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Private banks in Asia having a good year
- August Hatecke, UBS head South East Asia Wealth Management
- Francesco de Ferrari, Credit Suisse head of private banking Asia Pacific, CEO Southeast Asia and frontier markets
- Tan Su Shan, DBS Bank group head of consumer banking & wealth management
- Ong Yeng Fang, managing director and head of UOB Private Bank
- Anna Marrs, Standard Chartered regional CEO, Asean and South Asia, and CEO, commercial and private banking
- Bahren Shaari, chief executive, Bank of Singapore
- Bassam Salem, Citi Private Bank Asia Pacific chief executive
- Pierre Vrielinck, CEO, Asia Pacific of BNP Paribas Wealth Management
- Lok Yim, managing director, head of Deutsche Bank Wealth Management, Asia Pacific
- Sandeep Sharma, head of HSBC Private Banking, South East Asia
Moderator: Siow Li Sen, The Business Times
THERE'S a kind of glow to the private banking business, yet it hasn't stopped some banks from leaving the business, moves usually associated with tough situations. For the winners, 2017 seems to be a matter of more of everything - more income, new hires and higher assets under management - as wealth creation continues apace. According to UBS's 2016 global billionaire study, Asia is leading the way in wealth creation. Asia created a new billionaire every three days, led by China. Of the 210 new billionaires created, 113 billionaires were Asian entrepreneurs.
Hear the industry leaders' voices and investment ideas for the remainder of 2017.
BT: With half the year in, 2017 is looking very positive and global growth forecasts have been upgraded. Is your bank seeing an impact from improving fundamentals?
August Hatecke: Invested assets of UBS's wealth management division in the Asia-Pacific grew to 311 billion Swiss francs (S$447 billion) in the first quarter 2017, making UBS the first wealth manager in the region to exceed the 300 billion franc mark. We achieved a key milestone and saw continued strong growth with a record adjusted profit before tax growth of in excess of 30 per cent year on year to 263 million francs. This reflects growth across all revenue lines as interest income and recurring fees showed double-digit growth. It was also a record quarter for transaction-based income due to increased client activity. Its contribution to profit before tax in global wealth management grew to 36 per cent from 27 per cent in the previous quarter.
These achievements are thanks to the trust and confidence of our clients and the dedication and hard work of our employees. As the results show, Asia remains an area of growth for UBS. We plan to consolidate our growth in the region by sharpening our focus on China, Japan, and Taiwan, as well as the regional wealth management hubs, Hong Kong and Singapore. According to our 2016 global billionaire study, Asia is leading the way in wealth creation. This presents tremendous growth opportunities for the wealth management business. And this is where UBS is extremely well placed to benefit from the growth in the Asia-Pacific.
Francesco de Ferrari: Our private banking business in Asia delivered stellar results in the first quarter this year, continuing our momentum in 2016. In Q1 2017, we grew private banking revenues very strongly by 29 per cent year on year to 411 million francs, with robust growth in all three revenue components - net interest income up by 25 per cent, commissions and fees up by 11 per cent and transaction revenues up by 27 per cent. Our assets under management reached a historical record of 177 billion francs at 19 per cent year-on-year growth, with net new assets growing extremely strongly at 33 per cent year on year to 5.4 billion francs.
With Credit Suisse's Asia-Pacific divisional model, our wealth management, financing and underwriting and advisory teams are working more closely together to deliver integrated advisory services and solutions to our target ultra-high-net-worth, entrepreneur and corporate clients. In Q4 2016, we started reporting "wealth management and connected activities", encompassing our activities in wealth management as well as financing, underwriting and advisory for this important client group. In Q1 2017, APAC wealth management & connected activities revenues increased 44 per cent year on year to 589 million francs and pre-tax income at 65 per cent year on year to 201 million francs.
Tan Su Shan: At DBS, we continuously strive to leverage the best of the bank and combine our wealth management solutions with our clients' wealth creation needs. Our strong corporate and commercial banking franchise in Asia allows us to provide our Asian-based customers with regional connectivity and understanding of all our major Asian markets. These are invaluable to our clients, whose main business activities are centred in Asia.
