For an affluent country with the world’s
fourth-largest wealth management sector, Australia has a
surprisingly undeveloped private banking industry. But that hasn’t
stopped local and international banks from trying their luck in the
Australian market, and attempting to use it as a base for
operations in Asia.

On the face of it, Australia should be healthy pickings for
private banks. Australia’s millionaires are not only getting more
numerous, but they are richer than ever before.

The latest Merrill Lynch-Capgemini World Wealth Report revealed
that, despite the global market turmoil, Australia has retained its
top-10 spot in the world rankings of millionaires per country. With
a total population of 20 million, Australia has 172,000 people with
financial assets of at least US$1 million.

This means that one in every 123 Australians can call themselves a
‘high net worth individual’. In terms of households, around 10
percent have a net worth of more than $1 million.

But while many Australians are keen investors in the share markets
and certainly in residential and even commercial property, it has
proved more difficult for them to entrust their wealth to the
services of a private bank.

One reason is the pattern of Australian savings. A decade after the
Federal Government introduced a compulsory superannuation – or
pensions – scheme, around A$1 trillion has found its way into
superannuation assets. This has spawned a healthy funds management
and financial advice industry, with an increasing number of people
choosing to set up their own pension fund.

This remarkable momentum has failed to translate into the predicted
strong growth of the private banking sector partly because, as the
head of St George Private Bank – Carl Molden – said recently,
Australians are an egalitarian lot.

“Of the Australians who qualify according to the international
standard of high net worth, only about 30 per cent are actually
using these private banking services,” says Molden.

There have also been some well-documented hiccups. Credit Suisse,
strong globally in private banking but with a negligible presence
in Australia, announced its entry to great fanfare in early 2007,
only to lose its chief executive, Cedric Davies, in obscure
circumstances inside of six months.

New chief Nick Kalikajaros is driving a model which focuses on
entrepreneurs, people with the bulk of their wealth invested in the
businesses they have created.

Throughout the advisory sector banks have tried and abandoned
various models but – in the words of one analyst – they all come
back to what is a “quite traditional” commercial banking
model.

“They have all got some kind of product they call private banking
and while they are all pretty serious about it they haven’t got far
beyond offering different chequebooks, credit cards and access to a
relationship manager,” says the analyst.

“There is a trend towards bundling deposits together with products
such as margin lending and structured products, but it isn’t the
sophisticated European or even US style private banking service
which is being offered elsewhere.

He adds: “There is also a bit of a tendency for banks like HSBC and
Citi, for example, to call what are mid-market premium banking
services as private banking. It might sound nice in the market but
people aren’t silly and they can generally see them for what they
are.”

Fixated on debt

Perhaps because Australia is so focused on residential property and
mortgages, private banks also often have more of a fixation on debt
rather than investible wealth.

Tom Alexy, previously head of Merrill Lynch’s private banking
operation in Australia, lamented at one point that, after returning
from abroad after selling his home he was told that he could no
longer be a private banking client because he no longer had a
mortgage.

“I was gently told that I was no longer a private bank client
because I had paid off my mortgage and been shipped back to the
main office in Sydney,” Alexy said.

Indeed, there is anecdotal evidence that the private banks are
upping their debt requirements for banking: where once banks were
comfortable with A$500,000 in lending, some are now looking to
stretch that to A$1 million.

The hierarchy of private banks in Australia, among local players at
least, is largely reflective of their status in the general market,
although their models are very different.

According to a recent survey of the Big Four – ANZ, NAB, CBA and
Westpac – these banks between them have around A$60 billion
invested through their private banking operations.

Other local banks to play in the private banking space are the
HBOS-owned BankWest, St George, and the recently merged Bendigo and
Adelaide Banks.

Without exception they all target a segment of the market well
south of the A$10 million or so a person needs to be a client of
Deutsche or Citi Private Banks (as distinct from the Citigold
offering), or the $30 million needed to be a client of the Myer
Family Office, a historic institution now operated by the
Maple-Brown funds management group.

There are estimated to be around 1,100 of these ultra high net
worth individuals in Australia, compared with as many as 18,000 in
the Asia-Pacific region. While the general rule of thumb in the
industry is between 75 and 150 relationships for each relationship
manager, these more upmarket services keep it down to as low as 10
per manager.

Local banks

Among local banks, National Australia Bank leads the pack, holding
private banking assets estimated at around A$17 billion and,
according to Paul Dowling, principal analyst at research house East
and Partners, the one which is closest to “getting it right.”

“NAB is probably closest to that holistic model of a bespoke
service,” says Dowling.

“It has highly specialised business units addressing that segment
and has managed to integrate its wealth management offering much
more closely to the core retail banking offering.”

