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Economics & Finance

Further consolidation seen in private banking sector

Kevin Tan |

Even as the global economic downturn continues to ease, there will be further consolidation in the private banking industry amid cost-cutting efforts and falling revenues, says Pierre-Francois Baer, SG Private Banking’s CEO for Singapore & South Asia.

Indeed, the model of private banking is set to change following tremendous growth in the industry over the past five years, which has led many banks to pursue the brokerage sales model to drive revenue growth.

In Baer’s view, the industry needs to “take a step back” to rethink its business strategy as banks grow and consolidate their client base. “It’s not just the clients that decide which banks they choose,” says Baer. “But it’s also a time where the banks have to decide which clients they want to have as clients.”

Baer’s comment underscores the need for banks to retain high net worth clients to sustain profitability, while shifting away from being the wealth managers of clients who do not meet the minimum investment requirements.

According to a survey published by PricewaterhouseCoopers (PwC) earlier this month, about 60 per cent of private banks based in Asia saw their assets under management decline by more than 20 per cent in the 12 months ending in March.

Furthermore, industry profit margins are now ‘negligible’, as opposed to around 30-40 per cent during the years preceding the financial crisis, according to PwC.

Nevertheless Asia will remain a financial honeypot for the private banking industry, as analysts reckon that economic growth in Asia will be stronger than in the US and Europe in the next few years. For instance, the wealth of rich Asian individuals is reportedly set to grow at a compound rate of 12.8 per cent in the five years to 2013. And according to the 2009 World Wealth Report by Cap Gemini and Merrill Lynch Wealth Management, the number of people in China with investable assets of at least US$1 million last year outstripped that of the UK.

For now the challenge for the private banking industry is to rebuild the trust of clients who suffered financial losses buying products they did not understand on the advice of their bankers, says Baer, speaking recently at a Foreign Correspondents Association luncheon in Singapore.

Alluding to the catastrophic losses of Lehman-linked structured products, which were widely distributed by the banking sector, Baer says investors were pushed to buy products by their bankers who placed their own interests and those of their banks ahead of their clients’.

The basic role of private banks, says Baer, is to maintain and grow the wealth of their clients and help pass on the wealth to the next generation. But private bankers have lost sight of their mission.

“In the mindset of the industry today, how much money your client makes is not the key point,” says Baer. “The key point is how much money did you make for your organisation and how much do you want to make for yourself? And that’s where it has lost track of itself.”

Baer adds that in the last five years many joined the private banking sector for the wrong reasons, such as the glamour associated with the industry and the potential to make a lot of money, abetted by the desire of banks to grow their private banking business very quickly.

On a separate note, Baer expressed cautious optimism about the economic outlook, noting that there is a slow recovery underway that’s being bolstered by the “confidence and optimism” that US President Obama has helped instill in the global markets.

So while the risk of a depression has been avoided, no L-shaped or V-shaped recovery is in sight, says Baer who remains cautious about the economic outlook for the next two years.

In terms of investments, Baer says corporate credit remains attractive but he is not as bullish on government bonds, as governments will have to issue more bonds to help stimulate economic growth.

Baer is neutral on equities, adding that he prefers equities from emerging markets, which he thinks will continue to perform well. He also favours emerging market currencies, particularly Asian currencies. In contrast, the US dollar is facing a trend of long-term devaluation, says Baer.

Baer adds that he expects oil prices to hover around the US$70 a barrel level for the next 12 months and for the price of gold to reach US$850 an ounce.

When asked if private banks are now hiring more selectively as economic recovery takes hold, Baer says banks are turning away from the idea of hiring people with no financial background but who may know high net worth people.

Previously, banks thought it was fine to hire such people as they could be given training in sales and product knowledge, but banks are learning that “it doesn’t work that way”, says Baer.

“Even if you’re in the symphony orchestra and you know somebody, it doesn’t mean that somebody will give you money to manage, so that’s what some of the banks had to learn.”

Baer adds that it takes longer for clients to feel comfortable about handing over their assets to newcomers to manage.

When asked whether the private banking industry is shifting away from providing expensive expatriate compensation packages, Baer says that some “still exist but they are dying.”

“I think the industry has moved to a total compensation model. What does that mean? All the costs.”

“How much do I cost the organisation? So we don’t really care whether you have 10 kids or one or not. Whether you send them to the local school or for free or to whatever school. This is what you cost me as an organisation. So what can you do for me for that price?”

By using the total compensation model for comparison, Baer says it’s easier for banks to make quicker hiring decisions. He adds that increasingly more Europeans are willing to relocate to Singapore on local compensation packages, drawn by stronger career prospects in Asia.

“The tendency is to do a lump sum payment, for them to pay whatever they want to pay however they want to, and also some people, particularly young people who see more opportunities in Asia, are willing to take a local package.”