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April 17, 2009updated 04 Apr 2017 3:56pm

Onshore models become key as margins are squeezed

Onshore business models are becoming vastly more important for private banks in 2008 as they seek to expand their businesses because of eroding profit margins As client preferences have shifted from structured, often complex products, to more vanilla offerings and assets under management have fallen, banks have been forced to review their cost bases and look at new business models. UK-based SG Hambros is one bank which is starting to reap the benefits from an onshore drive it started in 2007

By PBI Editorial

Onshore business models are becoming vastly more important for private banks in 2008 as they seek to expand their businesses because of eroding profit margins.

As client preferences have shifted from structured, often complex products, to more vanilla offerings and assets under management have fallen, banks have been forced to review their cost bases and look at new business models.

UK-based SG Hambros is one bank which is starting to reap the benefits from an onshore drive it started in 2007. The private bank, a subsidiary of SG Private Banking, opened branches in Edinburgh and Manchester earlier this year, adding to existing locations in Yorkshire, Cambridge, Milton Keynes and Southampton.

Its parent company, Société Générale, through its SG Private Banking subsidiary, is following suit in France, expanding in Bordeaux, Marseille and Lyons, having previously been based solely in Paris.

“There are ways to address declining profitability, both through managing the cost base and attracting more business,” said Phil McIlwraith, group commercial director at SG Hambros.

“Industry returns on assets under management will reduce, but if you can increase client numbers, you can maintain or grow profitability. The days of making stellar returns are over – we’re making just over 100 basis points on assets under management currently, which is good but not excessive. Selective expansion, particularly through the onshore business, will be an important part of our strategy.”

While Asia is seen as the best region to expand organically by the global wealth managers, there are many European-based private banks that still believe their own markets offer opportunities for asset gathering with the effective use of local knowledge. Domestic markets are still fractured, they say, and opening regional branches is seen as a method of building better relationships with local clients.

“In the UK, like many fairly prosperous countries, clients outside of the main centre can feel overlooked and unloved – and a purely London-centric approach does not go down well at all,” said McIlwraith.

“The interesting thing about the UK market is that it’s still quite fragmented and there are lots of wealthy individuals who do not use a bank like us. They may have a historical relationship with a retail bank and not know or appreciate what a proper wealth manager can do to help them. The challenge is to get the message out there.”

 

MARGINS

Gross margin – model private bank

Asset class

2009E(1)

Gross margin

Accounts, money markets, fiduciaries

18

20

Alternative assets(2)

7

180

Third-party funds

8

90

Bonds

21

50

Equities

25

100

Investment loan finance

6

100

Own funds

15

150

Blended gross margin

 

88

E=estimate. (1) share of total profit; (2) structured products, hedge funds, private equity and commodities.

Source: Company data, UBS estimates

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