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01/30/2013

Towards a new private banking

After almost 5 years of financial crisis, one could assume that private banks would struggle to maintain their client basis. Indeed, the number of millionaires did fall during the crisis and their fortune decreased. But - as astonishing as it can seem - the number of millionaires as the total amount of their assets have never been as high as nowadays. Nevertheless, private banks are facing major challenges due, among other, to the post-crisis environment and the new distribution of the wealth among the world's population. The consequences of this new environment could reshape the face of the industry globally as well as in Belgium and Luxembourg.

High Net Worth Individuals

Every study presents a growing number of HNWI (High Net Worth Individuals), i.e. millionaires in USD. These happy few were more than 10 million in the world before the crisis. The richest among us also suffered from the crisis which induced a drop of 15% of the number of HNWI in 2008. But the number of HNWI quickly came back to its pre-crisis level in 2009 and kept growing since then. Today, the World Wealth report identifies more than 11 million of HWNI individual around the globe.

The total wealth of the richest of this planet also quickly reached back its pre-2008 level (around $41 trillion). The richest's fortune nowadays is estimated around $42 trillion.

While the global numbers tend to describe a resilient and calm world for the HNWI, the regional tendencies indicate big changes in the market. Even though North America still concentrates the biggest part of the HNWI's wealth, it has been overtaken in 2011 - for the first time - by the Asia-Pacific region on the race for the highest number of millionaires. More revealing: while the millionaire's growth rate in the old world (Europe and North-America) is contained between 1 to 3% for the last 5 years, the Asia Pacific region saw its millionaire's population boom with a growth rate of above 20% for the last 5 years.

In Belgium, around 80 000 millionaires enjoy a total capital of €300 billion. The wealthy population is following the global evolution of the European with a growth rate of 1.7% in 2011. Luxembourg concentrates 6% of the international private banking activity with a total of asset under management of €330 billion.

Markets and players

Even though the basic structure of their clientele is evolving fast, the private banking business is still dominated by North American and Swiss players. The financial crisis triggered a consolidation movement which has made appear new names among the top 10 while reinforcing the position of smaller players. While it did not even appeared in the Top 10 before 2007, Bank of America is now the leader of a very active market. Wells Fargo (acquisition of Wachovia), RBC (acquisition of Fortis Hong Kong wealth management) and BNP Paribas (acquisition of Fortis and BGL) have also taken advantage of the crisis to enhance their position in the market.

In Belgium, as in the usual retail banking market, the biggest four banks attract the biggest part of the HNWI clientele. They capitalize on their large and broad network among the country to catch and retain the wealthiest individuals in each region. Together they represent more than half of the wealth of the Belgian HNWI. However, the domination of retail banks in the private banking business is a recent phenomenon. Before the years 2000s, retail banks did not develop a private banking offer per se. Instead, the HNWI among their clientele were mainly in the hands of personal bankers from a local agency who managed their assets using the usual offer from the bank and not a dedicated one. This kind of offer used to be the privilege of smaller historical players that developed their private banking activity from scratch (as Puilaetco Dewaay) or based on their asset management division (Degroof, Petercam or Delen). These historical players still represents a large proportion of the private banking industry in Belgium.

During the last 10 years, Belgium has also seen the emergence of new players usually designated as family offices. These offices specialize in providing dedicated support to wealthy families by providing special services not always found among other players (succession planning, philanthropy...)

The Luxembourg market of private banking is one of the most active in Europe. With 56 private banks the Luxembourg's financial industry derives a consequent part of its revenue from this activity. The local market is dominated by foreign players, which attracts clients from all over the world thanks to the Luxembourg regulatory framework. This framework guarantees privacy and the competence center they built regroups the most qualified specialist of the industry. Built on the advantages of the banking secrecy and a developed financial center, Luxembourg has been the central place for private banking in Europe for a long time. However, the country now faces the same serious challenges as the entire industry.

Private banking renewal

The client base of private bank grows constantly but the trust it places in the manager of their assets has been severely hit by the crisis. Private banks have, as the entire financial sector, lost part of the confidence of their clients and need to adapt their global approach to catch new market shares. Special attention must be given to:

  • Segmentation of clients to identify their most profitable clientele;
  • Product offering which must provide the client with transparent, flexible and suitable products;
  • Relationship management with a focus on the service quality and the training of CRMS;
  • Prospection through a dynamic distribution network fit to the client targeted.

The decreasing margins and the operational conditions of private banks require them to improve their operational efficiencies. In order to present decent levels of profitability private banks have no choice but to decrease their cost of operations while increasing their assets under management. A balance must be found between the absolute need to improve banks system and operations and costs cuts to achieve the best efficiency.

As for the financial sector in general, regulation having impact on private banks has flourished post 2007. MiFid II, FATCA, Basel III, Rubik agreements and many others will impact the day-to-day business of private bankers. Changes will have to be made in the way private banks operate but answering the different regulations without a deep strategic analysis will drive private banks down. Instead, banks will have to concede large investments and adapt their business models following a new strategy to come out as a winner out of the regulatory changes. This is especially true for the Belgian market where one private banker out of three has not started implementing the new regulatory requirements yet. In Luxembourg, it is the global fight against banking secrecy that challenges the private banking activity the most. The Luxembourg's place is being redefined following the new rules of transparency and it faces now new competition of more exotic financial centers.

Finally, private banks will have to adapt their business model to new challenges and develop their presence in the emerging markets to attract new clients. While many might be tempted to simply export their expertise and knowledge, business models and product mixes adapted to the local market conditions will be the key to become a leader in these new regions.

Sia Partners


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