15 September 2016 |

The Doldrums

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Those of you with a penchant for whodunnits and an eye on the wire may have picked up on a recent report out of Switzerland, that 10 percent of Swiss private banks “disappeared” in 2015.

Yes, disappeared.

Alas, sleuths! If you were expecting some Doylian mystery with a whiff of red herring, I’m sorry to say that this is a fairly open-and-shut-case.

The culprits? Volatile markets and muted client activity, rock bottom interest rates, regulatory complexity and evolving client needs.

Ominously, a similar assemblage of factors is conspiring to make life difficult for Asia’s private banks – and the signs are telling.

Much has been written by Asian Private Banker about consolidation dynamics and, I dare say, acquisitions and exits will be par for the course for the foreseeable future.

But the recent retrenchment activities of a number of private banks in the region have only reinforced the fact that one can no longer run a business on the fumes of ambition alone; and those that do will soon reach an impasse – if they have not done so already.

I will refer to this impasse as the Doldrums.

The Doldrums, as any sailor can attest, is a zone that is antithetical to positive progress, where structure overawes agency, where trade winds are sickly (barring the odd ruinous hurricane) and frustration can boil over.

Some banks are better equipped to navigate the Doldrums and to even circumvent them altogether.

There is now a fairly confident consensus that scale is a deciding factor, with US$30 billion in assets under management generally accepted as the minimum amount required to run a profitable business.

But is it really that simple?

Not according to those that fall short of this mark. So-called boutiques (a hazy tag if ever there was one) acknowledge that they will never compete in terms of AUM size, but argue that their diminutive stature affords them a nimbleness that larger players cannot match. There is, of course, some merit to this argument, in the sense that these players may choose to focus on a particular area of strength unlike one-stop shops. At the same time, specialisation renders one vulnerable to cyclical dynamics and shocks – traits that are congenital to markets.   

Then there is the question of talent that, while an industry-wide issue, does not affect all banks equally. Boutiques will say that their scale removes the need to the hire en masse, and that they can afford to approach the talent pool in a more judicious manner. But to attract senior bankers, boutiques typically need to pay 20-40% above the going rate at industry leaders such as UBS and Credit Suisse, with little guarantee that they will be able onboard the assets. And they must also compete with a steadily growing cabal of independent wealth managers attractive to entrepreneurially-minded senior RMs.

What is notable is the growing trend amongst smaller-scale private banks to seek out onshore partnerships to ensure a pipeline of business. This is potentially an astute play given (i) the underbanked state of Asia’s onshore markets and (ii) the prohibitive costs of setting up a standalone onshore business. Lombard Odier has been especially active, inking strategic deals with institutions in South Korea, Thailand and, most recently, the Philippines. Others are looking to follow suit, with the under-penetrated China market a prime target (in the past two months alone, I have personally introduced two offshore CEOs to their counterparts at two large-scale Chinese institutions).

But the Doldrums are even less forgiving to another subset of private banks that typically languish below the US$30 billion threshold but, by virtue of their business model, require scale to survive.

I’m referring to private banking arms for larger international institutions that, being publicly-held, are under constant shareholder pressure to meet revenue targets.

These are the banks that are unable to justify an Asia presence when margins are so tight and when dire global conditions are forcing strategic rethinks at the group level. These are the banks that have been hit hard by a lull in transactional activity and a slow uptake in discretionary mandates in the region. These are the banks that will struggle to convince clients that they bring something unique to the table and that they are in it for the long game given that Asia is not their ‘home’ market. And accordingly, these are the banks that will struggle to attract, remunerate and retain high calibre talent.

Indeed, just how these banks intend to navigate their way out of the Doldrums on their own volition remains to be seen; and barring any structural shift in the market, I will make a rather safe prediction that we will see a raft of exits (whether outright or via acquisition) in the next 12-18 months. Yes, a 10% annual attrition rate in Asia may, at first blush, seem farfetched; but the omens are not at all good.

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