While the actions of the European and North American authorities, aimed at recouping lost tax revenues from offshore hubs, have eroded the traditional international wealth management business model and lower economic growth in many developed markets is limiting wealth creation, Asia has turned into the battlefield for growth for almost every single private bank in the world.
Asia Pacific is now the second largest region in terms of high net worth wealth after North America and its growth story is fuelled by high savings rates, increased domestic consumption and beneficial demographics.
However, while Asia is estimated to hold 30 per cent of global wealth, only 10 to 15 per cent of the region’s wealth is currently managed by private banks, versus 70 per cent in North America and 30 per cent in Europe. This under-penetration is a unique growth opportunity, says Kathryn Shih, CEO of UBS Wealth Management Asia Pacific. “The wealth pool in Apac is huge but not developed. Wealth in the US and Europe is older, while in Asia it is first or second generation wealth still in the hands of entrepreneurs.”
The demand for wealth management services is increasing over time, as wealth is transferred to the next generation, and corporate liquidity events lead rich entrepreneurs to look for financial planning advice. Challenging markets and a low yield environment are also forcing more people to turn to wealth managers.
But the challenges to building sustainable growth are enormous and newcomers to the region should be particulartly aware of them.
There is a serious talent shortage in the market and the merry-go-round of relationship managers in the industry has caused a massive escalation of salaries. In Hong Kong and Singapore, where today there are an estimated 4,600 private bankers in total, there will be a shortage of 1,600 private bankers in the next five years, due to the increasing number of wealthy people, says Ms Shih.
Declining revenue margins and high cost income ratios are also a major challenge.
Cost-to-income ratios in Asia, for example, are higher than in Europe. Revenues remain challenged due to lower asset levels and lower returns on managed assets. Clients have become more risk-averse, many have de-leveraged their portfolios and have been shifting towards simpler products that yield lower margins for banks, from equities into fixed income.
At the same time, new regulations are negatively affecting revenues while driving up the cost of business. Basel III as a regulatory example will further reduce the ability of banks to use their balance sheets to generate profits.
Many Asian private banks have high growth rates, but low profitability. In the past five years private banks’ profit margins have declined from 35 to 11 basis points in Asia, versus 24 basis points in Europe, according to the McKinsey Private Banking Survey 2012. “Cost management is very important while we are growing and it is vital to start getting performance management in place,” states Ms Shih.
“Capital constraints and tighter profit margins will trigger further industry consolidation and force many competitors to review their ambitions.”
Moreover, of the total $10,700bn (€8,255bn)of HNW assets in Asia, the vast majority, 90 per cent, is onshore wealth. And 40 per cent of the offshore wealth is booked in Hong Kong and Singapore today, according to the BCG Global Wealth report.
“A lot of us are fighting over a small, very expensive and mixed quality talent pool, in Singapore and Hong Kong, when 90 per cent of the wealth is not there,” she says. Wealth is in Japan ($4,231bn), China domestic ($2,706bn), Australia ($542bn), India ($477bn) and so forth, according to the RBC/Capgemini Asia Pacific Wealth Report 2012.
But there are several challenges that prevent private banks from establishing onshore operations, including licencing, high cost of setting up IT infrastructure and a small or non existent talent pool. “Many regulations are aimed at retail banks and brokers, so you have to do a lot of lobbying for regulators to allow you to offer a holistic wealth management,” explains Ms Shih.
Moreover, in these new markets, investors often have high return expectations, as they have made a lot of money in their businesses.
But with all the double tax treaties signed in Hong Kong and Singapore, and the focus on them operating as wealth management centres rather than tax havens, it is very important to start looking at other strategies in addition to just growing these two locations, believes Ms Shih.
Institutions should focus on which markets they want to cover. “As regulations develop and as tax compliance becomes more and more important, domestic businesses start to become more attractive.”
