Despite limited clarity around the success of recent mergers and acquisitions, there is a clear expectation that the pace of private bank consolidation will hasten in 2014, writes Paul Golden.
Various industry surveys point to an increase in acquisition activity over the coming months. For example, more than one third of respondents to PwC’s 2013 private banking survey expected significant consolidation over the next two years, compared to only 6% who predicted that there would be no mergers or acquisitions over that period.
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Data from Scorpio Partnership’s 2013 Global Private Banking Benchmark report indicates that the biggest private banks are getting bigger, with the top 20 growing their assets under management by 10.9% in 2012 compared to overall industry growth of 8.7%.
Boston Consulting Group’s most recent global wealth report states that regulation has added to the cost and complexity of servicing wealthy clients. Pascal Denis, managing director Accenture Luxembourg, believes that regulatory changes have had an impact on acquisition activity and adds that clients have become more complex through the increased use of international structures. Technology has also become more sophisticated, often requiring costly core banking system replacement.
"Many acquisitions start from the point of view of improving the mix of businesses within the bank to expand its revenue base, so private banks acquire family offices to broaden their product range," he says.
Jean Lassignardie, chief sales officer Capgemini Global Financial Services, is confident that the trend for consolidation will continue, driven by the need to be a single point of contact for clients at the front end while aggregating different types of products and solutions in the background.
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By GlobalDataThis view is shared by Steve Allan, head of Towers Watson’s EMEA M&A practice, who explains that the key factors in any private banker merger/acquisition deal will depend on the commercial rationale and the transaction implementation plan.
Retain strengths
"However, it would be typical in such deals that a core business imperative is to retain the strengths of the acquired business, including the existing client base and their assets. It is also imperative to retain the current business and relationship managers of the acquirer, especially if business is to be merged effectively," says Allan.
Therefore, from a human resources perspective there is often a significant focus both on the retention of key account managers and maintaining the valuable aspects of the culture of the acquired organisation.
"The external culture of the acquired organisation (defined as how account managers interact with clients) is often a crucial part of the continued engagement of account managers. It talks to their motivation and willingness to go the extra mile in supporting their clients and the overall business and therefore by extension the nature of the customer experience, which ties closely to customer retention."
According to Allan, issues in this area are often fundamental to whether a deal is a success or a failure. "In the private banking industry this can imply that extreme care needs to be taken with transaction implementation, ensuring that efficiency targets do not adversely impact the client experience and that care is taken to ensure that plans to expand client relationships are handled sensitively."
Private bank advisor David Maude says it is still too early to tell whether deals such as Bank of America’s acquisition of Julius Baer’s European and Asian private banking units have delivered the expected benefits.
"The real tests will come later: what is the real quality of the associated client relationships; can the targeted gross margin uplift be delivered; and how effective will the integration be, especially given the considerable scope for cultural clashes? More generally, of course, we only tend to hear about the deals that went really well or those that turned out to be a complete disaster," says Maude.
Smaller transactions
"I expect to see more acquisitions – such as the reported agreement for DBS to purchase Societe Generale’s Asian private bank – in 2014, although I think there may be a shift away from large flagship deals towards smaller transactions. Western Europe and Switzerland are the key markets to watch here. Another trend, already well underway, is for developing players to seek acquisition targets that will give them a foothold into Europe and/or the US," says Maude.
Credit Suisse recently sold its German private banking business to ABN AMRO. Ralph Hientzsch, Frankfurt-based managing partner of private banking consulting firm Consileon, says his firm has seen successful transactions across Germany, for example Bankhaus Bethmann which has been aggressively growing through acquisitions without suffering any major defections or operational issues.
"Financial factors and the customer base are probably top of mind for anyone planning an acquisition, but we see other elements gaining more weight. Private banking business models are becoming ever more dependent on technology, so we see platform fit as an emerging key point. Also, mergers do not happen in a vacuum: awareness of local market dynamics is essential. Post-merger integration in a hyper-competitive market poses all manner of challenges as other players will be aggressively using the transition period to poach clients and teams."
The PwC report asked respondents who had made acquisitions about the success of these deals. The feedback was that 20% of these acquisitions had not been as successful as planned based on an assessment of client, advisor and investment specialist retention as well as operational and systems synergies. Nearly a quarter said that they had failed to retain as many customer relationship managers as they expected.
Hientzsch observes that since integration is often done in a piecemeal fashion and that clients are still remarkably sticky, final judgement on the success or otherwise of acquisitions can only be passed in the medium term.
"Wealth growth in mature markets such as Germany has been broadly in line with expectations – the problem is that much of the growth accrued to non-bankable assets such as real estate. As margins are still low (and falling) we see that many marginal players are being squeezed out.
"The private banking industry is heading towards a multi-polar world consisting of global players, multi- and single country boutiques, regional banks and emerging online providers. Each of these pillars will see some degree of consolidation internally whilst the exact makeup of markets will be determined locally."
According to Hientzsch, the withdrawal of major banks from certain countries creates an opportunity for incumbents and new players only if clients are not totally disillusioned with the industry. "The German example shows that regional savings banks and cooperative banks have been gaining assets from clients who are fed up with promises of alpha. They actually prefer a red carpet retail solution to wealth managers who fail to deliver."
Monitoring missing
Denis suggests that one of the reasons why it is hard to measure the success of private bank acquisitions precisely is that they are very sensitive to market fluctuations. "It can be hard to determine whether a deal was a success in terms of integrating the businesses or whether it simply benefited from an improvement in market conditions. However, quality monitoring is often missing."
He believes that the number of sub-scale or inefficient banks has increased and that improving market conditions will give the largest players more scope to make acquisitions. "The market will become more concentrated overall, although increased availability of shared services will reduce the cost base for niche players."
Maude notes that domestic and regional developing market players had been starting to gain market share even before recent foreign bank exits (largely through a greater focus on affluent/low-end private banking) and says the withdrawal will only accelerate that trend and provides a way to kick start a more HNW-oriented push.
"We see circumstances where banks are looking to divest themselves of existing operations in countries and markets that they determine to be non-core," adds Allan. "A deal to sell these operations to alternative players can be very attractive in this situation and provide a natural opportunity for the buyer to gain market share through rapid inorganic growth."
Last year saw some significant western private banks withdrawing from Asia, says Lassignardie. "While some of the reasons are understandable, the high net worth population in Asia is expanding and widening the market for private banking and wealth management services. This may create opportunities for new, regionally-focused players, but it is difficult to predict how the industry will look in three or five years’ time."
Larger players are generally thought to be better able to absorb the rising cost of regulation and a global brand can certainly help in some instances and with some types of clients – larger players tend to have particularly strong appeal for the international affluent and for entrepreneurs, for example.
But as Maude concludes, private banking is ultimately a people business. "There will always be room for smaller players that excel in delivering the personal touch and that manage to carve out a position as the ‘go-to’ player in a particular niche."
