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04/11/2016

Wealth Management Growth in APAC: Which banks will come ahead?

This year, Asia Pacific is set to overtake North America as the largest market for High Net Worth Individuals (HNWI), and 5 APAC countries will reach the top 20 markets for this segment by 2018. This explains why Private Banks are shifting their focus east wards.

The APAC region, however, requires a specific approach: its main source of wealth is first-generational and entrepreneurial with, 41 percent of millionaires below the age of 45 compared to 20 percent in Europe. These business tycoons are discreet and conservative, in stark contrast to their heirs. This ‘bling dynasty’ of second generation rich (called ‘Fu’erdai’ in China) maintain flashy lifestyles and like to fly private jets, charter helicopters, pop Moet & Chandon Champagne bottles and park their Gucci bags in the trunk of a ‘double R’ (referring to Rolls Royce).

Which Private Banks are set to profit from the generational shift taking place in the region? How will they stay relevant in the face of maturing client expectations, technology and regulation changes – all of which continue to drive upwards the cost to income ratio (CIR) of the sector?
With an estimated 80% of wealth in Asia still not under professional management by wealth managers, there is clearly a large incentive to win the hearts and minds of the APAC wealthy.

Sia Partners is laying bare the risks and opportunities facing the different kinds of Private Banks and how each one can capitalise on its specific strengths to capture the crown of Wealth Management in Asia.

1.    The most prized Private Banking clients in Asia 

As explained above, the Asia Pacific region has a higher concentration of some specific type of Private Banking clients. Wealth managers evaluate their future success depending on the ability to attract the following categories of HNWI:

  • Business tycoons and families (including second generation HNWIs) – The business tycoons are usually financially conservative: their main objective is wealth preservation and inter-generational wealth transfer. As a result, they are interested in estate planning, trusts and family office services. Unlike the entrepreneurs, they like to separate their personal wealth from the business and exercise control over investment decisions. The Asian HNWIs in this segment are in the process of passing down or have already passed down wealth; giving rise to the second generation HNWIs who are also interested in preservation of wealth to ensure a sustained lifestyle and further transfer of wealth. Both of these type of clients require services to understand the new mindset which comes with these generational transfers – helping them navigate this shift can lead to the holy grail of Private banking, i.e. managing the wealth of a High Net Worth family across generations.  

 

  • Self-made first generation entrepreneurs (still involved in their business) – are the new age technology entrepreneurs or business owners who have created their own wealth. Unlike the business tycoons, their risk appetite is relatively higher as they have taken/take risks in their businesses on a day to day basis. However, a major part of their personal wealth may often be tied to their business. As a result, the focus of banks is to provide loans, assist in raising funds (debt and equity) and provide Corporate Banking solutions for the entrepreneur’s business. This not only generates immediate profits in the form of fees, but also creates a strong client relationship for future business on the Private Banking side. The entrepreneurs are usually more willing to let go of the control over investment decisions as they want to focus efforts on their core business.

 

  • Self-made first generation entrepreneurs (sold their business and have liquidity) – these are entrepreneurs who have sold off their businesses: they are flush with liquidity and are looking for good returns, which in turn makes them willing to take some risks. These must remain calculated risks as the new cash-rich millionaires still want to preserve their wealth and ensure safe inter-generational wealth transfer down the line. In most cases, the individuals in this segment exercise control over the investment decision making process: they are both curious to understand in detail what will happen to their fortune, and have time on their hands to do so.

 

  • Senior Executives – despite regulations and protests around the world on Senior Executive compensation, an increasing number of senior executives fall in the HNWI/UHNWI category. They are salaried employees who have risen the corporate ladder in Banks (especially in the golden era of banking in the 1990s and early 2000s) and Multi-National Corporations and are looking for returns on their hard earned money. In most cases this is for retirement purposes which usually leads them to be low to medium risk takers. 

2.    The contenders for the prize: different Private Banks

Based on their size, nature of business, geographic presence and value propositions, Sia Partners classifies the Private Banks into 3 categories: Universal Banks, Local Banks and Pure-play Private Banks. Each one has different business model with its own strength:

  • Universal Banks (e.g. Credit Suisse, UBS) – due to the continued growth in the HNWI market and slowdown in other lines of businesses, particularly Investment Banking, the Universal Banks are shifting their focus and efforts on the Private Banking and Wealth Management business (see the position of Credit Suisse in the insert). Their main strategy is to provide a cross-offering of Private / Investment / Corporate Banking products.
    An example for the entrepreneur segment could be raising funds in the equity and debt capital markets for the underlying core business of the client, combining this with Corporate Banking solutions in order to provide Wealth Management offerings and services at a time in the future.

