Asian private banking pulls out of crisis

Euromoney, July 2010

Asian private banking has felt a curious impact from the financial crises in the west. Asian economies, some blips apart, have sailed through everything from US sub-prime to Southern European sovereign debt problems with little direct impact; their stock markets, though, have plunged with the rest. And many clients in Asia, diversified into world markets, have been hit as badly by global problems as if they had been sitting in New York or London the whole while.

Correspondingly Asian high net worth clients, and their bankers, have done as much soul-searching about risk and portfolio strategy as anyone else. As elsewhere in the world, there has been a shift away from complexity; an increasing awareness of the need for a diversified and stable portfolio; heightened willingness to seek and pay for risk management services; deleveraging; and a loss of trust in many hedge fund and other alternative asset managers.

“Clients ask for transparency, they don’t want to fly blind,” says Marcel Kreis, head of private banking for Asia Pacific at Credit Suisse. “Knowing what the risks are is one thing but can the clients stomach the risk if it materialises? In 2007, clients and the banks took on enormous risks without being very clear on what would happen if those risks materialised. They did, and it cost a number of them everything. The same goes for clients.”

Clients today like their assets to be visible and solid. “People have started looking at real and tangible assets such as gold and property,” says Aamir Rahim, CEO of private banking for Asia Pacific at Citi. “Property is real, you can feel it and touch it, and it doesn’t collapse.”

One of the obvious areas to suffer in this new sentiment is structured products. There’s still room for them, provided people can clearly understand what it is they’re investing in, but their golden days appear to be gone.

“There’s great suspicion about anything that is not transparent,” says Debashish Duttagupta, who heads investments for Citi Private Bank in Asia Pacific. “The days of ‘here’s a new proprietary technology but we can’t tell you how it works’ are far away. But people are now comfortable using what I would call flow structured products, with short tenors, though they are not anywhere close to the levels of acceptance in the boom days of 2007.”

Peter Flavel heads the private bank at Standard Chartered and sees a similar theme. “As confidence has returned to the markets, we’ve seen clients prepared to take greater degrees of risk,” he says. But with the return of risk appetite has come greater suspicion, particularly around counterparties. “Once upon a time it was: ‘what’s the structured product and what’s the return?’ Now it’s: ‘I need to understand the product’, and the issue of what institution stands behind that product is very important.” But there’s still plenty that can be done within those parameters. “Products around underlyings of commodities or foreign exchange, people are prepared to invest in those.”

Renate de Guzman, CEO at Bank of Singapore, reports continuing interest in structures such as equity-linked notes and range accrual notes, but like Flavel he says people have become much more selective about the counterparty behind the structure. “With problems in Europe you have to be selective with European banks.”

Eventually, though, there’s no choice for private clients but to use a structure if they want to achieve a particular outcome. Andrea Carl, head of product and services at Clariden Leu in Singapore, says that although structuring to trade on a particular idea is out of favour, “a structured product can make sense to create a certain payout structure you want to have because of asset distribution.” Kreis sees activity in structured products with currencies – particularly in light of the fall of the euro – and commodities as underlyings, though not for long-term products. And Rahim adds:  “There’s always a role for structuring. If you want to take a view on sterling in six months, you can do that with a forward rate agreement, but if you want a series of options on a particular fixed income security that’s not publicly traded, you’re going to have to go through the structuring route.”

“Clients ask a lot more questions – as they should – about the fees we charge, the cost of unwinding and the like,” he adds. “But they are still interested.”

Still, the lack of volume in structured products has not been great for the bottom line. “Clients are very cautious in making long term commitments to more complex structures and products, and this has an impact on revenues without a doubt,” says Marcel Kreis, head of private banking Asia Pacific, at Credit Suisse. “Simple products don’t tend to be as rich in fees as more complex solutions.”

Another area that really felt the brunt of the change in sentiment was alternative investments.

“We are finding a lot of alternative managers had no clothes, so to speak, and there’s been a big flight to quality,” Duttagupta says. “Alpha does exist, but clients have come to realize that there are fewer managers who can add value compared to the number of people who say they can but just add leverage.”

Again, this has not been an area where managers or products have been cut off en masse. Clients do appear willing to distinguish between different managers, styles and asset classes. “In real estate, people are comfortable: we’re seeing that through fresh inflows,” Duttagupta says. “The private equity side of things is much more damaged.” Also at Citi, Rahim continues to see selective interest in hedge funds, just with greater scrutiny of the fund structure than before. “People are looking at hedge funds that have either no gate or a defined one so they can manage their liquidity more precisely,” he says. “One of the big issues was hedge funds gating people and not allowing them to take their investments out during the financial crisis. Clients now want to know how long their money will be locked up for.”

Flavel says the increased due diligence that has followed the financial crisis has an impact here. “A by-product of that is that it favours the incumbent and larger, stronger players, rather than a new start-up,” he says. “Pre-crisis, there were a lot of new hedge funds going out and setting themselves up. Now, doing that and getting on the approved list of a major player is going to be quite difficult.” Carl at Clariden Leu makes a similar point, saying interest in hedge funds has gravitated towards “more liquid, USIT-3 types of funds, which have more transparency and liquidity.”

