Although market customs are naturally still influenced by each culture's specific characteristics, the underlying wealth management trends are now very similar in both Asia and Europe. Their competitive landscapes, regulatory environments, client requirements, product ranges and private banking business models are much more similar than many would believe, and there is even a similar banking consolidation process taking place in each market. The last few months have seen a number of transactions, particularly in Asia, including several major ones: Société Générale and Barclays have sold their private banking businesses in Singapore and Hong Kong, while BSI and Coutts have disposed of their Asian businesses as part of global deals. As a result, Asia is no longer an exception to the private banking consolidation process that is transforming the sector around the world. This now gives us a good opportunity to compare two markets which, it turns out, are fairly similar.
In terms of the key market players, the latest private banking league tables in Asia show that the top spots are occupied by the same banks as in Switzerland and Europe. As was the case in Europe several decades ago, domestic retail banks – Chinese, Indian and Indonesian – are lagging behind, mainly because there is no regulatory framework allowing them to develop private banking businesses in their local markets. As soon as they are able to develop a more structured range of products and services, we will see onshore leaders genuinely competing with foreign banks, as large European banks are now doing in their domestic markets. Currently, then, the positions occupied by the main international players in Asia are still similar to their positions in the rest of the world, and they are still benefiting from a benign competitive environment in Asia.
As regards the regulatory framework, Asia is not lagging behind Europe, quite the contrary in fact. In terms of both the main regulatory principles and their implementation, the rules in force in Europe are also in force in Asia, and often the main financial centres in Asia have changed more quickly than those in Europe. Today, the due diligence that banks need to do on their clients, product suitability regulations, issues regarding selling authorisations and restrictions, and naturally tax compliance requirements are all on a par with European and Swiss regulations. The main Asian countries have also signed up to FATCA and are preparing for the automatic exchange of information according to OECD standards. As a result, the idea that regulatory or tax requirements are less demanding in Asia is now just a myth.
In terms of clientele, a distinction has often been made between European and Asian clients, the received wisdom being that Asian clients are "traders" whose needs are served much more effectively by a brokerage business model than the traditional private banking model. However, we are now seeing convergence in this area as well. Wealthy Asian clients are increasingly organised, often with family offices, and want their portfolios to be managed in a highly professional and diversified manner. The trading aspect remains a characteristic of the Asian market, but it is gradually giving way to a more traditional approach, focusing on long-term investments and diversification. That change is being driven particularly by a generational shift among high-net-worth Asian clients.
As regards products and services, there is now very little to choose between those available in Europe and in Asia. We are seeing convergence between available investment instruments and solutions such as hedge funds, structured products, and insurance-based wealth engineering solutions. Naturally, there is still a local bias, which means that Europeans prefer European issuers and Asians prefer Asian risk, but apart from that there are no longer any major differences. Asia and Europe are roughly equal in terms of coming up with innovations and new developments, which then spread rapidly in both markets.
The final aspect concerns the overall profitability of private banks, which is being hampered by the same problems in both continents. Banks are experiencing similar pressures on revenue and relatively rapid growth in overheads. In Asia, front-office staff now earn the same, or sometimes more, than their peers in Europe. Banks in both markets are also seeing similar cost inflation because of the greater resources needed for compliance, risk management and control purposes. The situation is putting a serious squeeze on profits, and it is vital for banks to achieve sufficient scale and streamline their organisations.
As a result, the general context for private banking in Asia is very similar to that seen in Europe. In terms of volume, however, the Asian market is now the largest in the world, bigger than its US counterpart, and it is growing and will continue to grow more quickly than the European and US markets. It is that growth potential that is prompting most global players to continue making heavy investments in Asia. We are likely to see the trend continue, sometimes at the expense of banks' European operations, and that is sure to continue driving the current market consolidation.
Michel Longhini
CEO Private Banking