Mike, generally a positive start to the year going by UBP’s interim earnings report.
UBP’s first half results were very encouraging, net profit up 13%, revenue up 20% – a large part of this is a result of the Coutts acquisition. As Guy de Picciotto [CEO, UBP,] has said, in many ways the results for the first half of 2016 have vindicated UBP’s view of the Coutts business.
UBP was not the only bank to look at Coutts with a view to acquire. But others were put off by Coutts Asia’s unsustainable cost/income (CI) ratio. Why do you think UBP proceeded with the purchase?
In terms of the various views on the acquisition of the business, what I would say is that UBP has a huge amount of experience in acquiring wealth management businesses, largely in Europe, with five acquisitions in the last five years; so, we’ve developed a real understanding of the acquisition process.
The conclusion, having looked at the Coutts business, was that this was transformational for UBP in Asia, in that it gave us a platform in the region.
As a result of the purchase, we went from around US$1 billion in assets under management in Asia to about US$10 billion overnight. It also gave UBP a branch in Hong Kong alongside the original branch in Singapore. So there’s no question that, for UBP, the Hong Kong and Singapore branches and the acquisition of Coutts are transformational and give us now a foundation to further build a business.
But how is it that UBP was able to rationalise taking on a business whose CI ratio was well in excess of 100%?
It’s difficult to directly compare the CI ratio of the Coutts business before integration and the ratio today. What is clear is that the ratio has improved dramatically over the course of the integration.
The reason why it is difficult to assess is, first of all, the Coutts business pre-integration was in a holding pattern. As you will remember, there was a protracted period – about two-and-a-half years – during which the business was first under strategic review before going through the sale process and finally integration.
So to assess the CI ratio and commercial performance of Coutts at that point is quite difficult, given that the business was not in growth mode. What is absolutely clear is that the CI ratio has greatly improved and we are now set up to grow profitably.
When Guy de Picciotto was here earlier in the year, he outlined a fairly bullish vision for UBP’s business in Asia and set a number of targets – aiming to double AUM over the midterm, and to increase Asia’s share of the bank’s global AUM to 25%, also over the midterm.
Yes, the primary objective at the moment is to double the size of the [Asia] business off the back of the Coutts acquisition. So the immediate priority now is to consolidate and double in size. Whether that takes us two, three or four years depends to a certain extent on the steps we take and also the market environment.
Let’s assume that the next five years stretch constitutes the ‘midterm’. By our estimates, UBP has US$11 billion in private banking AUM in Asia, and that doubling AUM would take you, conservatively, to US$20 billion. To do this, UBP would have to achieve a compound annual growth rate of just under 13%, which is far in excess of what a number of your competitors are achieving. How do you intend to beat the market?
It will take a combination of measures. The first approach – which Guy has also spoken about – is hiring established RMs, and we have an ambition to increase the number of RMs from around 65 at present to approximately 100 across Asia within the next couple of years. Essentially, organic growth through relationship managers.
Second, we have here a very well-established client base. The business has been in a holding pattern and we are already starting to see clients doing more with us. There is absolutely the potential to increase the share of wallet we have with existing clients.
The third element, which is always difficult to anticipate, but remains relevant is that as we see further consolidation in the region, there may well be opportunities that arise – either in terms of teams or portfolios – that we are well-placed to take advantage of.
So while a CAGR of 13% over the next five years is, I agree, higher than market, the CAGR from US$1 billion (AUM) to US$11 billion is also higher than market. Clearly there are a multitude of ways to achieve higher growth rates.
De Picciotto’s aim to increase the Asian share of UBP’s global AUM to 25% will only increase the pressure to grow at a higher-than-average rate.
Like I said, the core focus for us at present is to consolidate the acquisition – it’s been a really great start over the last four months – and to hit the targets in terms of doubling the size of business and to hiring RMs that share our vision for WM in Asia.
How do you intend to meet your hiring targets?
