Australia: growing old gracefully

Australia’s domestic banks have maintained their
dominant position in the private banking market and are becoming
more global in their offerings, spurred by competition from foreign
players. The much talked about youth of the Australian wealth
market may be moving into a more respectable middle age, says
William Cain.

Private bankers and wealth managers in
Australia say assets under management growth of around 6 percent
will be a good result in 2009 given the turmoil in global financial
markets.

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A PBI poll of senior wealth
managers in the country showed industry professionals were
understandably less optimistic than in previous years, when growth
rates of 10 to 15 percent were seen as achievable benchmarks. Six
percent looks ambitious in 2009, even with the Reserve Bank of
Australia’s (RBA) policy interest rate sitting at 3.25 percent, and
probably reflects an unwillingness, even off the record, for wealth
managers to forecast declines in the wealth they are managing. Some
refused to make estimates altogether because of the difficulty of
forecasting what the economic environment will look like in 12
months’ time. But others were more forthcoming.

“This is not a year when we expect growth
of equities, real estate or many other asset classes,” said one
Australian private banker.

“It will be a buying year rather than a
selling year and there will be some good trading opportunities. But
I do not see a lot of wealth creation going on in the current
market.”

For a broad idea of the impact of the
downturn on the investment industry, industry asset values declined
by around 17.3 percent for the first nine months of 2008, according
to the most recent figures published by the Australian Bureau of
Statistics.

The current investment manager assets
figure – a bellwether for the country’s wealth management industry
– includes Australian and foreign investments in the country, spans
managed funds, life insurance, superannuation and a variety of
other asset classes, and currently stands at A$1.13 trillion ($858
billion).

If a similar decline had been seen by
Australia’s HNW clients – those with more than $1 million in
investable assets – HNW wealth would have fallen from $550 billion
to a level of around $455 billion as of the third quarter of 2008.
In the longer term, however, wealth managers believe the outlook
for the Australian industry is better.

“The fundamentals for the growth in the
wealth industry here are really strong,” said Michael Pillemar, CEO
and co-founder of independent wealth adviser Centric.

“We have an ageing population and economic
growth underpinned by an increasing population and good levels of
immigration.”

Maturing wealth
industry

The Australian private banking market has
been characterised as young and unsophisticated but highly
competitive, with companies pursuing various models to gain market
share. The majority of the retail banks operate private banking
services which they maintain are comprehensive offerings, while
rivals label them ‘red carpet retail’ services or ‘priority
banking’.

Interestingly, two of these banks, CBA and
NAB Private Wealth, have recently appointed former investment
bankers and product specialists as heads of their respective units
in an attempt to offer more institutional and global products to
their clients, while ANZ also has a former investment banker at its
helm.

Angela Mentis, head of private wealth at
NAB, set up NAB’s Specialised Investments business when she joined
the bank two years ago, which was created to widen the bank’s
product capability. She held previous investment and private
banking roles at Macquarie, Citi, Westpac and BT Financial Group,
the Australian wealth manager now owned by Westpac.

Edward Tait, a former investment banker at
Macquarie, is executive general manager for private client services
at Commonwealth Bank, though Richard Nunn, the head of its private
bank, has more of a wealth background. Tait said that in addition
to being able to offer more complex investment products and lending
structures, a key differentiator between the big domestic banks was
customer service.

“The level of expertise on the advisory
side is generally quite weak in the banking area… we’re an
egalitarian society and the idea of a business built on a strong
customer service ethic is probably a bit lacking [in Australia],”
he said. “We think there is a great opportunity in this area –
everyone says they provide this type of customer service but it’s
still actually quite rare, which is why we’re looking at improving
the intellectual horse power in our advisory business.”

Beyond that there is a vast array of
independent wealth managers and financial planners, of which
Centric is the largest.

“The retail banks have taken some big
strides in private banking over the past decade, but their
capabilities are still essentially a retail red carpet banking
service,” said an industry source. “They have been broadening and
deepening their value proposition but their strength is still in
banking. Competitors will always struggle to compete against them
on the banking and lending side, but when it comes to strategic
planning, risk insurance, advice and bringing it all together with
the accounting, they still have a way to go.”

The investment banks tend to focus on
wealthier clients, with AuM thresholds from A$10 million at
Deutsche Bank up to A$50 million in the case of Citi (though its
says its “sweetspot” is clients with more than A$250 million).
Macquarie, the domestic investment bank, has a wealth threshold of
A$4 million. Credit Suisse and UBS have lower thresholds, but say
the services they offer are subject to a segmentation approach.

“The market varies between priority
private banking and true private banking,” said Ray McGregor, head
of private banking at Credit Suisse.