 

The investment bank is there primarily to support our ambitions in the private banking and wealth management, […] shifting the focus from short-term trading activities to capturing longer-term fee opportunities

Credit Suisse CEO Tidjane Thiam, November 19, 2015

 

  • Local and Regional Banks (e.g. Bank of Singapore, DBS) – for a long time, local players were heavily involved in the retail business and had managed to build a big customer base in this area. As their retail client base became more affluent, the expectations in terms of products and services offered increased as well. As a result, the banks in this category have the opportunity to rise to the occasion and capitalize on their existing customer base. This has sometimes been done by acquiring the Private Banking know-how through acquisitions: OCBC (Bank of Singapore) acquired ING Asia Private Bank for example, while DBS bought the Private Banking Asia arm of Société Générale. These investments in skills, capabilities and expertise as well as a broader product offering in the wealth management area are now poised to deliver results with DBS rising to Number 8 in the list of Largest Asian Private Banks in terms of AUM. 

 

  • Pure-play Private Banks (e.g. Lombard Odier, Pictet, BSI) – have focused on their core business of private banking, and are known to have a clear service as well as a product offering without any conflicts of interest found in other banks. In order to achieve the same level of success they have in the West, these banks are capitalizing on their brand while adapting to the more transactional nature of the clients in the region. Understanding that an increasing number of clients are favoring the boutique banks for their ability to achieve a pure open architecture and for having a strong brand and independence, some of the most well-renowned pure-play banks such as Union Bancaire Privée (UBP), Lombard Odier and Pictet & Cie have recently hired new Managing Directors in Asia.  

 

3.    Strategic and operational challenges faced by banks

In its recent research on Private Banking and Wealth Management, Sia Partners identifies several challenges that banks are facing. These can be bundled in those four broad categories:  

4.    No “one size fits all”: how each bank can win the race

Certain changes relating to the four challenges above need to be made by all banks, irrespective of their type or their strategy in APAC. Those who fail to undertake these common changes, which will be ‘hygiene factors’ in the future, will struggle to remain relevant in an already hyper-competitive market.   On top of those basic elements, however, there are unique actions that each type of bank can take in order to ensure that they are able to meet their growth objectives and capitalize on the opportunities present in APAC.

Universal banks can choose to offshore/outsource non-core functions to lower cost centers, strive to further break down ‘Chinese walls’ and improve cross product and service offerings between PB, IB and CB to cater to entrepreneurs who are still involved in their business. Their main focus should be entrepreneurs who are still involved in their businesses and those who have sold their business in addition to serving the UHNW families.

Local banks, which have historically been considered as relatively secure, should continue to have strong balance sheets while adding products and expertise through M&A with international banks. Their focus should be on risk-averse Senior Executives as well as small scale entrepreneurs.

Pure-play Private Banks should continue to focus on their Unique Selling Propositions (USPs) such as open architecture, independence and inter-generational wealth transfer while building strong alliances with other financial institutions in non-competing segments. They should take proactive measures to widen brand recognition with a view to form long term relationships with UHNW families.

The table below highlights all of the change actions, both common and specific, that the different kinds of banks need to consider.   

 

Common & adapted strategy changes to cope with challenges and capitalize on market situation

 

5.    Conclusion

While Private Banks have historically been conservative in responding to change, the opportunities available in Asia require some major strategic and operational changes in order to win the hearts and minds of the entrepreneurs. With the net millionaire wealth in APAC projected to rise to USD 17.7 trillion by 2018 and with only USD 1.54 Trillion under management at the end of 2014, no Private Bank can afford to stand by and miss the boat.

As we see more and more in our age of disruption, the Banks who are fastest to respond stand to win a disproportionate section of the growing segment of wealthy entrepreneurs in APAC. Furthermore, these new fortunes will remain attractive over a long period of time, generating profits for decades to come.

Since there is no “one size fits all” approach, it is a race in each segment. Banks have to baseline their own strengths, weaknesses and unique strategies for this competition – which is only in its infancy. To win the battle as well as win the war each bank will have to continuously review its capabilities and constraints – something only a few actors on this market are doing today.

 

Sia Partners

Copyright © 2016 Sia Partners. Any use of this material without specific permission of Sia Partners is strictly prohibited.

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