Despite changes in appetite, product manufacturers are not idle. Duttagupta says Citi is working on ways to address the issues that will arise when rates begin to rise worldwide, and to provide cheap hedges for that event. Other clients want to park cash and make a decent return from it, so Citi is designing short-term, low-risk carry products. It has broadened its property advisory business, developed products to invest in UK property, has staffed up its investment labs with quants to help with asset allocation, brought in a new focus on fixed income with detailed credit analytics brought in from rating advisory teams, and is looking at ways of investing in themes such as distressed US real estate, or to exploit inefficiencies in commodity markets.

“Nothing dramatically complex,” Duttagupta stresses. “Nothing that will take more than two minutes to understand.”

Elsewhere Clariden Leu reports an increase in inflation-linked and capital guaranteed product, and many institutions are busy finding ways to build exposure to the robust Asian growth story. At local institutions, BDO Private Bank, for example, is looking for “sectoral and thematic funds, bonds and appropriate structured products that take advantage of activity in the power, infrastructure and manufacturing sectors in the region,” according to Josefina Tan, who runs the business.

“There’s certainly a heightened awareness of the growth stories of China and India and the countries that are associated with that growth in Asia,” says Flavel. “But it’s not as simple as saying I want to buy an Indian or Chinese stock. It’s understanding this shift to the east in terms of economic power and growth, and working out which investments are going to do well as a result of that. It might be the mining stocks in Australia or Latin America, the shipping companies handling the resources, or the manufacturers selling components into India and China.”

Tied into this is the trend for Asian investors to bring money back home. “Through the crisis in the US market and now the European market we have seen Asia sail through relatively undamaged, and at times assisted by deposit guarantees to reassure investors in domestic markets,” says Duttagupta. “Asian wealth has been very comfortable with its own markets.” There is already a flight into emerging markets worldwide, and this return of capital home exacerbates the trend.

Others say the big themes in the industry are not about product so much as the way things are sold. “Client assets are spread across different institutions, jurisdictions, even different team members or family members, so there is much bigger demand for consolidating a view on to that,” says Carl. “During the crisis it was a fragment here, a fragment there. Now the holistic view is much more in favour. The relationship manager is becoming less an investment selector than a strategic advisor for the portfolio.”

Has the structure of private banking changed? Kreis at Credit Suisse says the people mix has changed at the banks. “One of the major changes would be a shift in focus in the type of relationship managers and investment professionals we would like to attract,” he says. “Leading up to 2007, the more bankers you had drove your net money acquisition. It was a market that was chasing everyone who had an interest in private banking.” But then everything changed. “2008 showed some of the glaring shortfalls in the quality of the bankers: the training, the supervision, their advisory capability. Many of them simply hadn’t been in the industry long enough and most of them had never seen a downturn. They had never had to deal with an investment recommendation they made that then went spectacularly south.”

For Credit Suisse’s part, it has continued to hire – even all the way through 2009 – but with a focus on more experienced relationship managers and what it calls the solution partners group, “which is in many ways a private banking internal investment bank that helps clients find solutions which we then execute through the investment bank”. Existing staff are more thoroughly trained as a consequence of the financial crisis. “A lot more effort goes into training and coaching the relationship managers, upgrading their technical skills,” Kreis says; all its client facing staff now having to go through an 11-module training and certification program.

And is the money coming back? Rahim says “clients ebb and flow” and that the first two months of the year were very strong for Citi, March and April reasonable and May weaker, impacted by people taking money off the table through the euro and Greece situation. “We are of the view that this is a much needed correction after a much needed rally – we see little danger of a double dip, though you can never say that the chance is zero.” Credit Suisse’s private banking assets in the region are at a record high of Sfr 74.2 billion as of the first quarter of 2010 – a 9.6% year-on-year climb in the quarter following 45.6% growth in 2009. Net new assets were Sfr11.5 billion in 2009, and a further Sfr4 billion in the first quarter of 2010. Domestic businesses, particularly Japan, Australia and Singapore, have been major contributors.

Private bankers have watched closely the increased scrutiny of Switzerland, where the idea of client confidentiality is under threat. Is the same attention coming to Singapore? Bankers are not worried about the Swiss situation – which was chiefly about America seeking tax evading clients – because, as de Guzman says, “Asia is more of a low tax environment”, and it’s not a place known for harbouring large amounts of American money anyway.

There is, though, regulatory change coming, and not just in terms of the requirement that clients fully understand what they are buying. Kreis notes discussion in Singapore about requiring private bankers to be registered and certified before they talk to clients. What does he think of that? “I think that’s good,” he says. “We’d like to think that self-regulation is preferable, but we are seeing more and more banks opening offices here [Singapore] and Hong Kong to take advantage of the world’s most dynamic region, and some industry professional minimum standards are required.”

