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Why is Asian private banking still attractive when everyone else is selling?
THESE days, we can't open the papers without being bombarded by negative news on Asia - whether it's another stockmarket meltdown, a disappointing PMI figure or more closures of companies. Alongside such gloomy news, we also see some of the biggest global banks moving out or shrinking their operations in Asia. This includes some of the top European private banks.
So is the rise and rise of the Asian private banking and wealth management industry over?
To put this in context, let us examine the longer-term structural opportunities in Asia.
ASIA IS STILL GROWING
Firstly, consider the Asian economy. Even with China's slower growth, the collective gross domestic product (GDP) growth of Asia now can still put a Germany on the map every 3.5 years. The time it takes to do so shrinks every year. Hence the Asia-Pacific has been driving growth in global wealth, and, over the last eight years, doubling in size.
China and India have been and will continue to be the stand-out stories in the Asia-Pacific over the medium term - these two markets represent approximately 10 per cent of overall HNWI (high-net-worth individual) wealth and contribute 17 per cent of the global increase in new wealth since 2006. Emerging Asia is expected to lead the Asia-Pacific and global HNWI wealth growth through 2017.
Despite Asia's economic slowdown, China's economy grew 6.9 per cent in 2015, which is an additional US$700 billion to the US$10 trillion economy. Though there has been constant chatter about China's dropping growth rates, it must be taken into consideration that US$700 billion is much more than the double-digit growth when China was just a US$2 trillion economy a decade ago. With these figures in mind, this explains why the Asia-Pacific overtook North America to become the region with the largest HNWI population at 4.69 million.
ASIAN WEALTH IS DIFFERENT
But to be able to serve this segment of customers in Asia, one must be prepared to do things differently. The model here is not one where we can simply plug and play from the West. For a start, the Asian HNW assets may not liquid. They could be new wealth created from operating businesses, or investment in hard assets like real estate. It could also be large blocks of single stocks which are restricted.
So, to be able to cater as a wealth solution partner to such clients, one needs to be able to offer liquidity solutions, hedging ideas and foreign exchange overlays. Even when they have liquid assets, there is a tendency to reinvest in sectors they understand or know how to operate in. Many believe in concentrated investments in what they know best.
For example, it is not unusual for a technopreneur to want to invest in more tech companies, whether listed stocks or private equity deals. So while this flies in the face of traditional economic models of diversified investments within an efficient frontier, it also challenges advisers on how to withstand big volatility swings and potentially highly illiquid scenarios.
Then there is the age-old obsession with real estate and property. I have, in my time, met many real estate developers and even their personal portfolios are full of Reits or real estate funds. So client advisers have to constantly be cognisant of correlation risks, illiquidity of assets and big volatility swings.
A MATURING CLIENT BASE
However, this trend may soon be changing as wealth is passed onto the next generation. In fact, one of the more positive developments arising out of the recent market volatility is that the large swings suffered by Asian investors have spurred many Asian business families to look at having a more diversified and professionally managed portfolio.
They are now more thoughtful about the way they structure and invest their wealth and are asking advisers for better, long-term, sustainable wealth plans and portfolios. While many were driven by outsized returns in the past, more are becoming more realistic about their returns expectations and are also looking for downside protection.
Take, for example, the local Chinese investor. In the past, many were lured by the promise of high returns from either local trust funds, (which turned out to be nothing more than a pooled fund of asset-backed securities), or the turbo-charged returns of the local bourses. Both have since corrected.
Though many retail investors were unfortunately caught in the recent P2P scandal reminiscent of the shadow banking type asset investments, the HNW families seem to have grown in sophistication and they are now less beguiled by the latest market fad but more concerned about having their wealth under professional management. Many have begun the journey of structuring their assets or foundations, and learning how to best transfer their wealth to the next generation.
Therefore, increased familiarity with the private banking experience and its offerings (specifically in Asia) presents a unique and lucrative opportunity for private banks in Asia. Despite current global economic dislocation, the Asian HNW segment is fundamentally sound and will continue to grow briskly over the next decade.
COSTS UP, MARGINS DOWN
However, all is not rosy, despite the positive outlook we must not forget about low revenue margins in the current market context - margins have significantly fallen from pre-global financial crisis to today. At the same time, costs are high and rising, generated by rising costs of regulatory compliance, expensive relationship managers and frontline staff, and the required investments in technology. The result is high cost to incomes ratios.
In 2014, the average operating cost to income ratio for private banks in Asia was around 75 per cent. Given the major players with scale, or those that share cost platforms, operate with ratios in the 60s, many smaller private banks are operating with ratios in the 80s and 90s and beyond.
As a rapid improvement in revenue margins is unlikely and the costs of compliance continue to rise, margins in Asia will remain thinner than global averages, with scale being an increasingly important factor in running a sustainable private banking business in Asia.
In general, new entrants to the private banking industry in Asia have tended to underestimate the cost of establishing an Asian business; therefore, further consolidation will be inevitable.
Not surprisingly, the top performers have focused on improving processing efficiency and investment knowledge of frontline staff to boost performance. Heavy investment in digitalisation will be a key success factor to ensure a sustainable growth in the Asian private banking industry. While banks have historically resisted change, it's clear that they are increasingly acknowledging that readjustments to their business and operating models are not only advantageous but also necessary.
While the jury is still out on whether Robo Advisers or artificial intelligence will replace humans in the wealth management industry, it is clear that the banks which will lead will be the ones who have the wherewithal to invest in data analysts, good design teams, behaviour scientists and other types of digital talent that enable them to give clients more relevant, timely and contextual advice. Those players which are quicker to overcome resistance to revolution stand a better chance to maximise opportunities to serve Asia's wealthy - who will remain fundamentally attractive over the long term.
- The writer is group head of consumer banking and wealth management, DBS Bank