We’re not going to go out and hire anyone we can find. It’s a case of quality over quantity. I’m spending a lot of time meeting with RMs in Hong Kong and Singapore and we’ve been really encouraged by the conversations we’ve had. People are intrigued by a privately-owned private bank that is committed to and investing in the region at a time when a lot of banks are either retrenching or withdrawing altogether.
But you may not be able to avoid bidding wars, especially because, like others, you are targeting “quality” talent with decent books. More so, mature, entrepreneurial talent is increasing taking the IAM/EAM route. So why would an RM choose to work for UBP in Asia?
For RMs today, there are some reasonably clear choices. They can go for large universal banks that offer clients a one-stop shop. But that also means that relationships are increasingly institutionalised. The other option is to go with boutique private banks, including UBP, where the RM continues to be the primary interface and the primary owner of the relationship.
You’re right, the kind of RM that has been successful at UBP over the years – and will continue to be successful – is someone who is very experienced and has got a very strong network of relationships, whose clients respect them for the advice they provide and who’ve developed their reputation over multiple years. For these individuals, we offer a secure and stable platform and environment to service their clients into the future.
At US$11 billion in AUM, UBP is still well below the consensus ‘minimum scale mark’ for Asia [US$25-30 billion and growing]. Do you agree that this is an issue?
It’s interesting. At one of your recent events, there was a discussion about this and, during the conversation, the required AUM mark went from about US$15 billion to US$30 billion depending upon who was speaking. That, for me, exemplifies the issue perfectly. Big is not necessarily beautiful. To a certain extent, your break-even point depends very much on your platform, footprint, focus and appetite to invest.
You will find in this industry players with very small AUM totals that are profitable and players with rather larger AUM totals that are unprofitable. For this reason I don’t believe you can take size as the only indicator. Guy has been very clear about where we are at the moment and where we want to be.
In terms of the platform and niche, the three things that UBP brings to its existing client base here are: first, institutional-quality asset management with a strong fund management track record; second, a strong track record in alternatives where we have a depth of experience in due diligence, product selection and portfolio construction; third, private ownership that, when wrapped around these other factors, gives you stability and makes us a flatter organisation.
Notwithstanding the sizeable boost Coutts has given to UBP’s book in the region, 2016 has proven difficult for private banks that depend on transactional business. What are you doing to shore up recurrent sources of income given current market conditions?
In terms of our current book [in Asia], 10% is in discretionary, 20% is in advisory where there is a dedicated investment advisor who has contact with the client in addition to the RM; and the remainder is “RM-led”. This [discretionary/advisory rate] is slightly higher than the industry norm. In terms of direction and travel, we do see an increased appetite amongst clients to consider discretionary as part of their portfolio. It’s a journey and we remain at a very early stage, but it’s definitely the direction we are travelling in.
Your CEO has said that he would like for the ratio between advisory and discretionary to be reversed. How would you achieve this?
In Asia, there has been an ongoing introductory process with clients, of course. But we must also consider market trend. Take China as an example. Among Chinese clients and prospects that have a base here in Hong Kong and Singapore, we’re seeing an increased willingness to consider discretionary as part of the overall offering that they receive.
Are you seeking a private banking partnership with an onshore player, whether in China or elsewhere in Asia?
We are very interested in the partnership model. I think it’s the model that stands the greatest chance of success. Onshore builds are extremely expensive and take a huge amount of commitment over a number of years.
There’s also limited proof that the onshore strategy works in Asia.
Yes, there’s little proof that it works as a whole. It has for a handful of larger players, but overall, my sense is that competing against very large domestic players is certainly not what we want to be doing.
You joined UBP as part of the Coutts deal, so I want to finish up by asking you about a woolly concept – organisational DNA. Specifically, what effect, if any, did any consonances and dissonances between both banks’ DNAs have on the integration outcome?
A lot of people in this region joined Coutts between 2011 and 2013, and one of the reasons they did so is because they wanted to join a boutique private bank that was committed to the region and to offering an Asian-centric offering to clients. UBP is many of the things that people joined Coutts for.