Private banking in Asia: seemingly-great potential rewards belie challenges
The combined wealth of more than five million high-net-worth individuals in the Asia-Pacific region hit US$17.4trn by the end of last year, surpassing total net wealth held in North America for the first time, according to the Capgemini World Wealth Report. Nevertheless, as Asian Private Banker’s most recent survey of assets under management revealed, total client assets at the top 20 private banks in the region actually fell last year, for the first time since 2012.
That private banking in Asia is not turning out to be as easy as the numbers of wealthy people living there might suggest has also been revealed by a series of announcements over the past 11 months of private banking operations being closed, consolidated and, in a number of cases, acquired, often (but not exclusively) by Asian rivals.
Most recently, as reported, Geneva-based Edmond de Rothschild (Suisse) SA confirmed reports that it was planning simply to close its Hong Kong private banking operations. The announcement came some seven months after the company was given approval by China’s banking regulator to close its Shanghai representative office.
Earlier this week, LGT, the Liechtenstein private bank that had its origins as the family office of Liechtenstein’s royal family, announced it was to acquire ABN AMRO’s private banking business in Asia and the Middle East, giving it new private banking outposts in Hong Kong, Singapore and Dubai.
As reported here in October, Australia’s Australia & New Zealand Banking Group said it planned to sell its retail and wealth-management businesses in five countries in Asia to Singapore’s DBS Bank; earlier this year, the UK-based Barclays banking group sold its private banking business in Singapore and Hong Kong to Bank of Singapore, the wholly-owned private banking subsidiary of Singapore’s OCBC Bank. In 2014, France’s Société Générale sold its Asian private banking operations, also to DBS.
Also in 2014, US-based Citigroup announced it was to sell its Japanese retail banking business, amid reports that it was earning less from this business “than its global chief executive officer’s salary [had totalled the previous] year”, as a result, the Sydney Morning Herald said, of Prime Minister Shinzo Abe’s “Abenomics”, which had had a crushing effect on banks’ loan returns. (The photo, above, is of a Hong Kong Citibank branch opening, in 2011.)
One bank that has been bucking the retrenchment trend has been Credit Suisse, which, under chief executive Tidjane Thiam, has been actively growing its Asian operations. According to published reports it had hired some 100 private banking executives in Asia by the middle of 2016, and in May, announced it was opening an office in the Thai capital, Bangkok, in an effort to target that market’s high-net-worth and ultra-high-net-worth individuals.
Paris-based Crédit Agricole Private Bank is also still looking east with an eye towards expansion, it seems. Earlier this year it re-branded as Indosuez Wealth Management – reviving a name from its own past, which it had dropped more than a decade ago, as part of what it said at the time was an effort to appeal to new generations of wealthy individuals in countries around the world.
Such individuals,Crédit Agricole noted, were thought more likely to be attracted to that name, with its regional connotations, than they would be to its traditional and extremely French-sounding moniker.
Experts point to a number of reasons for the struggle many private banks and larger banking institutions have been having in Asia recently. Some point to the fact that there are already established local banks servicing the market, and convincing even HNWIs to move can require significant and costly efforts; and the fact that regulations have increased bankers’ costs significantly.
Most recently, tax amnesty programmes in a couple of key Asian countries in which a certain number of wealthy individuals had made a point of keeping their assets hidden offshore has resulted in some of this offshore wealth being repatriated, ahead of the implementation of a new global automatic information reporting scheme known as the Common Reporting Standard.
Under the CRS, which is a project of the Organisation for Economic Co-operation and Development, those hoping to avoid paying tax by keeping offshore bank accounts are likely to be caught out one banks are freely exchanging account details with foreign tax authorities, and thus will be forced to pay both the unpaid tax owing as well as a fine.
Currently some 87 countries have agreed to being part of the automatic exchange of information agreement, which will begin to come into force next September, although some jurisdictions aren’t set to participate until 2018.
One school of thought, meanwhile, is that expectations may have been too high in the first place.
“Asian banks are more willing to invest in the region, a strategy that sometimes demands accepting losses for a period of time,” one Singapore-based private banker said, explaining this philosophy.
