No easy profits as banks court Asia’s wealthy

The multimillionaire sputtered into his wine when asked about the quality of his bank’s services. “Are you kidding?” he asked, as he detailed a litany of complaints about hassles and complications likely to be familiar to anyone with a bank account and access to a helpline.

But this millionaire is from Asia, and thus belongs to one of the world’s most-courted set of bank customers. If he doesn’t like his current set-up, he has choices.

Bank executives around the world are lining up to tell their shareholders they are looking east in search of higher profits.

The case is at first glance a strong one. Last year, Asia’s wealthy — those with at least US$1 million (S$1.34 million) in investable assets, excluding their primary home — overtook those in the United States to become the largest group in the world, according to a report by Capgemini and RBC Wealth Management.

Their wealth is growing more quickly too, at 11.4 per cent in 2014 compared with 7.2 per cent globally.

In absolute numbers, Asia is home to 4.7 million of the world’s rich people, who hold US$15.8 trillion that should be in search of management and other services.

Private bankers estimate perhaps as much as half of this is not being professionally managed. The region is also embarking on an unprecedented generational transfer of wealth as the current set of patriarchs prepare to hand over the reins.

“If you are a wealth manager, you want to be where the wealth is being created. And wealth is being created on a huge scale in emerging markets whichever way you want to look at it,” said Mr Tidjane Thiam, chief executive of Credit Suisse, before a five-day visit to the bank’s most-valued Chinese clients this month.

Credit Suisse has drawn back from the US and parts of Europe, but has doubled the growth rate of its 600-strong army of Asia-based relationship managers.

UK-listed rival Standard Chartered, meanwhile, plans to use its decades-old corporate relationships in the region to support its push into private banking.

But how easy will it be for banks to establish lasting — and profitable — relationships?

Not all multimillionaires offer the same opportunities. JPMorgan became a case in point this month when it cut one-fifth of its Asian private bank relationship managers (RMs) and refocused on customers with more than US$10 million.

“The economics are such that for most private banks, unless you have somewhere starting between US$7 million and US$9 million to invest, offering a full private banking service is probably unprofitable,” says Mr Chris Harvey, global head of financial services at Deloitte.

Yet most banks do not know how best to deploy their employees. While 90 per cent of them can track revenues attributable to each relationship manager, less than one in 10 can measure individual profitability, according to a study by BCG.

Scale matters as well. Geneva-based Union Bancaire Privée (UBP) this week said that its US$10 billion assets under management in Asia, mostly acquired from its takeover of Coutts’ international operations, were about half the level it would need to be comfortably profitable.

Getting to US$20 billion would rank UBP 17th in the region, according to Asian Private Banker.

UBS, Citigroup and Credit Suisse are the largest competitors with US$274 billion, US$210 billion and US$150.6 billion under management, respectively.

Regional competition is also toughening. Singapore’s DBS acquired Société Générale’s wealth management business two years ago and OCBC this month added Barclays’ Singapore and Hong Kong units to its Bank of Singapore brand. Those two lenders now have roughly US$75 billion in assets under management — and they too boast deep relationships around the region.

The last challenge for wealth managers is the nature of the clients themselves. They are slow to entrust assets, favouring old-style long-term relationships — which can be expensive for the banks involved.

They also like to hold more cash than the rich elsewhere, cutting into fees, according to Capgemini, and they expect their bank to extend more credit than their peers do elsewhere.

“The margins have come down since the financial crisis,” says Mr Michael Blake, head of UBP’s private banking operations in Asia. He attributes this to costs such as compliance as well as competition.

“It is, however, absolutely possible to be profitable in this market. Clients will pay for advice and they value the networking effect of a private bank, too.”

Given the strains on business models elsewhere, even the possibility of profits from Asia’s wealthy will keep banks coming. But they shouldn’t expect it to be easy.

ABOUT THE AUTHOR

Jennifer Hughes is Asia capital markets editor at Financial Times.