It was once the norm for global financial services firms to boast of their international private banking presence in multiple markets. They would compete aggressively for client facing and investment talent in professional hires, often matching and exceeding compensation models for their already overpaid investment bankers.
But financial crises, compounded by global attacks on perceived tax havens, have caused a dramatic turnaround in the plans of business strategists at banking headquarters. Not only are they struggling with depleted capital and compliance-based reputation challenges, but they are finding themselves under pressure from frustrated shareholders, who no longer support remote, disparate presences and sub-optimal business lines.
There are already clear signs of both small and large-scale retrenchment by global players. Examples include Bank of America’s impending disposal of its Merrill Lynch wealth management businesses outside the US (the original Bank of America having abandoned its international private banking operations over a decade ago). Coutts is also disposing of operations in remote centres.
BIG AND SMALL
The units for sale are either small in scale and far away from the home country or conversely relatively large, like KBC’s for example, and represent some more desirable assets that could attract the few buyers willing to pay prices close to book value.
Given the low valuation environment and low capital intensity of wealth businesses as well as the often-unused linkage between private clients and their industrial/commercial banking requirements, it is surprising to see these units being sold, compared to alternative options available to universal banks in shedding assets.
Nevertheless the trend is clear. Expect many more large players to focus on home countries and their preferred regions. This will result in further disposals, both large and small, dealing deadly blows to their original plans of being global players in private banking.
PICKING THE WINNERS
Three classes of winners are emerging: Swiss-based global players such as Julius Baer, Safra/Sarasin and Union Bancaire Privée; ambitious Canadian firms such as RBC; and certain sovereign wealth funds tempted by the perceived low risk of such acquisitions and hoping for market recoveries so as to eventually exit at a profit or through market listings.
Private equity will remain interested, principally where synergies on a national level could tempt them to release pent-up, surplus funds. In the smaller financial centres, local national players will always be there to consolidate. However, client defection risk remains high in such cases.
Portfolios of wealth management clients will be bought and sold every few years. But at least the clients can be reasonably sure their responsible relationship managers will be loyal to them, as they will be taken care of by their new employers.
We should also not overlook the pressure of national regulators over their national banks, urging them to exit what they perceive as tainted tax haven centres on top of all the capital constraints from Basel III and the like.
Equally, the cost of implementing the new cross-border compliance practices will limit the ability of many to undertake the necessary investments needed to shelter themselves from ever stricter regulatory and compliance checks and burdens.
The institutions who best handled the crises were those with a clear stable focus on the industry and these will once again come out on top.
This is the third in series of articles by Ray Soudah, Founding Partner of MilleniumAssociates AG, the independent global M&A and corporate finance firm based in Switzerland and the UK