Kreis thinks regulators in the region “are paying a lot closer attention to bankers flying in and out of countries. The days of unlimited unfettered travel and advisory activities in the countries where bankers visit their clients – those days are over. You are going to see a much tighter regime around international private bankers travelling into different jurisdictions.” This has a consequence for clients: increasingly they are going to need to come to Hong Kong and Singapore for portfolio and investment reviews, where there are established systems for legal, trust and product support. This is one reason Credit Suisse is opening its branches on Saturday mornings, to allow people in places like Indonesia or Malaysia to come through while passing through on leisure or to see family at weekends.

Flavel says: “There will be greater pressure because governments around the world are seeking greater tax compliance and looking for ways to ensure there are less avenues for people not to comply with onshore taxation. But it’s not going to affect the amount of money booked in private banking in Hong Kong and Singapore.” He adds, though, that “there is a trend of people putting money onshore,” such as people in India seeking to participate in their own nation’s growth story.

On balance, the market looks brighter in Asia than it does elsewhere in the world. “You see in Hong Kong and the east a natural exuberance about the future,” says Flavel. “People are still quite upbeat and confident even despite the recent volatility. Go to Europe and it’s almost despondent. Issues around privacy and secrecy in Europe and Switzerland have taken quite a heavy toll on the way people feel about private banking in Europe. Here, it’s not happening to anything like the same degree.”

BOX: Different positions

The financial crisis brought into stark relief the three distinct structures of private banking in Asia. There are the private banking arms of the global powerhouses, such as UBS and Citi; the Swiss specialists doing nothing but private banking, such as Clariden Leu and Pictet; and the local Asian institutions with private banking operations. They make for a competitive environment which the financial crisis did nothing to thin out. “If anything the field has gotten more crowded,” says Kreis.

Unsurprisingly, people’s views on the future of private banking depend very much on where they’re sitting. The big see the virtue in scale; the small see the virtue in focus; the local see the virtue in Asia.

“The landscape will increasingly shift towards banks that can provide full service private banking and bring genuine global advice and product capability to clients, rather than private banks that are boutiques and don’t have a global footprint in terms of research and product execution,” says Duttagupta at Citi. “Our client needs are becoming increasingly institutional and sophisticated in nature. Private banks that are part of larger banks can tap into that capability.”

The Swiss specialists see their own approach as the way to go. “For us, this model has worked for 250 years,” says Carl at Clariden Leu. “We have just the private banking clients to focus on. The future is bright for pure private banks.” Asked about clients wanting to see public data about these most private of private banks, she points to SFr 100 billion under management and a tier one capital ratio of 24.6%. “They feel a lot more comfortable putting deposits in our bank, particularly during the crisis.” She claims “very good momentum” in flows.

Local domestic banks claim to have come through the crisis with little impact, and gained in terms of flows. Josefina Tan, who heads BDO Private Bank in the Philippines, says “the global financial crisis had minimal effects on the assets of clients” with her institution. “Although the majority of the assets were in local currency (the Philippine peso), even the foreign currency assets did not suffer the massive valuation swings brought about by the violent market volatility.” She attributes this to the fact that banks like BDO have never offered risky or complex products, focusing instead on the basics of capital preservation and estate planning.

She says her bank “was a beneficiary to the inflow of investments back home: a flight to safety, so to speak.  Clients who have made investments abroad would select a strong and robust domestic financial institution with the experience and expertise in handling private banking funds.”

One institution uniquely well positioned to comment is Bank of Singapore, the private banking subsidiary of OCBC, the Singaporean bank. This is primarily made up of the private banking business that OCBC bought from ING.

Today, Bank of Singapore’s CEO, Renato de Guzman, pushes the advantages of local ownership: strength of the parent (OCBC is rated Aa1/AA+, higher than many global peers), the fact that Asian banks had little exposure to toxic assets or European sovereign debt, and a vast branch network to reach the local population (382 branches in Indonesia, for example, and a full bank licence in China where it offers banking services in seven provinces.) “For those who want to diversify out of Switzerland into Singapore, we are a different proposition to a branch of UBS or HSBC or Credit Suisse,” he says. “We are a locally-owned Singapore bank with expertise in global private banking.”

Local private banks in Asia universally claim to have received inflows as a consequence of mounting suspicion of western institutions through the financial crisis. “During the crisis a lot of money went from the international banks to the local banks because they are easier to understand and better regulated,” de Guzman says. “ING was very difficult to understand: insurance, banking… and when you look at the capital ratios, OCBC’s tier one ratio is 14%, whereas ING’s was 6, 7%. Generally the European banks are undercapitalized, overleveraged and have exposure to the PIGS [Portugal, Italy, Greece, Spain] countries.” He feels the combination of businesses in western banks also causes problems. “You see very complicated models in the US where investment banking and private banking platforms have been combined and got them into trouble.”

Whichever model works best, one interesting development is the degree of international seniority in the region. Standard Chartered has its international headquarters for private banking in Singapore; JP Morgan’s private bank international head is now in Hong Kong; and Citi’s international private banking head (that is, head of private banking operations outside the US) is in Singapore. Singapore is one of only two key booking platforms for Clariden Leu, the other being the home office of Zurich. “You really are seeing in Asia some very senior executives of global private banks being based in Asia,” says Flavel. “That reflects the shifts to the east. These are not Asian outposts; banks are voting with their feet and moving their senior executives to Asia.”