Asia’s rich offer slim pickings for private banks

June 10, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

HONG KONG — Asia’s rapid growth in private wealth isn’t translating into fat profits for private banks. In fact, margins for managing private wealth are lower for global banks than they were in 2007. Lucrative structured products are less popular now, and the first-generation rich who typify private bank clients in the region demand high returns. That’s tough for the likes of UBS and Citi.

China, Hong Kong and Taiwan together already host 1.6 million millionaires, second only to the United States. Yet even as Asia has grown richer and assets held at private banks have grown, pre-tax margins of global private banks have halved to 19 percent from 2007 levels, according to Boston Consulting Group.

Margins are depressed because banks are selling more plain vanilla products after the crisis. Asia clients were formerly big buyers of derivatives and structured products, thanks to high expectations for return and above-average risk appetite. Now customers are more cautious.

Asia’s first-generation rich also prefer to take charge of their own portfolios, using the banks mostly as brokers. That’s bad for banks, because portfolio management is more scalable and stable business than broking, and less labour-intensive. Private banking pre-tax margins in Asia are only half of the level of those of Europe, where entrusting money with advisers is more common.

Local restrictions and competition add more pressure. Chinese citizens are banned from making overseas investments, an area in which foreign banks excel. Local banks like Singapore’s OCBC and China’s ICBC have better access to clients at home. A shortage of experienced advisers is another problem. The average advisor in Asia has just nine years of experience and has been with the firm for less than six years. This compares with an average in North America of 24 years of experience and 20 years of tenure, according to Merrill Lynch and Cap Gemini.

As entrepreneurs become more settled into their wealth and growth slows down in China, they might take a more hands-off approach and accept stable but lower returns. Ambitious global banks need to wait for China’s new money to grow older.

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