Wealth management is an attractive business in comparison with the other lines at the big global banks, new research contends. One key factor is that wealth advisory requires much less capital under the Basel III regime as still-anaemic banks seek to regain past profitability.

New analysis has confirmed that wealth management provides significant expansion potential for the banking industry. A rebound in revenues from current low levels makes wealth advisory much more promising than investment or retail banking, according to Kian Abouhossein, the widely followed European banking analyst at JP Morgan Cazenove.

The only banking business with this "structural growth outlook" is wealth management, he asserts. While the revenue environment in wealth management is still depressed, after the financial crisis hit in 2007, this should turn out to be "purely cyclical".

And while there are some headwinds for the wealth industry, chiefly from tax treaties and regulatory pressure on cross border/offshore businesses, "we expect the impact to be manageable for the larger players," JP Morgan Cazenove’s Global Banking report contends.

In fact, these structural changes have an upside, his analysis argues. They could lead to ongoing consolidation in the fragmented wealth management industry, especially in Switzerland, with smaller players which have until now relied on offshore banking models "likely to struggle in the new regulatory environment".

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UBS, Credit Suisse and Citi likely "winners"

Global wealth managers like UBS, Credit Suisse and Citi are the likely "winners" in the long term, as they have scale with multiple global booking centres. They are also willing to make strategic ongoing investments to adapt to the new business model through increased onshore presence, IT investments, adviser acquisition and diversification into higher margin products, the Abouhossein scenario suggests.

His analysis points to the fact that the wealth management industry remains highly fragmented. The Top 20 wealth managers account for about 50% of the assets under management (AuM) ‘wallet’. No single player held more than 10% of this estimated $11.5trn wallet in 2011 (see chart).

As a result, the trend of industry consolidation is expected to continue as global players take higher market shares at the expense of smaller players, particularly those more reliant on the beleaguered offshore model.

The increasing number of tax treaties between nations and requirements for compliance in individual geographies mean higher investments in training for financial advisers, along with better operating platforms which Abouhossein believes "can be leveraged by the larger players with the scale of operations to make the investments economically viable".

Another factor favouring wealth management is the loyalty of clients. Private banking is a "very sticky business", in the analyst’s view. This is evident from the manageable outflows in UBS Wealth Management of about CHF200bn, or only 15% of invested assets, seen during the crisis years of 2008- 2010 when the bank had to be bailed out by the Swiss state.

As for the global wealth management market itself, the Morgan analyst sees global AuM in private banking growing at a compound annual rate of 4%, from $33trn in 2010 to $40trn in 2015, driven in particularly by Asia-Pacific and other emerging markets such as Latin America.


Being exposed in emerging markets

In addition, the ultra high net worth (UHNW) client segment will continue to remain the segment with fastest growth potential, helped by the recent quantitative easing measures undertaken globally by central banks which should drive asset inflation, thus benefiting the UHNW clients.

UHNW AuM is expected to grow at a CAGR of 7% from $4.5trn in to $6.3trn in 2015 globally, increasing its share of global AuM from 13% in 2010 to 16% in 2015.

As wealth management shows fastest growth in the emerging markets, UBS and Credit Suisse are expected to be the main beneficiaries, after investing to open up new booking centres.

Credit Suisse, for example, had a total of 23 booking centres as of 2011, and has indicated that about two-thirds of net new assets were in booking centres outside of Switzerland in the past few years. UBS has 13 wealth domestic locations in the Asia-Pacific region.
The analysis goes on to attack the conventional wisdom that integrated players like Credit Suisse, UBS and Morgan Stanley have an advantage in a full-scale investment banking business.

By contrast, "pure play" private banking players such as Julius Baer have remained largely unaffected by the increased Basel regulation and have focused on improving their value proposition to their client base.

"We have advocated a more aggressive scale back of the investment banking divisions of Tier II…players like UBS, Credit Suisse and Morgan Stanley as we believe the arguments in favour of running a full scale investment bank to support the wealth management client base are overstated," Abouhossein concludes.