Private Banking

London, 29 April 2010 – More High Net Worth Individuals in Asia Pacific Than U.S. and Europe Leading to Tectonic Shift in Private Banking.

  • Shifts in global wealth and a softening of banking secrecy are leading to a transformation in private banking practices.

Almost one third of the world’s high net worth (HNW) individuals (defined as having greater than $1 million in investible assets) will reside in the Asia/Pacific region – 2% more than in the United States and 6% more than in Europe - by the end of 2011 according to a new study Private Banking after the Perfect Storm by Booz & Company out today.

This means that the future growth of the private banking industry lies in emerging economies with China, India and the Middle East offering new opportunities. However, as well as following this new flow of wealth, private banks need to adapt their business models to new global financial regulations and customer expectations.

Nearly 3.6 million of the global high-net-worth individuals are expected to live in the Asia/Pacific region, up from 2.6 million in 2008. The study, which carried out 140 in-depth interviews with senior private bankers around the world, also concludes that for the next few years emerging markets will lead the industrialised world in returning to pre-crisis growth rates. Emerging market countries are expected to become more politically stable, and this will encourage high-net-worth individuals in these markets to keep their newly created wealth increasingly onshore.

Alan Gemes, Partner at Booz & Company, said: “Private banks, with an ambition to grow, need to seriously consider emerging markets. China, India, and the Middle East are emerging as new wealth centres, in a tectonic shift in global wealth distribution.”

A crackdown on undeclared assets is forcing offshore private banks to come up with new approaches to providing valued services for their customers. Faced with increased scrutiny of offshore accounts by tax authorities, especially those of G20 countries, private investors have started to repatriate and/or declare previously undeclared offshore funds. Offshore private banks will need to create new strategies to play in a “declared world” and private banks heavily dependent on un-declared assets might find themselves without a viable business model sooner rather than later.

Despite private banks’ resilience during the financial crisis the recession has created challenges. According to this study, clients will behave much more conservatively. This trend is already apparent. Since March 2009 clients have kept cash levels high while reducing amounts in other asset classes”.

Client expectations will put the integrated private banking model itself under the microscope, according to the report. Today there is some mistrust towards integrated players that do not maintain a fully transparent approach to product portfolio management. In response, some institutions have already taken steps to separate their asset management business from their distribution arms, and others are likely to follow. Almost 90% of respondents say that there is already a trend toward true open product architecture – where clients are offered the best financial products from top suppliers in every asset class.

The study found that private banks were very effective at cutting costs to remain profitable during the downturn.

Alan Gemes said, “The myth that private banking is stodgy and overly bureaucratic just isn’t true. Instead, firms have aggressively cut costs, laid off low performers, restructured IT and operations and withdrawn from unprofitable markets.

“But they will need to find new ways to lower their cost base by a further 15-20%. These should include new approaches to building a more cost efficient operating model and strategies that focus on developing differentiated capabilities,” he added.

While long-term prospects for the private banking industry are distinctly positive, private banks need to adapt their business models to the new realities:

  • Emerging markets, led by China, India, and the Middle East, will be the main sources of wealth generation in coming years. With fundamental private banking needs in these regions underserved today, private banks should be looking for ways to penetrate these markets even more systematically than in the past.

  • Private banking that relies on tax breaks is becoming a thing of the past. The transition will be painful for many clients, and private banks need to help. In particular, offshore players need to strive for full cross-border compliance while preparing for a time when they are able to offer onshore services.

  • Different client segments have sharply different needs. Private banks need to adopt new client service models to regain client trust while ensuring compliance and cost-efficient servicing.

  • The ongoing pressure on margins will make it necessary to get costs down along the entire value chain. Besides the measures already taken, a more rigorous approach will be needed to restore client profitability.

  • All the changes taking place will set the stage for consolidation. Smart private banks will use M&A to build scale and to add critical capabilities.