Offshore wealth management players are continuing to grow more slowly than their onshore equivalents. However, they still remain highly profitable, with a strong business model, according to the European private banking survey by consultancy McKinsey.

Onshore banks last year increased their assets under management by 15 percent, compared with only 9 percent for offshore players. Swiss banks performed slightly above average, with 10 percent offshore asset growth, after achieving more success in attracting customers outside Europe. Luxembourg’s assets grew 7 percent. Overall, offshore banks produced a profit margin of 35 basis points (bps) compared with 42 bps for universal onshore banks, 23 bps for other onshore banks and 11 bps for investment banks.

This offshore growth is especially challenging in Europe, where new inflows of European money to offshore booking centres remained low, McKinsey notes. It raises questions of the value a large offshore acquisition adds for players in search of growth.

Data taken from a subsample of Swiss banks clearly illustrates the importance of new growth markets. Europe represents approximately 60 percent of the stock of assets of these banks, but only 40 percent of the inflow. In contrast, the Middle East represents about 10 percent of the stock but 25 percent of the inflow. This underlines how the ‘country focus’ within the offshore and onshore categories affects growth prospects, the McKinsey survey found.

While high net worth investors from ‘old Europe’ still hold more than one-half the stock of offshore money in countries such as Switzerland, some players get more than two-thirds of their net new money from the emerging growth markets of Eastern Europe, the Middle East and Latin America.

Entry timing

For onshore markets, the timing of entry into a new market remains of critical importance. With a growth rate of 23 percent, Iberia grew more rapidly than all other European markets in 2006 and, after several years of impressive above average growth, private banks in Belgium grew at 18 percent, which is closer to the European average. The UK market grew at 24 percent.

Overall, the markets in the UK, Iberia, Belgium and Austria last year showed significant double-digit growth based on structural growth drivers, such as ultra high net worth growth and stock market performance. The onshore markets of Germany, France, Italy and the Netherlands each had absolute growth in the range of 10 percent to 14 percent.

The survey also sheds light on the varied nature of clients of European private banks, underlining that there is no standard high net worth investor across Europe. Slightly more than one-half of all private banking clients are over 60 years old, but another third is between 40 and 60 and the rest are even younger.

Although the clients who have assets of more than €10 million ($15 million) in any single bank are small in number, their aggregate assets nonetheless represent 40 percent of the total asset base of private banks. By comparison, the merely affluent clients with fewer than €1 million still represent 24 percent of the asset base.

Ultra rich

The very rich invest differently. Looking at the ultra high net worth clients with assets of more than €30 million, the survey indicates that they have a different investment risk profile than the standard high net worth individual segment. Not surprisingly, the ultras prefer higher-risk products. However, they still have a substantial need for advice – nearly 40 percent still delegate their investment decisions to the private bank or pay a fee for an advisory mandate, which is nearly as much as that observed for the remaining high net worth investors.

Country differences also exist in private banking. There is clearly no single European investment profile. Equity cultures are different, as high net worth individuals invest more than 40 percent of their assets into equity in the UK, Spain, Portugal and the Netherlands, but less than 28 percent in Austria.

There is also a difference in the split between high net worth clients who favour discretionary advice and those who prefer advisory services. While discretionary mandates represent one-third or more of the assets in Belgium, Italy, Spain, Portugal and the UK, they represent less than 20 percent in the Netherlands and Germany.

McKinsey found that, unsurprisingly, the breadth and depth of product range of wealth players matter. Basic banking and investment services typically account for only three-quarters of revenues. “Additional revenue streams for lending, structuring and insurance products significantly enhance the profitability of the strong performers,” it said.

Lending is a sizeable part of the product offering for many players, a fact that McKinsey notes is sometimes overlooked. Forty-five percent of loans are for clients with assets over €2.5 million, typically representing 6 percent to 7 percent of the client’s assets and partly advanced as mortgages.

These lending products not only have attractive margins but, more importantly, increase client retention. This is particularly advantageous for universal banks that generally have a broader product base and are more comfortable with handling the credit processes associated with lending.

Nonetheless, individual players often fail to go beyond the natural strengths of their business model. Universal banks have a higher penetration of lending products – 12 percent of assets – than investment banks, for which the figure is just 6 percent.

This also holds true for investment products. Universal banks place 5 percent of total assets in structured products compared with 0.5 percent for investment banks. On the other hand, the penetration of hedge funds is 9 percent among investment banks but less than 5 percent in universal banks.

“Proactively shaping and evolving the model and product offering will therefore have a major impact on profits,” McKinsey concludes.