Cerulli Associates, Asia Pacific Edge, January 2009

As the world’s private banks struggle to come to terms with their vastly changed status after 12 months of market turmoil, so too are they adapting to changing needs and expectations from their clients. The market for private banking services in Asia, and the models of those banks who seek to provide them, are in a great state of flux.

It starts at the very top. Consider the field of the world’s leading private banking groups. UBS remains intact, but with confidence in the bank and its model shattered and $4.4 billion of write-downs in the third quarter alone; it has committed to paying back $8.3 billion of auction-rate securities held by its private clients, securities it clearly now believes should not have been sold to them in the first place. Credit Suisse wrote down SFr2.4 billion in the same quarter. Merrill Lynch lost so much that it has been taken over by Bank of America. Citi’s losses were so big, in terms of money and confidence, that it had to be bailed out by the US government. Of the bigger names, JP Morgan and HSBC have come out looking best – and one would hardly call them unscathed.

None of these losses of capital and credibility have come from private banking divisions, but the perilous state of the parent organisations cannot help but have had a negative effect on private banking clients’ perceptions. And, though private clients are generally well diversified and long-term in their thinking, the losses from almost every asset class since the end of 2007 won’t have helped. So private banks face a double challenge: not only do they have to find ways to help their clients make, or at least preserve, money in one of the worst financial environments in a century, but they also have to rebuild the level of trust those clients have in the organisations as a whole. Private banking is the ultimate people-business, and trust is never more important than in this field of banking: an institution that loses that trust has lost its business model.

There are several knock-on effects of this change. One is an apparent opportunity for those private banks that do nothing else but manage wealth – names like Julius Baer, Coutts, LGT, Clariden and Pictet. Another is that an even bigger opportunity has been created for those local names in the region with aspirations in private banking: regional players like Singapore’s DBS, or the clutch of Chinese banks who have spent the last few years building dedicated wealth management divisions to serve their local population. So far the perception of the credit crunch from Asia has been that is mainly an affliction of Western investment banks; with no Asian banks (yet) caught up to any great degree, there is a major branding opportunity for them to present themselves as safer institutions more in tune with local requirements.

In fact, the level of competition for private banks has never been higher. In addition to the specialists and the locals, there are also insurance companies, commercial banks and independent financial advisers all competing for market share among the high net worth segment. In some countries, notably Taiwan, wealth management is increasingly seen as the only profitable game in town for commercial banks, as other areas of business have suffered increasingly cramped margins or regulatory change; every bank of note is now active in this area. Elsewhere, China’s Ping An is an example of an insurer that now wants to be a financial services powerhouse, with wealth management a key part of the offering. (Globally, one could point to AIA, Skandia and Axa as part of the same trend.) And in the long run, IFAs may yet be the biggest threat, although their involvement in private client affairs is still fairly nascent in Asia.

There are also considerable changes taking place in product demand. One of the biggest is a rising mistrust of complex structured products. Many private clients around the world had money in collateralised debt obligations or credit-linked notes and have come to regret it. Currency-linked accumulators have also cause problems, and in many cases litigation. The fate of structured products has depended very much on the underlying, and on the mechanisms used to access or replicate it, but many of these products have been plagued by low or non-existent liquidity, meaningless capital protection or hopeless returns.

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