As such, we have continued to deliver consistent robust growth over the past few years and was the only Singapore bank to break into the top five largest private banks in the Asia-Pacific. In Q1 2017, our total wealth management AUM reached S$171 billion (+14 per cent y-o-y). Our total income has also increased by 34 per cent y-o-y, driven by markets as well as new investment and insurance products launched this year. As wealth management is an integral part of our overall business, we will continue to pursue our growth strategy and expand our footprint. Earlier this year, we obtained a licence to run a new wealth management office in London to serve ultra high net worth clients and family offices who are looking to Asia for an edge to both their business and investment needs. Our expansion into UK makes us an attractive option for clients who are looking at Asia as an investment destination, coupled with our in-depth bank-wide expertise, and heritage and reputation as Asia's safest bank.
We are also adding relationship managers to our Dubai office to serve the growing group of clients and prospects. Through DBS's focus on digital innovation and our one-bank approach across wealth management, corporate banking and capital markets, we will be able to leverage the best of the bank to deliver an integrated and efficient client-focused solution.
Ong Yeng Fang: We have been seeing a pick-up in global economic activity, especially in Japan and Europe. This has led to positive investor sentiment, and in turn, an increase in our clients' activity. We remain prudent in advising our clients and helping them optimise and diversify their investment portfolios. This will ensure that their portfolios stay resilient to various economic scenarios and uncertainties.
Anna Marrs: We continue to make good progress in improving the bank's performance and are seeing encouraging signs of underlying business momentum. Specifically, income from private banking in the first quarter of 2017 rose 2 per cent year on year and 6 per cent quarter on quarter, driven by increases in deposits margins and higher sales of treasury products in wealth management. We also saw early net new money momentum, with US$0.9 billion added in the first quarter.
Bahren Shaari: In the first quarter of 2017, our assets under management grew 49 per cent to US$85 billion, together with a 51 per cent increase in our revenue on a year-on-year basis. This growth is derived from the assets that we acquired from Barclays's wealth and investment business, as well as assets of our original client base which we have grown a fair bit. Similarly, we have seen an increase in the volume of investment activities. We have also seen more inflows from the Middle East, following the opening of our branch in the Dubai International Financial Centre earlier this year.
BT: Hiring continues apace - going by some news reports - will this push costs up?
Mr Hatecke: There continues to be strong competition for talent in the wealth management industry. However, instead of focusing on hiring only seasoned bankers, it is just as important for a wealth manager to build a future pipeline of talent. UBS invests significantly in human resources, not only to attract and retain the best talent in the market, but to also to build a pipeline of talent and continuously upscale our employees through our various talent and UBS University programmes. Today, we have more than 1,000 client advisers and more than 2,800 employees in Wealth Management Asia Pacific, making it one of the largest and highest calibre multi-lingual wealth management teams in the region. We plan to continue to hire strategically depending on the needs of the business. However, cost management and increased efficiency are top priorities for the entire firm at all times. Our ability to attract and retain talent continues to be a lynchpin of our business platform.
Mr de Ferrari: In 2016, we added 60 net RMs to reach 640, and continue to make investments for the longer term while managing our costs prudently - our private banking revenues grew 29 per cent and pre-tax income 18 per cent in the first quarter, while achieving this on lower cost-income ratio of our wealth management & connected activities of 65 per cent compared to 75 per cent in Q1 2016.
This year, we are continuing our focus on strategically recruiting senior bankers and have a good pipeline in place, but equally on maximising returns from the investments we have already made, to onboard and integrate the new bankers and further increase the productivity of our talent base.
Other than the dedicated Credit Suisse Wealth Institute training facility in Singapore, we have rolled out key new initiatives to onboard new talent, including a new RM onboarding initiative throughout the first year of their joining; a mentorship programme by our most senior and successful private banker; front-to-back mentoring programmes so that new RMs fully understand Credit Suisse's platform and processes comprehensively; as well as targeted development programmes eg the Entrepreneurs Banker Programme to deepen our RMs' understanding of the corporate side of a client's wealth.
Ms Marrs: Talent and expertise are critical elements to the success of private banks - clients cited their connection with their relationship manager as the main reason for banking with us in our most recent client survey. However, the shortage of experienced bankers to match the industry's growing demand and expectations means that the competition for talent further contributes to rising cost pressures. Rather than focusing solely on quantity, our hiring approach is based on attracting senior bankers who can identify and support the diverse needs of our clients through economic market cycles, from wealth management solutions to leveraging the broader bank's commercial and investment banking capabilities. In fact, 80 per cent of our new hires this year fall into the executive director or managing director category.
Bassam Salem: We continue to be selective in our hiring and are careful not to do so just to meet "hiring targets". Having said that, we have been successful in our hiring efforts this year which has picked up its pace. However, it has not had the effect of pushing our costs up as attrition and our ongoing efforts to automate have provided cost savings that offset any additional costs as a result of our hiring.