“A large number of Australians have money
in these priority banking services. That’s a competitive market and
the local banks are good at it, but it’s not true private banking.
In the same way as we don’t compete with the retail banks in the
checking account space, they don’t compete with us at the upper end
of private banking. We’ve got access to more platforms and products
which allow clients to better diversify their risk.”

However, while it appears not to be the
case with Credit Suisse, which has invested heavily in its private
banking infrastructure in the country since setting up shop in
2007, there are signs foreign banking groups are scaling back their
operations.

Citi has shifted its private banking focus
in Australia, and is increasingly serving clients from its
Singapore Investment Centre (see A return to suitcase
banking?). It has also pushed its offering further up the
wealth ladder, increasing its wealth threshold in the country from
$10 million to $50 million in the last two years. While there is
little evidence this is happening at the other international
players in the country, Pillemar, at Sydney-based Centric Wealth,
said problems back home for the overseas players had opened up
opportunities for domestic businesses.

Recruitment

This is particularly the case in the jobs
market, with traditional shortages in the supply of skilled client
advisers moving into surplus. Jobs in the Australian wealth
industry have been hit in much the same way as in other countries
across the world, with layoffs both at the international banks and
domestic players.

While it is unclear from the PBI
survey, there is evidence to suggest some wealth managers are still
hiring staff. At least three of those spoken to in the course of
the survey said they were actively hiring, one of them a foreign
firm. Perpetual, the largest custodian of philanthropic trusts in
the country and a A$7.7 billion-asset private bank, was one of
these. CEO John Nesbitt said he was looking to quadruple the number
of client-facing advisers in its private client division from the
current level of 80.

“If we’d tried to do that 18 months ago,
it would have been a difficult task, but there is far more
opportunity in the jobs market now” said Nesbitt.

Consolidation

As the survey shows, the market for
true private banking services in Australia is dominated by a few
major players. But beyond that, there is a huge industry advising
private investors in Australia, from stockbrokers, investment
banks, and financial planners to wrap platforms. There was a round
of consolidation in the industry at the turn of the decade, when
domestic banks tried to strengthen their wealth offerings by buying
up niche wealth management businesses. BT Financial Group was
bought by Westpac, Colonial First State was acquired by CBA and MLC
was bought by NAB in the space of a couple of years.

“It would seem likely that the current
challenging financial market conditions may see a move to greater
consolidation,” said one private banker. “Increasing demands from
regulators – from capital requirements to meeting new regulatory
standards – would suggest that the cost of doing business is
increasing and therefore some business may need to change, adapt or
merge.”

Leverage

Australia’s private banking market,
as in the US, is known for its clients’ appetite for leverage.
Sophisticated lending products are an important part of the private
banking menu, and PBI understands that some banks earn as
much as 80 percent of their revenue through lending products.

Part of the attraction for this is
high tax rates in Australia, which bankers said may explain
relatively high levels of lending and leverage in the Australian
market. Clients look to improve return on equity by leveraging
investments, which is needed to overcome higher levels of tax in
Australia compared to other countries, particularly in
Asia-Pacific.

“Tax rates are so high in general, just about
every investment decision we make here would need to consider the
pre- and post-tax outcomes,” said McGregor at Credit Suisse.

“Gross and net returns can be substantially
different and if you can use a product which has a good tax
deduction, then that can look very attractive. That’s completely
different to somewhere like Singapore, where the gross and net
investment decision becomes less relevant.”

Various private banks recently ran a product
which allowed clients to buy a put option on a stock and at the
same time purchase the underlying stock with debt as a way to
protect themselves from a decline.

The put and the loan could then be used as a
valuable tax deduction, though the structure has recently been
reviewed by Australian regulators and the benefit for clients and
the banks, which could make impressive profits from the sale of the
product, have been watered down.

Regulation

Superannuation, which bears
similarities with the 401k plan in the US and Individual Savings
Accounts in the UK, has a big impact on how consumers manage their
money and consequently the services private banks offer to them. It
is a compulsory scheme, where employers by law have to pay a
proportion of wages and salaries, currently 9 percent, into a
superannuation fund, which can be accessed at retirement.

Prescribed private funds – trusts which
businesses, families and individuals can make tax-deductable
donations into – were introduced by the Australian government in
2000, an area in which Myer Family Office, the country’s biggest
multi-family office has been particularly active.

The government has also moved to licence and
more closely regulate margin lenders following a controversy
involving Storm Financial, a retail wealth management business.
Some Australian banks, including Macquarie and HSBC Australia, have
exited their margin loan businesses as the cost of funds started to
increase.

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