The 19th annual PBI conference drew
speakers from across the industry to speak about the key trends
affecting their businesses. Will Cain sums up the main talking
points from a day and a half of presentations on compliance,
offshore centres and private banking business
models
Offshore strategy, business models and compliance were the key
areas of discussion at this year’s PBI summit and awards. There was
an overriding feeling of optimism for the year ahead, with most
private bankers predicting inflows of client assets in the 10
percent to 15 percent range (see page 10), though there were some
caveats.
Go deeper with GlobalData
Key takeaways
• Compliance remains a key concern, with senior bankers claiming
increased regulatory costs could add between 3 percent to 4 percent
to cost income ratios across the industry.
• Uncertainties persist over the effect of international pressure
on offshore centres and the impact of recent tax agreements.
Private bankers are maintaining a wait-and-see approach to their
offshore strategy, but more than 80 percent reported little impact
on their business so far in a forum poll (see page 10).
• The private banking business model is becoming a central pillar
of strategy within universal banking groups which have scale in the
discipline because of its return on equity. Private banks which are
able to offer finance are seen to have an advantage in today’s low
interest rate environment.
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By GlobalDataKeynote speech
Chris Meares, CEO of HSBC Private Bank, delivered the keynote
speech at the 19th annual awards. He said there were three key
influences facing private banking: the economic shift from West to
East, the changing regulatory environment and new client
requirements. Succession planning is emerging as particularly
important theme in the industry, he added.
“There is a post-war generation in which entrepreneurs created a
huge amount of wealth, and many of them think they are
indestructible, but they are not,” said Meares. “They need to take
steps to prepare for the future, and private banks are in a
position to help them.
“There needs to be a transfer of wealth to the next generation and
how you manage that, and cater for the differing requirements of
individuals is going to be a big theme. Private banks are going to
need to tune into that.”
Compliance
Compliance has been acknowledged as an important industry theme for
some time, but this has intensified in the wake of the financial
crisis. Daniel Truchi, global CEO at SG Private Banking, said
increasing compliance costs would hit private banks’ cost-income
ratios, possibly by between 3 to 4 percentage points.
As a result, there was a need for an increasingly high-tech
approach in private banking. While private banks are looking to
reduce costs in light of declining margins, many are actually
increasing spending on technology, because their current level of
investment in the area is considered sub-optimal.
Establishing sales suitability for clients was identified as
critical in the wake of mis-selling scandals in the industry.
Meares said in the last edition of PBI that client conversations
had to be well recorded, particularly in instances where they were
buying multiples of the same product after the initial
purchase.
“There is a tightening of regulation,” he said. “It has already
been seen in Europe through the MiFID requirements, and we can
safely say regulation is here to stay.
“You have to do your job with regard to know your customer and
sales suitability, and it means our private bankers have to be well
trained and well versed in those subjects.”
Dr Thomas Meier, Julius Baer’s CEO for Asia, Middle East and
Eastern Europe, agreed that MiFID and fair-dealing guidelines for
customers would have long-lasting consequences on private banks in
general. There was a need for increased clarity and quality of
advice “translated through absolute performance”.
“If you are in a position to generate absolute performance with an
excellent service you will have a future in the years to come,”
said Meier.
He described the recent move to separate the private banking and
advisory businesses of Baer from its asset management division as
“one of the most extreme moves you can imagine to live up to the
new demands of industry”.
“We came to the conclusion on the business model side that we
should go back to basics,” he said. “We believe this approach is
the way to go – a holistic approach which fits particular client
requirements.”
Offshore private banking
The world of offshore private banking is changing so quickly it is
starting to develop a new vocabulary. The Inland Revenue Service,
the tax service of the US, has started being popularised as the
‘External Revenue Service’ in the industry (see page 2), a swipe at
its increasing efforts to police the global tax system.
Meier introduced another new phrase during the conference. He said
distinctions between onshore and offshore were generally
misleading, and introduced the concept of “no-shoring”.