Lok Yim: Wealth Management Asia Pacific is looking for professionals across different disciplines - be they client-facing or infrastructure support. As of now, Asia has added more than 15 employees in Hong Kong, Singapore and Dubai across client coverage, know your client and project management functions. WM aims to add 50 client-facing positions including relationship managers this year.
Ms Ong: For UOB Private Bank, our focus is on bringing in the best and the brightest talent with the right skillsets and values to serve the needs of our clients. Since 2014, we have increased the number of our client advisers by more than 80 per cent. We are continuing to strengthen our team not only in scale, but also in expertise. This is because the calibre of our people and the industry knowledge of our client advisers contribute to UOB Private Bank's success. We believe that by hiring, grooming and retaining talent who are committed to advising and to acting in the best interests of our clients, we will also be able to achieve business growth. We also want to ensure we are disciplined about cost. In this regard, we are enhancing our technology infrastructure and business processes to improve operational efficiency and productivity.
BT: As for investor sentiment, are their optimistic "animal spirits" intact?
Sandeep Sharma: We continue to see multiple tail risks, but note several important reasons why markets have not been overly worried about them. First, of course, they are difficult to price. As long as the underlying fundamentals are positive, investors fear losing out, and tend to be unwilling to position for a negative but low-probability tail risk event. Second, policymakers have provided safety nets: central banks' accommodative policies reduce the potential for financial contagion, and they should continue to be generous if the economic outlook were to deteriorate. In China, credit growth is being managed carefully to avoid either a bubble growing, or a bubble bursting. As for political change, checks and balances in parliamentary democracies are limiting the scope for rapid policy change (with positive and negative effects). Finally, geo-political risks exist, but such shocks are most dangerous when they lead oil prices to spike.
At present, we think oil will drift higher, but believe that the scope for a sharp spike triggered by geo-political risks is severely limited by the ample inventories of oil.
Mr Salem: Although investors are engaged, we don't feel that they have fully recovered their "animal spirits". Portfolio positioning remains largely conservative. We see good opportunities in EM (emerging market) equities and local currency bonds where clients are still very underweight in general.
Ms Ong: Investor optimism has receded slightly in recent months as it has taken longer than expected for the Trump administration to implement its policies to boost economic growth in the US. However, we believe that investors will remain confident of the global market outlook in the second half of the year as major economies such as Japan and Europe continue growing.
Mr Hatecke: We believe that investors still have appetite for risky assets. Volatility measures across financial asset classes are low by historical comparison, most notably in equities where they hover at multi-decade lows. This is due to very benign GDP growth in virtually all regions and the relief from non-populist outcomes in European elections. Meanwhile, central banks globally are still quite accommodative. In the business world, we see confidence indicators confirming a similar picture of measured optimism.
Economies worldwide are growing but not at the level of overheating, and earnings in major markets (with the exception of Japan) should notch double-digit growth rates. UBS CIO recommends that investors stay constructive on risky assets in this environment, with overweight positions on global and eurozone equities and US high yield bonds, which provide a lucrative yield at around 6 per cent. We are overweight on the euro to reflect the ongoing resilient expansion in Europe and the ECB's potential QE tapering, as well as the Canadian dollar to benefit from Canada's growth acceleration. Also, government bond yields, while no longer at record lows, remain a weak competitor to potential stockmarket returns. Thus, we recommend that investors should remain invested with a focus on equities.
BT: Prices of some asset classes look toppish, what do you say?
Pierre Vrielinck: We turned our equity view from positive to neutral tactically in April this year, on the back of the strong rally seen in equities. We believe most of the gains in 2017 have already been achieved. We believe the coming months may likely be a period of consolidation among investors.
It appears that the key drivers of the strong rally seen in equities that we had observed in the first quarter of this year seems to have lost some momentum. Leading economic indicators have stabilised at high levels; economic surprises have deteriorated; and earnings momentum may slow after the recovery of oil prices in the first quarter.
New drivers do not appear to be on the horizon as pro-growth policies in the US are likely to take time to materialise and much more limited than anticipated by many investors. In addition, inflationary pressures also take time to build up.
However, we are still positive on equities from a medium to longer term perspective. We still see a breadth of growth drivers on the horizon. Consumption is picking up, and we have observed that a capex cycle has started again from late 2016, with a less protectionist rhetoric that bodes well for global trade and with major developed economies ready to expand fiscal policies. In addition, with operating leverage, share buybacks and strong base effects in commodity-related sectors and in financials, we expect these factors to support good revenue and earnings growth in 2017.
