Private banking: After the perfect storm

Executive summary

Private banks have spent the last 18 months dealing with one of the most difficult periods in modern financial history. A “perfect storm” of asset-price declines and the near or actual collapse of some of the best-known wealth management firms has altered the behavior of clients, prompting them to move into less risky financial instruments that are much less profitable for the banks. All of this has pushed revenue levels 25 to 30 percent below where they were before the crisis. As an added challenge, governments are cracking down on their wealthy citizens’ untaxed offshore accounts, forcing many private banks to find new value propositions.

Not everything has been negative, however. Private banks have continued to deliver profits despite the huge declines in their revenue bases — proof of their ability to manage through cyclical downturns. And many banks are starting to move strongly into emerging markets, a huge growth opportunity, especially in places like Asia and India where the populations of high-net-worth individuals are expanding rapidly.

This report — based on quantitative market analysis complemented by in-depth interviews with more than 140 private banking executives, senior financial advisors, and regulators from the leading financial centers worldwide — provides a snapshot of the private banking industry’s evolving state, and highlights five new imperatives. To be successful in the future, private banks will need to become much more serious about emerging markets, they will have to combine their onshore and offshore businesses more strongly, and they will need to build scale and capabilities, often in inorganic ways. Successful private banks will also need to adapt their client service models to restore client trust while ensuring compliance and cost-efficient servicing. Finally, as pressure on revenue pools will endure, further cost reduction measures will be unavoidable.

Conclusion

The face of private banking has been altered irrevocably in the last 18 months. Companies that were icons of the industry only two years ago either have disappeared or find themselves struggling to survive at a fraction of their earlier strength. Other once-powerful companies are now operating under the wings of one-time rivals.

Meanwhile, there are players who have done most things right and are positioned to lead the industry consolidation that is now taking shape.

As 2010 begins, we believe that the private banking industry is poised to find a new equilibrium. Given the industry’s fundamental attractiveness, institutions that have lost ground will embark on strategies to regain the trust of their clients, employees, and markets, while the players who received significant net new asset inflows over the course of the financial crisis will try to maintain their improved positions.

Private banking after the 2008–09 storm will look familiar in some aspects but very different in others. The bottom line is that there are plenty of opportunities ahead for the private banker who is strategically prepared.

Key findings

• We see a tectonic shift in high-net-worth individuals from mature to emerging markets.
• The population of HNWIs is growing far more rapidly in emerging markets than in the developed world. By 2011, Asia-Pacific will have the world’s largest population of millionaires.
• A crackdown on tax havens, especially on the part of G20 countries, is forcing offshore banks to come up with new value propositions.
• Client skepticism about complex financial instruments and insistence on price transparency in the wake of the 2008 market meltdown means bankers will have to find new client service models and value propositions.
• Disciplined cost management has helped private banks survive the downturn, but they will need to become even more diligent about cost cutting to ensure their continued profitability.
• M&A is emerging as a primary tool, helping big banks expand into emerging markets and increase revenue and offering an exit strategy to small banks not able to adjust to the upheaval.

Appendix: Methodology and approach

This report is based on Strategy& quantitative market analysis complemented by in-depth interviews with more than 140 private banking executives, senior financial advisors, and leaders of the regulating authorities worldwide, including Austria, Brazil, China, Germany, Hong Kong, India, Italy, Japan, Liechtenstein, the Netherlands, Saudi Arabia, Switzerland, the UAE, the U.K., and the United States.

The participating private wealth managers spanned all business models and regions. Thirty-six percent were the private banking units of global wealth management companies, 28 percent pure-play private banks, and 36 percent from the local or regional banking sectors (including cooperative banks).

The information collected through interviews was complemented by Strategy& research and analysis and the practical experience of about 30 Strategy& wealth management experts. HNWI market forecasts are based on a quantitative model built on economic, demographic, and fiscal factors.