Thursday, 15 October 2009

Singapore - the Last Bastion of Irrational Exuberance?

The music is back on for private bankers. Their favourite pastime of musical chairs has started. If activity in Asia's private banking sector is any gauge then the global financial crisis is over – at least in Asia.
It is reported that at least one quarter of RBS Coutts Singapore staff have resigned and joined a Swiss outfit, BSI. Recent media reports indicate that OCBC, another local lender, is interested in purchasing the Asian private banking business of ING. What competitive advantage OCBC may have in executing such a purchase is a question OCBC shareholders must be asking themselves. Shareholders must also be hoping that the management will not overpay for any acquisition.

Certainly, the market to serve wealthy individuals in Asia is a 'rich' market. By some estimates, wealthy individuals in Asia have approximately USD 7.4 trillion in assets. The Asia (ex-Japan) wealth totals approximately USD 4.5 trillion with China's amounting to USD 1.7 trillion.
The sums are large and the incentive to operate a successful private banking business is significant. Think of the potential fees private bankers can extract from such a large pie - at 0.5% the number is in the range of USD 22.2 billion! Most calculators don't permit so many zeros.
By hiring the RBS Coutts staff, BSI believes it is paying reasonable money for a part of this USD 22 billion. Or it is actually providing evidence that Singapore was spared a banking crisis during the recent downturn?
The global financial crisis affected the Singapore economy severely. The country's GDP has contracted for several quarters now. However, the banking sector was left unscathed.
Banking profitability was certainly affected but the capital structure and loan to deposit ratios remain relatively healthy. There was no hint of any Singapore registered bank needing government support to stay afloat.
Perhaps as a result of being bypassed by the global banking crisis Asian senior managers have reverted to 'exuberant' behaviour before their international counterparts. They are surely willing to pay large amounts to pursue the holy grail of a private banking business.
Certainly, Swiss banks like BSI have an incentive to strengthen their foothold in Asia given that their US and European franchises have been battered by allegations of tax evasion. The cracks in Switzerland's legal code governing banking secrecy have also not helped growth in their traditional markets.
A Swiss bank diversifying its revenue stream away from Europe and towards Asia is good, but only if a reasonable price is paid?
The Asian private banking industry does not operate in a vacuum. Any premiums paid by employers to 'talent' will 'reimbursed' by clients. Any bank will demand at least a 3:1cost to income ratio from these highly paid employees.
The environment is not conducive for collecting fees.

A wide gulf has recently emerged between clients and financial advisors. Lawsuits against the private banking arms of banks have become more common in the last few years. Even the regulators such as the Hong Kong Monetary Authority and the Monetary Authority of Singapore have been forced to step in to mediate disputes between investors and financial institutions.
At least two major forces are at work which will force a reduction in wealth management fees over the coming years. Client behaviour has changed and the regulatory atmosphere is tightening up.
Clients' are far less trusting of private bankers. Suspicion, especially of complex and hard to understand structured products, runs high. Few clients believe that private bankers are looking out for their interests, instead accepting that bankers are only pushing product to generate revenue.
The regulatory framework for investment products and financial advisors is slowly evolving to keep pace with the arrival of new products. Financial advisors are constrained in their ability to create and market complicated products with rich fee structures. The veil of opaqueness has been replaced by the glare of enforced transparency.
The traditional business model for private banking has crumbled, much like many of the institutions who were touting a few years ago. Tomorrow's successful wealth manager will look different from the financial supermarket of yesterday.
Will someone please educate Singapore's private bankers about the lessons learnt from the global banking crisis?

No comments:

Post a Comment