Under the topic "Changing business models to capture the new reality" at the PBI Wealth Summit 2012, the panel discussed the impact of new competitors, business models and technologies on Asia’s private banking industry. Mario Bassi shares his key takeaways from the session.
Ray Soudah, founding partner & chairman, at Millennium Associates, predicted a dramatic increase of mergers and acquisitions (M&A) in the wealth/asset management sectors, opening opportunities for banks with strong balance sheets to acquire foreign banks’ assets and operations, especially in Asia. He pointed out: "M&A valuations for private banks are not commanding a premium to book value; some even offer discounts."
When asked about which the composition of future M&As in the region, Soudah said that it was "most likely that the sellers are European or American given their problems back home. The most likely buyers are Asian national/regional/local banks or independent private banks like Julius Baer and Bank Sarasin, which are not plagued by any balance sheet issues."
As the private banking industry has lost some of its prestige over the last years, private banks need to continue to rebuild the trust and respect of their clients and the general public. As a result private banking business models need to change to capture the new reality believes Dr Mario A Bassi, head of Asia Solution Providers Management Consulting.
He said: "Private banks need to refocus on profitable and sustainable growth. Currently, only 9% of private banks achieve at least 10%revenue growth with a cost/ income ratio of less than 60%; the majority of banks (70%) have a cost/ income ratio of more than 60%. The average cost/income ratio for a Singapore/ Hong Kong bank was forecast to be 82% in 2011; it is currently more likely to be 88%-90%."
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Bassi suggested that a key consideration for the next generation of private banks was for them to engage and collaborate more closely with specialists, such as external asset managers (EAM). Contrary to private banks, EAMs align their goals closely to those of the client and provide unbiased advice in the best interests of the client. By taking this approach, they avoid the perception that they are putting their own interests before those of the client.
Also, EAMs know that they will only do well if their clients do well.
This is supported by recent research conducted by Solution Providers showing that the success of the EAM business model is highly correlated to client-centricity.
Asked about the increasing competition for private banks from EAMs, Bassi assured that private banks had little to worry about. Using Switzerland as an example, Bassi argued: "EAMs have been in business there for about 30 years, but their market share is still only about 13% of the total market. While it may be foreseeable that this number grows to about 20%, the EAM model will not take over the banks’. They are the new kids on the block, a new player in the market. Either ignore them as a bank or see it as an opportunity to work with them and become relevant."
Other findings from the Solution Providers research indicate that EAMs generally manage fewer clients than a private bank, enabling them to provide higher-quality service to their clientele. This allows them to charge a premium for their services and as a result achieve lower cost-to-income ratios. A high degree of openness and transparency on fees, the rationale for advice and other available options also helps EAMs to earn their clients’ trust.
Bassi explained that 85% of EAMs interviewed have set up office in Singapore, with most having some sort of Swiss heritage.
EAMs’ assets under management in Asia are mostly less than $200m (62% of respondents) or between $400m-$800m (33%), and typically their clients tend to be Asian, followed by Europeans and lastly, Americans.
Nick Kalikajaros, regional solutions director for Private Wealth Management APMEA at Temenos, also highlighted the need for developing a client-centric business model for private banks and wealth management firms. He felt the need to invest in technology to drive higher customer engagement as optimising the client-facing time is a very strong revenue enhancement lever. Banks need to enable the success of the relationship manager and change their value proposition in terms of service and offerings, while managing costs and accepting regulation as part of their everyday life.
When moderator Michael Lagopoulos, deputy chairman of RBC Wealth Management, asked about the right benchmark to strive for in terms of technology improvements, Kalikajaros replied: "The conversation around technology used to be ‘What’s the return on investment on technology?’
The financial crises probably changed things. To buy a platform was really not that difficult a decision, but now, the conversation comes two-fold: ‘What’s the ROI on making that capital allocation?’ and ‘What’s the level of risk taken on by making that decision?’"
Asked about digital strategy, Kalikajaros felt that private banks or wealth management firms should "not rush it, but think about it and be very clear and focused about what client segment you want to target as part of your digital strategy".