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Revisiting an Asian marathon

Recent wealth trends and M&A developments are a reminder that to succeed, banks need to get a few key elements right.

Managing the expanding wealth pools of Asian economies continues to be a rewarding business with secular growth potential, says Mr de Ferrari.

FOUR years ago when I first took the helm of Credit Suisse's private banking business in Asia, I wrote in a Business Times report that private banking in Asia is a marathon and not a sprint, and that having a long-term vision for the business will lead industry players to do the right things.

What have been the major developments in the private banking industry in Asia since?

Even as global economies are gradually progressing on the path of recovery post-financial crisis, bouts of market volatility have persisted and have been intensifying in recent months. Interest rates have remained low or have gone negative. Regulatory demands on banks in terms of ensuring investment suitability and in tightening governance and processes around know-your-customer, anti-money laundering and tax transparency have continued to escalate, with banks committing significant investments to step up internal risk culture and controls.

While available experienced talent in private banking remains in high demand, at the same time, banks are also realising that building a digital multi-channel platform has become a "must have" in serving the wealth management needs of a new generation of clients. During this time, at least eight mergers and acquisitions (M&A) have taken place involving the private banking industry in Asia. Both international banks that do not have private banking as their core business as well as pure private banks have taken a hard look at their business portfolios and have come to their own conclusions as to where to focus their increasingly constrained resources and capital as well as their geographical footprint. In particular, private banking as a peripheral business is clearly not sustainable in this environment.

The Asia-Pacific is becoming the world's wealthiest region, supported by strong fundamentals

However, far from spelling doom and gloom for private banking in Asia, managing the expanding wealth pools of Asian economies continues to be an attractive and rewarding business with secular growth potential.

While the economic growth of some of the largest Asian economies has been slowing, it remains high in absolute terms, with China's GDP growing at 6.9 per cent, India at 7.3 per cent and Indonesia at 4.7 per cent in 2015. In addition, seven out of world's top 10 countries with the largest foreign reserves are in Asia. In particular, as China is transforming itself from an infrastructure-led to a consumer-led economy, it is likely to grow more slowly, but we believe it has the fiscal and financial means to avoid a hard landing.

Notwithstanding that some developed Asian countries are grappling with the issues of an ageing society, Asia remains by far a populous and young region. Sixty per cent of the world's population are in Asia, with half of them below the age of 30. In the next 30 to 40 years, with their increasing share of working age young adults, many Asian economies will benefit from the demographic dividend that would result in rising aggregate disposable incomes and spending, and higher investments in education, healthcare, technology and skills to support a growing economy.

Wealth trends in Asia corroborate this long-term economic growth picture. According to Boston Consulting Group, the Asia-Pacific is the largest and the fastest-growing wealth region in the world, and is projected to generate around 50 per cent of global wealth growth in the next five years.

The Credit Suisse Research Institute's Global Wealth Report 2015 also finds that middle-class wealth in the Asia-Pacific has expanded by 70 per cent from 2000 to 2015 to US$27.2 trillion. Forty six per cent of the 664 million global middle-class population is in the Asia-Pacific, with China having the largest middle-class population of 109 million, surpassing that of the United States.

This long-term growth path in both global household wealth and middle-class wealth will present massive opportunities for businesses in Asia targeting these young consumers. Behind these businesses are first- or second-generation entrepreneurs who are generating more than 80 per cent of the region's new wealth. An estimated 85 per cent of all businesses in the region and around half of the listed ones are family-owned; while at the upper end, 76 per cent of these global family businesses with more than US$1 billion in market capitalisation are in Asia.

The right business model to effectively serve the needs of Asian entrepreneurs

These economic and wealth trends as well as the recent private banking M&A developments are a clear reminder that to succeed in this marathon, banks need to get a few key elements right. This will ultimately determine who will continue with the race bigger and stronger, and who might drop off along the way.

The most important of these are:

  • having the right business model that can effectively serve the current and future generation of entrepreneur clients throughout their entrepreneurial lifecycle of starting their business, expanding, consolidating to handing over both the family business and wealth to the next generation;
  • being able to provide these entrepreneurs with integrated wealth management and corporate finance solutions for both their corporate and personal needs; and
  • for the private banking business to be able to reach the scale to generate profitable growth consistently and sustainably over the longer term.

One-size does not fit all in Asia

At the same time, the heterogeneity of the Asia-Pacific region extends to the regulatory and operating environment for private banks, as well as the wide range of business potential and market maturity.

While Singapore and Hong Kong are historically the key regional wealth management hubs currently capturing 16 per cent of global offshore assets mainly originating from within the region, two-thirds of the region's wealth is concentrated in Japan and China where the vast majority of wealth resides onshore.

To effectively serve the region's diverse wealth pools, complex private banking operating models are required that can efficiently combine both offshore and onshore platforms while taking into account the end-clients' diverse personal and corporate needs, in a rapidly evolving regulatory, competitive and cost environment.

We are now halfway through the marathon and at this point of the race, the less-prepared participants are likely to drop out, leaving only the fittest to reach the finish line.

  • The writer is head, Private Banking Asia-Pacific, and CEO, South-east Asia, Credit Suisse