The great global private banking expansion party has been the one everyone wanted to come to. Now the hangover, as banks increasingly count the cost of the growth of recent years, particularly in Asia. Closures and pullouts mark the new mood of sobriety. John Evans takes a look at global consolidation across the industry.
Despite the global financial crisis of 2007/08, banks large and small have been bankrolling active growth in their private banking operations at home and abroad in recent years. Asia in particular attracted much of the investment in new networks and advisory workforces.
One factor driving the growth was that banks figured that private banking, which doesn’t require huge amounts of bank capital, was a relatively efficient way to find new business, particularly among wealth business figures who could bring in other revenue generators, like corporate finance deal-making.
Now, a growing list of closures, sales and cutbacks in private banking are signalling that the heady days of pell-mell expansion are over, triggered by factors like steadily escalating costs of meeting regulations and the assault against tax evasion, along with the spiralling costs of trying to build market share.
"It is clear there is a hangover from pre-crisis expansion," says Christopher Wheeler, analyst with Mediobanca Securities who says banks are now careful about picking what are truly "core" operations. "With gross margins under pressure, to maintain returns at the pre-tax margin level, costs are the key."
So cutting businesses "with a lack of scale will help with the cost story", he asserts.
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Among the banks now retrenching, the most surprising is France’s Societe Generale, a bank famous under its former private banking CEO Daniel Truchi for nailing its colours to the mast for growth. The bank hasn’t officially commented, but it is understood to have put its Asia wealth business up for sale. If confirmed, SocGen would be one of the biggest banks to exit Asia-Pacific – see sidebar.
It is widely known in Singapore that few foreign private banks make money in Asia wealth, due to high overheads, cost of hiring qualified advisers and the growing regulation. Many millions have been spent on building capacity in the region, as banks and investment managers have seen high net worth assets in Asia accelerate at much higher rates than the US and Europe in recent years.
Still, the growth in Asia-Pacific seems bound to continue. The Asia-Pacific region is poised to become the largest wealth market as early as 2014, far outpacing other geographies, according to the latest survey by Capgemini and RBC Wealth Management.
None the less, the SocGen divestment may prove a watershed, persuading other banks that profitability in Asia is going to prove tough to achieve in the foreseeable future — whatever the growth story.
For example, India, a notoriously tough market in which achieve margin, seems to be a pointer to things to come.
Australia’s Macquarie Bank has become the latest firm to pull out ofIndia after selling its 50 percent stake in the joint wealth venture, Religare Macquarie Wealth Management, to its Indian partner, Religare Enterprises Ltd.
Even UBS reportedly began winding down its wealth management and commercial banking businesses in India earlier this year. This follows its decision to surrender its banking licence in India, a move driven by a reassessment of business strategy in the face of new regulations and stringent capital rules, according to Mumbai reports. Its wealth operations are understood to be loss-making.
The latest withdrawal may prove to be J. Safra Sarasin Group, said to be closing its Indian wealth joint venture after being unable to build sufficient scale after three years of trying. The venture, Sarasin Alpen is owned by the Swiss bank and Dubai-based Alpen Capital.
Other withdrawals from India include Morgan Stanley, which sold its local wealth management arm to Standard Chartered after deciding a broad retrenchment of its international business.
Apart from Asia, other banks have announced swingeing cutbacks as they bite the bullet on larger businesses that they used to think should turn out to be profitable.
For example, Credit Suisse has just confirmed it is losing CHF60 million or more on its US wealth business, which is responsible for a hefty fifth of overall assets under management. As a result, the bank’s pretax margin is being depressed by an estimated four to five percent.
Big bank cost control programmes hitting the headlines currently include:
– Credit Suisse Private Banking has confirmed plans to withdraw from a reported 50 countries which it considers unprofitable, while it ploughs forward with plans to orientate its business towards an ultra high net client base. It’s exiting from a number of markets where it either has too small a presence in or where the costs of doing business and regulatory requirements make it less profitable. Credit Suisse will also stop serving less wealthy customers in some Western markets where the bank does not have a large enough volume to serve small clients profitably. It is likely to pull out of mass affluent banking in Germany, for example.
– Barclays Wealth announced a new strategy involving stopping offering wealth management services in about 130 countries by 2016 and reduce jobs to rein in costs and boost profit."This is part of our new strategy, focusing on reducing complexity and competing where we can win," it said.The wealth arm will focus on 70 markets, which it estimates covers 86 percent of the global wealth market, and leave countries where it lacks scale or which are unprofitable. The number of its booking centres will be cut to about a dozen from 17.At home, Barclays will stop full-service wealth management for clients with between £100,000 and £500,000 of investible assets. They will be served by a "lighter touch" new segment called "Private Clients".
– Royal Bank of Canada. A bank which has rapidly grown internationally in the last few years is quietly exiting direct involvement across Latin America. PBI understands that it plans to exit all of its Latin American offices by the end of the year and will instead service Latin clients from Toronto, New York, Miami and Geneva. RBC is estimated to service more than $30 billion of Latino money from the various offices.RBC sources stress the bank has very successfully delivered on servicing the majority of its High Net Worth and Ultra High Net Worth Latin American clients from the British Isles, Caribbean, Europe and North America for more than two decades.
– HSBC. Another broad retrenchment has been set by HSBC, which was last year handed a $1.9 billion fine by US authorities for failing to maintain an effective programme against money laundering. Since then HSBC has been broadly implementing what analysts call a "de-risking" of the bank and well as countering costs. HSBC itself has so far exited or sold 54 businesses across the whole group to help improve profitability, as well as reduce exposures. It is understood to have put its Global Asset Management business up for review. Latest moves include the withdrawal of wealth management products in Bahrain, Jordan and the Lebanon. It also tried to sell its private banking operations in Monaco earlier this year, but apparently failed to find a buyer at an acceptable price.
– SocGen on the auction block.
Standard Chartered, DBS Group and HSBC have reportedly submitted first round bids for Societe Generale’s Asian private bank and its estimated US$13 billion under management.
SocGen declined to comment on their plans, which apparently hope to get around US$600 million from a divestment. That would imply a net profit after tax of $40 million–$50 million, a figure which many foreign banks in Singapore would find it difficult to aspire to say local bankers.
Still, SocGen has been usefully building its private bank in Asia over the last 15 years, and so would make a useful addition to banks seeking better scale for their business in the region.
The same considerations are impacting on other banks, particularly in Switzerland. The introduction of FATCA, the US legislation which imposes onerous reporting requirements on any bank with US clients, has persuaded a number of firms to give up their clientele. FATCA-style restrictions are likely to be adopted in Europe and elsewhere while the huge growth in tax information agreements (TIEs) also promise to make tax evasion problematic, analysts say.
Mediobanca’s Christopher Wheeler observes that banks like HSBC "are getting out of businesses which may have reputational risk….."