NAB private banking sat for much of this decade within the parent
bank’s business banking unit, catering to clients with A$1 million
or more in wealth apart from their own home – something of an
industry standard in Australia.

The NAB has however, tweaked its model and in April created a
Private and Institutional Wealth Division, saying a retail bank had
to offer more in the high net worth market than they had
previously.

The new division combines a number of NAB businesses serving both
private wealth and institutional clients, such as the former NAB
Private Bank, National Custodian Services, National Online Trading
and units providing investment consulting, financial planning and
specialised investments.

After several management changes in recent years Andrew Hagger now
heads up the new Private and Institutional Wealth Division which he
says was formed because “the customer base was saying that they
wanted access to the sophistication of the wider bank group.”

Creating specialised services

It is a similar story with a slightly different approach at the
Commonwealth Bank of Australia (CBA), which was ranked fourth among
the Big Four Australian banks with private banking assets of around
A$11 billion when it embarked on a new direction recently.

The CBA revamped its private bank to sit within a new area called
private client services, which takes in not only the retail bank
but stockbroking arm CommSec and wealth management arm Colonial
First State.

The CBA has a higher threshold, targeting clients with $A2.5
million of more in assets (excluding assets contained within their
home). Former Macquarie Bank executive Edward Tait is the executive
general manager of private client services and Richard Nunn, the
head of the CBA Private Bank, reports to him.

Nunn admits that for many years the CBA made little progress in
private banking because it couldn’t get its model right.

“The background to private banking at the CBA is that it really
wasn’t sure in the past where it sat, sometimes it was business
banking, sometimes institutional banking,” says Tait.

“The CBA strategy is to provide lending in the asset area as well
as stock lending, and to also provide a more sophisticated advisory
capability and bring in some intellectual horsepower and apply
institutional practices to wealthy people’s accounts.”

The Commonwealth Private Bank is also expanding out of the
traditional centres of Melbourne and Sydney – and even Hong Kong
and Singapore – and recently opened new offices in Queensland in
Townsville (also home to ANZ) and on the Sunshine Coast.

And while it is opening offices in regional Australia, CBA is also
retreating from Asia, selling a Singapore operation to Schroders in
October last year for A$10 million.

It’s a different strategy to ANZ, which – despite selling its south
Asian arm Grindlays several years ago – has rekindled its interest
in the region with the stated aim of being a “super-regional bank,”
including in wealth management and private banking.

Standard Chartered, meanwhile, is targeting wealthy Australian
expatriates with its private banking offering, which is using the
ambassadorial services of legendary Australian cricket captain –
and former India coach – Greg Chappell as part of its recruitment
effort.

Another Australian bank which is not running from Asia is
Macquarie, which earlier this year launched its Macquarie Private
Wealth Asia business out of Singapore under the leadership of
former JPMorgan private banker Joseph Poon. The operation hopes to
grow rapidly through accessing not just the advisory and broking
expertise of Macquarie in Asia, but also its access to deal
flow.

This strategy echoes that of Macquarie’s Private Bank in Australia,
where banking head Guy Hedley has said the point of differentiation
for Macquarie is on the “investment side of the ledger,” bringing
deals such as private equity opportunities to its clients.

To become a client of Macquarie Private Bank, the threshold is A$4
million in wealth. While the bank is relatively small, with A$1
billion in assets, it remains a powerful player largely because of
the local strength of its parent.

Another player leveraging the scale of its parent is UBS, which
plays in a less wealthy market segment than Macquarie but which
makes its “European-style” service its point of
differentiation.

In this European model clients often hand over the assets to be
managed entirely by the bank, inhouse, across its global
operations. UBS is also very strong on the transferring of wealth
across generations, not just from one generation to the next but
across multi-generations.

The bank has also incorporated philanthropic services into its
offerings.

But while the banks are positioning themselves to grow their
private banking businesses, the recent market downturn has been a
significant setback.

“There are plenty of people who made it through our private banking
threshold in the last year, only to slip back down again as the
market slumped,” said one private banker, working for a domestic
Australian bank in Sydney.

“It presents a real dilemma for us. Do you back that person to
reclaim their wealth, and therefore go after them as a customer, or
do you write them off or wait for them to come back up again?

“It’s a tough call when we are under pressure to get it right in
private banking, and grow our business against our
competitors.”

While the market conditions may not be much of an issue for the
banks which deal with ultra high net worth individuals, who want
risk management strategies and their wealth preserved, it is a
different dilemma for banks which deal with higher numbers of
clients whose wealth has, in many cases, started to evaporate in
the current downturn.

“It is just what the industry didn’t need right now,” said the
Sydney-based banker. “And if it goes on for much longer it could
set the industry back a few years, just as we were starting to
grow.”