Having said that, we cannot stress enough on the importance of investment risk diversification. We believe asset allocation is a key approach for investors to minimise their volatility and optimise their returns.
Mr Hatecke: While valuations have expanded since the 2008 financial crisis, they are not in bubble territory. However, if one asset class does look stretched, it would be "risk-free" government bonds. Stock valuations in the US and Asia ex-Japan, for example, have moved into the upper half of their historical trading range.
Yet, this alone does not necessarily spell a correction. In addition, for a bull market to end, two key ingredients have historically come into play: an excessive build-up of private financial leverage and high capacity utilisation, which leads to inflation and ultimately central banks tightening aggressively.
In the current environment of fairly tame growth rates, this threat does not look imminent. Still, investors must acknowledge that the world has not necessarily become more predictable, in spite of big data and artificial intelligence. Investors should ideally diversify across asset classes, regions and currencies, as well as focus on longer-term trends that might be easier to anticipate. These include investment strategies that benefit from population growth, ageing populations and urbanisation. Some popular investment themes for consideration might include retirement homes, robotics, emerging market healthcare and rail-based urban public transport, just to name a few.
Ms Tan: Investors are facing a dilemma today. Staying in cash at these low rates remains unattractive. Waiting for a big crash to bring out your cash hoard is likely to be a long and wasteful exercise. So investing is a more delicate and discerning business today. Developed Markets - particularly US equities - range from fairly-valued to over-valued. The risk of a correction, which we had expected last quarter, remains high. Yet the global economy continues to grow with reasonable strength, interest rates remain historically very low, and political risks appear containable. Asian equities are where we are more positive. Asian equities are generally cheaper compared to US and European equities. In Japan, equities valuation is cheap relative to its recent historical range and relative to the US, yet its growth gap relative to US is narrowing. While in Asia ex-Japan and emerging markets, equities could be heading into a "sweet spot" - a combination of stabilising economic growth, tame inflation, a strong earnings recovery, moderate valuations and relatively tame US Treasury yields and dollar.
Mr Sharma: With stockmarket indices near multi-year highs (or even record highs in the US), some investors may be forgiven for having vertigo. But US earnings are close to a record high as well, while dividends continue to break new records. We think that investors will continue to look for both growth and income, and if companies can continue to deliver both, as they have been doing, we do not think that equity index levels are stretched. In our view, investors who hold large cash balances significantly reduce the potential to generate income from the start. Instead, we believe it makes more sense to remain invested in a diversified portfolio, to take advantage of the global recovery supporting stocks, a still accommodative monetary policy supporting income and the search for yield, and strong fundamentals supporting commodity prices.
Ms Ong: The highly accommodative monetary policies adopted by many central banks in the post-crisis period have resulted in an environment of favourable liquidity, which has supported a strong price rally across many asset classes to historical highs. We foresee that some of these high asset valuations may persist or even extend their run beyond historical thresholds. We advise our clients to assess the fundamental drivers underpinning each asset before adjusting or reducing their holdings in these assets at their current high valuations.
Ms Marrs: From an equity market perspective, we do not believe this to be the case. The key argument for equity market weakness is their high valuations. However, earnings growth is expected to accelerate in almost all regions this year including in the US, Europe and Asia ex-Japan. Meanwhile, inflation pressures are likely to remain relatively benign as we go through this year, which should limit the pace of interest rate hikes. As such, we remain constructive towards global equities over the next 12 months with a preference for Euro area and Asia ex-Japan regions, where we see the scope for earnings to pick up strongly while central banks remain largely focused on supporting growth rather than about fighting inflation. We are still positive on the outlook for US equities, but do not expect them to outperform as the risk of de-rating is significant given their high valuations.
For bond markets, we expect bond yields to gradually move higher in the 12 months, which by definition means prices would fall. However, limited inflationary pressures means a yield spike is unlikely, in our opinion. We expect positive total returns from most areas within fixed income with a preference for emerging market government bonds, both US dollar and local currency bonds. A key assumption here is that we will not see any significant US dollar strength (we expect modest weakness) and further weakness in oil prices. In developed markets, we have a preference for corporate bonds over sovereign debt.
Mr Salem: The rally looks long in the tooth, but in reality, it has been well supported by earnings growth. The current environment of stable inflation and growth, with broadly low interest rates and moderate policy backdrop is actually very supportive of asset valuations.
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