market recovery that we have seen over the year and ongoing recognition of the value that investment specialists can add when it comes to wealth preservation or growth," he says.
The 2013 World Wealth Report (which RBC Wealth Management produces in partnership with Capgemini) showed that a strong proportion of high net worth individuals globally continue to have a high level of trust in their wealth managers, while their confidence in the markets and in regulators waned.
According to Harris, this is evidence of the opportunity for talented advisors armed with a comprehensive set of wealth management tools to provide a valuable service to an ever growing pool of wealthy individuals.
He does not expect any major strategic shifts in 2014, but rather a refinement of private bank business models. "In the wake of RDR and a tighter operating environment, trying to be all things to all people is simply unrealistic. Next year will inevitably see more consolidation in the industry as businesses look to crystallise their proposition and define their target segment within the marketplace. Fundamentally, firms that can adhere to a well-considered strategy with the support of a strong team of bankers and specialists will continue to make good headway."