“Foreign [non-Asian] players have a much shorter time horizon, so their motivation for doing deals can be down to the need to generate positive publicity through ‘buying’ growth.”
Recent deals would seem to support this view – the Bank of Singapore’s purchase of Barclays’s Singapore and Hong Kong operations, for example, and Sumitomo Mitsui Banking Corp’s 2014 acquisition of Citi’s Japanese business.
Jimmy Lee, Julius Baer’s head of Asia Pacific, says he expects the consolidations will continue, and warns that some banks in the region may not see the rate of AUM growth they’ve experienced over the last five years continuing into the next decade.
“Declining margins and escalating costs, together with this potential slowdown in AUM growth, will likely lead to a shake-out of some marginal players,” he says.
Bassam Salem, Asia Pacific chief executive of Citi Private Bank, believes regulation will prove to have been one of the most important contributors to the banking consolidation trend being seen in Asia currently.
“As regulators enforce rules more strictly, those who have been ‘loosely’ adhering to them will find themselves struggling,” he says.
“When some banks are not profitable, they strive [to achieve] profitability by taking shortcuts, such as accepting clients with dubious backgrounds [and/or] sources of wealth, and accepting transactions that are not normally
“In short, when you are not making money, and are under pressure to do so, you could end up doing foolish things.”
Eventually, Salem says, banks that are not profitable could become subject to review.
“We have grown into an environment in which competition has been encouraged,” he says.
“[As a result] we have too many non-profitable private banks, and it might be time to make the ongoing licensing of these banks accountable to certain standards.”
‘Two speed market’
As for the Common Reporting Standard, some believe it is likely to create a “two-speed market” for banks in the region, at least in the early stages of
For now, at least, India and Korea are the only major Asian countries in the “early adopter” group that implemented the standard on 1 January 2016. Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand and Singapore
are among the second wave of countries that will implement the standard in 2017.
“Major financial centres such as Singapore and Hong Kong do not feel comfortable with full exchange of information with smaller regional centres, asking for reciprocity with jurisdictions such as the Philippines, which don’t have the which don’t have the infrastructure to guarantee that exchanged data will remain secure,” said one private banker, who requested anonymity.
The future intentions of China’s banks, meanwhile, remain the Asian banking industry’s great unknown.
When asked whether these institutions had genuine aspirations to become major regional players in the private banking space, the anonymous private banker told International Investment that for now, at least, they are still focused on the domestic market – which, given the recent efforts Beijing has made to tighten capital controls, thus keeping individuals and companies from being able to transfer money outside of the country – may not be all that surprising.
“The Chinese market is sufficiently profitable to convince managers that they don’t need to look beyond their own borders,” the banker said.
“This may change over time, but it is unlikely to happen in the short term, as they lack the management capacity to absorb an acquisition in another financial
In the meantime, overseas entities continue to take tentative steps into China.
In June, Chinese regulators approved Hang Seng Bank’s application to take a majority stake in a new asset manager, the first onshore fund house with a majority stake held by a non-mainland entity. Hang Seng will control 70% of Hang Seng Qianhai Fund Management Co.
Nevertheless, cross-border private banking is expected to experience continued domination by Hong Kong and Singapore. This is despite the development of private banking in locations such as Korea.
Malaysia is trying to develop its banking profile, but will struggle to convince
cross-border clients to book their assets there, industry observers say.
As a result, the only other centre that’s seen as potentially becoming a major crossborder force is Shanghai – if the Chinese government were to decide to open
it up as a gateway to China. That, however, is seen as unlikely to happen, given that Hong Kong already fulfills that role, and would not welcome the competition.
‘One-tenth of the investable assets’
What is abundantly clear to everyone in Asia’s private banking circles is that there is a significant amount of wealth to be played for over the next few years, at least if data on the market is to be believed.
According to this data, the combined assets under management of the top 20 private banks in the region currently amounts to an estimated one-tenth only of the total pool of investable assets Asia’s HNWIs are expected to be in possession of by 2020.