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Asia’s Private-Banking shakeout to intensify, says UBS

Asia’s private-banking industry will experience a “big shakeout” as the global recession saps investors’ appetite for risk and drives down fees, according to UBS AG. 

The Zurich-based bank, Switzerland’s biggest, and other firms will have to cut compensation, the biggest cost component of the business, said Tee Fong Seng, Head for Key Clients in Asia-Pacific at UBS’s wealth-management unit. Costs haven’t declined with revenue after the industry grew, “maybe a bit too aggressively,” in the last few years, he said. 

“There was a sense of optimism leading up to 2005, 2006, 2007, and things just received carried away,” Tee said today at an industry conference in Singapore. “The present business model of banking is not sustainable, it has to change. Revenue is coming down.” 

Assets under management at UBS’s private-banking unit in the region have fallen “substantially,” after growing to more than US$200 billion in 2007 from US$75 billion at the end of 2004, he said. 

The wealth-management industry is seeking to win back the trust of clients whose wealth has been eroded by global financial turmoil. Individuals worldwide with more than US$1 million probably saw the value of their assets shrink by about 20% to 25% in 2008, Stephen Wall, a London-based director at Scorpio Partnership Ltd, said in an interview. 

Cutting Edge 
In 2007, wealthy people’s assets rose 9.4% to US$41 trillion, while the total number of high-net-worth individuals rose 6%, according to the latest survey by Capgemini SA and Merrill Lynch & Co. 

Clients prefer “simple direct investments” in equities, bonds and precious metals, shunning “complex structured products” that pay higher fees, said Kwong Kin Mun, head of private banking in South Asia at Singapore-based DBS Group Holdings Ltd 

“When we go back to clients with terms like ‘innovation’ and ‘cutting edge,’ they are really viewed with suspicion and in some cases disgust,” Kwong said. “The credit crunch right now has developed into a kind of a revenue crunch and the whole industry is trying to find the right model.” 

If the “risk aversion” lasts for another nine to 12 months, it will have “tremendous impact on the wealth management industry,” Kwong said. “Most of us have built our models on a very bullish assumption.” 

High Costs 
Private banks competing to manage the region’s riches were recruiting senior bankers from their competitors as recently as two-years ago, leading pay to escalate. Private bankers will have to be “more realistic” in their salary expectations, UBS’s Tee said. 

Costs that were built up in the past were “well taken care of by the revenue generation,” he said. 

New York-based Morgan Stanley is trying to cut its “variable costs,” said Tan Su Shan, the bank’s head of wealth management in Southeast Asia and Australia. “We’ve come to realise that our fixed costs have been too high,” she said. 

Aggressive Strategy 
“Three or four-years ago, most of the industry players realised that excesses had built up, but none was brave enough to stand against this very strength,” said DBS’s Kwong. “Most, if not all, of the industry players continued to carry out a very aggressive growth strategy on the premise that perhaps Asia would take over the driver’s seat in world economic growth and therefore private wealth would continue to grow incessantly.” 

Financial institutions worldwide have reported US$1.3 trillion of losses and shed more than 286,000 jobs since the US subprime mortgage market collapsed, data compiled by Bloomberg show. 

“The modern wealth management market has never been through a decline like this,” said Scorpio Partnership’s Wall. “It’s been experiencing about 15 years of growth and it’s become a massively professional industry. Now it appears that all the professionalism didn’t work, it’s become a basic average man-on-the-street investor kind of process. Banks haven’t lived up to expectations.” 

Source: Bloomberg, 27.03.2009

Filed under: Asia, Banking, News, Risk Management, Services, Wealth Management, , , , , , , , , , , , ,

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