“Many of our clients run global enterprises, and they don’t think
about national boundaries,” he said. “They are just looking for the
most professional player who can deal with the wealth situation of
a client, and you can’t do that in every country in the world. I
think that this notion about offshore is wrong, and you should
overcome it and redefine the value proposition to the global
requirements of your clients.”
Truchi said many of the grey-listed institutions were committed to
signing enough tax agreements to make them compliant with G20
regulations, and that “for the time being” the changes did not
affect SG’s business, though he was monitoring the situation and
the jurisdictions SG operated in. He said clients were more and
more global, and their need for tax advice and succession planning
were greater than ever.
“Onshore will be difficult to crack,” Truchi said. “Even in France,
for foreign banks to succeed in the domestic market is difficult
and it requires a long-term commitment. That’s true whether it’s
France, Japan or China.”
HSBC Private Bank has been relatively unaffected by the pressure on
offshore centres by the G20 nations, Meares said.
“The offshore industry will continue but in a different shape and
form,” he said. “There are lots of good reasons for using offshore
banking: diversification of risk, hedging against political
uncertainty and tapping into other investment cycles.”
Business models and clients
Meares said the current low interest rate environment highlighted
the strengths of private banks that had access to a balance sheet
and could provide their clients with loans.
“Interest rates are low, and we expect them to continue to be low,”
he said. “That will induce leverage, though not excessively
so.”
Truchi added that private banks were well positioned within
financial services because of their high levels of capital and
return on equity. He said the G20’s requirement for banks to hold
more reserves would provide private banks the opportunity to evolve
within their parent organisations.
Another key area for Truchi was restoring trust among
clients.
“We have lost a lot of trust from clients and we need in this
banking industry more professionals, not mercenaries,” he said.
“This business has to be run on a long-term basis, not switching
from one bank to another every couple of years. We need real
professionals with good training to retain respect from clients and
this is something which is very important.”
Francois Monnet, Credit Suisse’s private banking head for South
East Asia, said private banks needed to acknowledge that clients
were disillusioned. There was a need for higher service standards,
greater transparency and disclosure around products and services,
particularly advice.
The key to executing a differentiated advice-led strategy, he said,
was the re-skilling of relationship managers, a conclusion echoed
by many of the summit speakers.
Catherine McDowell, managing director at ANZ Private Bank, said the
value drivers in the industry are starting to change.
In the past, brand, relationship managers and industry framework
were important, but the emphasis is shifting. Private banks were
focused on prestige, exclusivity and security, and could get away
with high pricing. There was a focus on relationship managers,
particularly in terms of the quality of advice and service level,
and although this remains an important focus, there is an
increasing need for systems to support them.
The industry framework, which was traditionally based on banking
secrecy and the stability of the Swiss model, is now moving into a
more transparent phase.
McDowell argued there was now a focus on emerging markets, cost
management and “differentiatiors”.
Private banks are able to generate extra revenue through the
significant asset pool of untapped assets in emerging markets.
Costs are being driven down by improving economies of scale,
segmentation and technology.
Differentiation would be driven by regional product specialists,
asset allocation, quality of people and a variety of business
models – for example family offices and boutiques.
Consolidation
Consolidation and new entries into the industry are being driven by
the attractiveness of the private banking business. Most private
banking assets are held off balance sheet, which has seen the
industry emerge more strongly from the financial crisis than other
areas of financial services. Meares said he expected more
competition in the coming years.
McDowell, whose ANZ business recently bought parts of RBS’s private
banking operations in Asia in a $550 million deal, looked at some
of the potential private banking mergers and acquisitions
candidates.
She listed parts of RBS, Lloyds Banking Group, ABN AMRO, Clariden
Leu, Dexia and KBC as potentially available. She said consolidators
in the industry could include BNP Paribas, Société Générale, Crédit
Agricole, Credit Suisse, Standard Chartered and Bank
Sarasin.
