Canada’s banks have emerged from the financial crisis as
some of the safest bets around. RBC Wealth Management chief
executive Michael Lagopoulos tells Nicholas Moody about RBC’s plans
to exploit its links with Asia and South America and why Canada
sits above Switzerland in the private banking world.
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By GlobalData
Safe and secure are not sexy buzzwords, but Michael
Lagopoulos remains unfazed. The chief executive of Royal Bank of
Canada’s (RBC) international wealth management division is
trumpeting his bank’s credentials as one of the world’s safest
private banks as its larger competitors battle to deal with the
post-crisis landscape. RBC’s dictat of compliant confidentiality
looks to protect its clients but remains comfortable when
regulators come knocking. It is now looking to expand its links
with Latin America and Asia. The danger is that this safe attitude
could hold it back from competing against the large global
players.
“Our view is there is no point
being rich if you can not sleep at night. There is no point having
money if you can not be comfortable,” says Michael Lagopoulos.
“We never believed in banking
secrecy we believe in compliant confidentiality, so confidentiality
and privacy around your affairs is absolutely critically important
but it is also important that you be compliant,” he adds.
Meshing together
confidentiality and adhering to regulations is the biggest
challenge facing the global private banking industry in the
post-crisis era, particularly in Switzerland. UBS, one of the top
three global wealth managers, has been wounded by ongoing wrangles
with US authorities over the tax details of 4,450 clients. Many
other private banks are reconsidering their banking models to keep
onside with financial authorities.
“We have not seen the attack on UBS
as a problem, quite the opposite,” says Lagopoulos. “We use it as a
marketing tool to say, this is why you should pay for advice, this
is why you should structure your affairs in a proper fashion and
this is why it is worth paying to be compliant.”
As a result, RBC’s Swiss bank has
seen significant growth in client assets, rising from $4bn to $7bn
in the past four years.
Mirabaud speaks out on
secrecy
Speaking to Private Banker
International in June, Mirabaud managing partner Yves Mirabaud
said bank secrecy was still important despite Switzerland’s
decision to comply with the Organisation for Economic Co-operation
and Development’s (OECD) rules relating to exchange of information
treaties.
Lagopoulos takes a very different
view.
“We are just as paranoid about the
privacy of our client affairs as any Swiss bank but we do not see
ourselves as a safe haven from anybody or anything because we’re
not sure those safe havens exist anymore. If they ever really did,”
he says. “Our focus on Switzerland has never been on tax cheats,
it’s always been on people who are looking for safety and
security.”
Safe and
secure
Sensible regulation and strict
lending rules have provided Canadian banks with strong balance
sheets and put them in an advantageous position for international
expansion.
RBC is Canada’s largest bank ranked
by assets with total market capitalisation of C$82bn ($79.4bn).
Wealth management is one of RBC’s five core businesses, accounting
for about 14% of the bank’s total profit. The bank has been helped
by a strong credit rating and healthy balance sheet.
RBC’s wealth management business
however extends far beyond Switzerland, serving more than 35,000
high net worth individuals and institutions through more than 34
offices globally.
Lagopoulos oversees about 11,000
people in four core segments: Three are distribution businesses and
one is manufacturing business dealing trust, tax, investments,
banking and credit. Its international business is licensed to
service Canadian and American clients.
Up until 12 months ago, RBC’s
international wealth business had grown profits by a compound
annual growth rate of 30% over the past five years. The past 18
months have dented this heady rise.
In its second quarterly
report to 30 April, wealth net income was C$90m, down C$36m or 29%
over the past year primarily due to an unfavourable accounting
impact of C$68m (C$61m after-tax) related to foreign currency
translation.
Profits were also down between 12
to 14% partly impacted by the strengthening Canadian dollar.
Lower market indices, clients going
more into advisory than discretionary services and client
transaction volumes dropping during the past two years have all had
an impact, says Lagopoulos.
“Like all private banks, the last
12 months have not been great. We have had spread compression on
profitability. You can make a good spread when rates are 1-3%,
pretty hard to make a spread on 25 basis points,” he says.
The short-term slowdown does not
overshadow a steady ranking rise. Based on year-end 2006 data, RBC
ranked as only the 20th-largest private bank with assets under
management (AuM) of C$150bn. By 30 April 2010, RBC’s discretionary
AuM has risen to C$250bn assets, which includes its asset
management business. Its Canadian, US and International wealth
business had AuM of C$44.4bn to 2009 year-end.
RBC’s steady AuM growth has been
fuelled by a concerted hiring push over the past 4-5 years. The
wealth management arm has hired more than 1,200 staff globally
during the past year with more than 700 being client facing
employees. Hiring emphasis has been in Latin America, the Middle
East, in Switzerland to handle African clients, and India where it
has hired a non-resident Indian team.
Asian linkages
Latin American and Asia are two
regions RBC’s international wealth business is giving special
attention. Lagopoulos says the Canadian bank is closing in on
acquisitions in Asia and Latin America.
“We are expecting that between now
and the end of this year we will have a couple of things to
report,” he said.
The growth of the Asian private
wealth market is no secret. The 2010 Merrill Lunch/Capgemini
World Wealth Report says Asia-Pacific high net worth wealth
surged 31% to $9.7 trillion in 2009, overtaking Europe’s for the
first time.
Lagopoulos wants to hone in on the
Canadian link to the Asian market. Tapping into the estimated
100,000 Canadian passport holders in China is just one example of
exploiting these links.
Canadians eye Taiwan,
Vietnam and Korea
RBC has had wealth offices in China
for the past five years, and operates hubs in Hong Kong and
Singapore. Taiwan, Vietnam and Korea have also been identified as
important markets for new money going into Canada.
“The Canadian linkage to the Asian
market is a very important one. China and India are important but
also markets like Taiwan, Vietnam and Korea are important as well
for new money going into Canada,” he says.
“The linkage to Canada is something
we push very hard and the benefit of being with Canada’s number one
bank is something that is very important to us.”
Latin America remains other big
part of its international plans. RBC has had a presence in the
region for more than 100 years, with about 18% of client assets
coming from the region.
The key markets are Venezuela,
Brazil, Argentina, Colombia – with a smaller but important presence
in the Caribbean, says Lagopoulos. It has built out its Latin
American team in Toronto, New York, Miami and Geneva and spent
“heavily” to build its client base in the region.
More private bank
consolidation?
RBC’s desire to
acquire leads Lagopoulos to speculate on wider industry trends. RBC
has a history of purchasing highly professional business, its
latest was in February 2009, when it bought Mourant Private
Wealth.
He sees consolidation between
private banks re-igniting prompted by the sell-off of international
wealth businesses within banks that received state support.
Examples include Germany’s
Commerzbank which sold its international businesses Kleinwort
Benson and Dresdner. KBC and ING also divested its Swiss and Asian
private banking arms.
“We think there’s going to be more
consolidation. There are a lot of governments that stepped in to
save banks, and they still own those banks,” he says.
“The point of governments stepping
in to save those banks was to save their local depositor, not to
have them be the best Swiss bank in the world, or the best trustee
in the Channel Islands.
“So where is the money going to get
spent? Is it going to be spent on a better and better Swiss bank,
or is it going to be spent on being a safer US or UK bank?”
Big bank model
Regulators in various jurisdictions
may be eyeing up the one bank model for possible break up, however
Lagopoulos remains upbeat.
“I am still very bullish on the big
bank model – credit quality, safety and security and stability are
going to continue to be important to clients. The way we’ve always
sold our business is a ‘boutique with a balance sheet’,” he
says.
When challenged about RBC’s ability
to genuinely compete against its larger rivals including Credit
Suisse, JP Morgan, Bank of America/Merrill Lynch and Citibank,
Lagopoulos goes on the front foot.
“I don’t see that as a
big deal, if you take discretionary assets you’d put where UBS was
at $1 trillion, can you do that much more with a $1 trillion than
you can at $250bn, I think you get to a size where it doesn’t
really matter.
“We are more than big enough to
succeed, I think we are more than competitive – growth trends show
– look at where we were five years ago and look at where some of
the other players were five years ago and where we are today. I
wouldn’t accept that bigger is necessarily better in this
business,” he argues.
Looking ahead, the Canadian linkage
with Asian and South American clients, is an important focus for
Lagopoulos.
“When I started in this business 24
years ago I thought being a Canadian bank was a liability. Because
nobody knew Canada, Canada’s stake in the global economy has risen
significantly,” he says.
“About five years ago I would have said Canadian is about the
next best thing to Swiss in this industry. Now I think it’s the
best.”
