[APB] Michel, you recently penned a piece that listed challenges facing the private banking industry, including a drop in brokerage revenues, a “zero-sum” game for assets and heightened competition from direct investments. That was a grim – if refreshing – assessment from a CEO.
[ML] Yes I received a lot of feedback on that. There has not been a lot of realistic commentary coming out of the industry. Everybody thought Asia would sit outside of these global trends because of its particular characteristics, but in the end, it is the same.
Consolidation is happening far more than we expected, margin pressures persist, banks are playing with balance sheets more than ever. Some of these trends originated in Asia and spread globally while others spread to Asia.
“[T]here was a view ten years ago that you were building a private banking business with high growth potential, low risk, and huge value on the expectation that everybody would be looking to sell the business at 5% on the assets.”
Do you think Asia is seeing a correction of sorts, in terms of industry optimism?
[ML] There has certainly been over-optimism in Asia regarding growth prospects, revenue generation and hiring. This is always a problem where you need to be selective, provide high service and you run the risk of hiring bankers that, in the end, do not deliver. It’s a complex business.
[MB] This more realistic phase of growth for the industry in Asia is a very good thing. If you go back over the last 10-15 years, you had a period up to 2007 that was, in a sense, the halcyon days, where everyone was attracted by and convinced of the growth and were willing to commit – or overcommit – to significant investment against the promise of future returns in this part of the world. You then had a period when the global financial crisis hit and attention was focused on issues in the US and Europe. This has given way to the current phase, where banks are looking far more closely at the returns on their investments in Asia.
[ML] To be more blunt, there was a view ten years ago that you were building a private banking business with high growth potential, low risk, and huge value on the expectation that everybody would be looking to sell the business at 5% on the assets. If you look at the last two or three transactions in Asia, that is not the case.
From memory, only the OCBC-ING deal came close to that rate – and that ended up being a great purchase.
[ML] It was a good purchase, and at that time it was a good way to grow. Today, rates have been higher than expected, profitability – if you are over-optimistic – is difficult to achieve, and valuations are unrealistic.
You have said before that private banks today need to: (i) adjust costs in line with their growth potential and their ability to generate revenue and (ii) reinvent their offering and not engage in expensive hiring. How have you applied these solutions to UBP’s business in Asia?
[ML] Asia [and the acquisition of Coutts] for us was a very significant step because we had a small set up prior. It was a good acquisition as we had an extremely limited amount of attrition, which proves that the book of clients brought across to UBP felt positive. We have since optimised the cost base and the run rate in terms of profitability went positive at the end of the year.
What aspects of your cost base have you focused on?
[ML] We optimised our general global cost base, for example fixed costs such as rent, and now that we have bought the set up, we can optimise some of the existing teams. Looking at the processes one-by-one, now that we have integrated, it becomes important to simplify and achieve cost reductions.
“[Coutts] was a good acquisition as we had an extremely limited amount of attrition, which proves that the book of clients brought across to UBP felt positive.”
[MB] It’s also the beauty of the organisation only being focused on wealth management and asset management. We don’t have the complexities of shadow allocated costs or areas of costs that aren’t controllable. Everything that we consume we can control and that, for all of us, is tremendously powerful.
How diversified are your revenue streams in Asia – I ask this because last year was a difficult time for hedge funds and UBP has historically been associated with hedge funds and alternatives in general.
[ML] Hedge funds do not contribute a major part of our revenues today. They used to, and they still are one of our strengths in terms of offering, but now they are a smaller portion of our activities. We saw success last year in fixed income solutions and in structured products globally.
I’m surprised, if only because the industry saw a downturn in structured product volumes in Asia in 2016, at least over the first three quarters.
[MB] We bucked the trend in that case.
[ML] We also saw additional revenues from direct investments, which touches upon the point that we must look at solutions that are beyond the average scope. Last year one of the successes we had in Asia was to promote and develop direct investment solutions, such as real estate deals and funds that we structured, the sale of a plane that we then leased to an airline company. Also, by bringing the asset management capabilities of UBP to the Coutts business, we increased our capacity to generate additional revenues, which was a pleasant surprise.
What has worked well for us is the optimisation of costs following the acquisition and the addition of capacity on the revenue side through new product and ideas. On the Asian side, it was not the same type of acquisition as Coutts Europe, which was an integration with an existing set up. Here it was the creation of a set up for UBP, but the fact that attrition was low has created a platform for us to start hiring new teams. We are now in the process growing assets.
“Short term, we set ourselves the target of reaching CHF 15 billion in assets and liabilities in Asia. Today we are around CHF 12 billion and CHF 17 billion including asset management.”
Last year, UBP set itself the target of doubling the size of its business in Asia over the medium-term and increasing the RM headcount to around 100. What progress have you made?
[ML] Short term, we set ourselves the target of reaching CHF 15 billion in assets and liabilities in Asia. Today we are around CHF 12 billion and CHF 17 billion including asset management. I think with the recent hiring we have done and with clients we have brought across from Coutts, growth will continue this year.
Your latest earnings report noted strong inflows in Asia in 2016 from individual and institutional clients. With regards to the private banking business, did these new assets primarily come from existing or new clients?
[ML] Primarily from new clients, but also from existing clients bringing in additional money, which is a very good sign. We are seeing a good balance between existing client growth because we have been able to offer them additional solutions and new assets driven by our hiring at the end of 2016 and the beginning of this year. On the asset management side, we have had very good success in the institutional business, in Japan in particular and had good inflows to our Chinese equity products.
Is the Asia business now contributing meaningfully to revenues at the group level?
[ML] For private banking, Asia is the second biggest contributor after Europe at around 10%. Our aim is for Asia to represent between 15% and 20%.
Given these aims, do you think that you are doing enough to communicate to prospective clients and bankers that you are seriously committed to the Asia market?
[ML] We are not loud in terms of advertising because the bank has never been very active in that area. But we like to be loud in our facts: there are not many banks that have, more or less, doubled their size in the last five years in this business, created two booking centres in Asia, and grown the institutional business significantly. Both in Asia and Europe, we are certainly seen as the player that is committed to private banking. You don’t buy four banks in five years just for kicks.
“Both in Asia and Europe, we are certainly seen as the player that is committed to private banking. You don’t buy four banks in five years just for kicks.”
Do you envisage another global or regional acquisition?
[ML] You never know.
[MB] The short-term priority is to make sure that those RMs who have joined us get up and running quickly. We’re already seeing this happen.
How much patience will you show toward these RMs in terms of hitting profitability?
[ML] Some may take longer depending on their client base, but generally, after a year you have a general sense if an RM will make it. Some may fit into the organisation and leverage the platform effectively, some may not, because they were wrong in assessing their capacity to bring clients in, or perhaps their clients are asking that our platform does not offer.
How is UBP approaching CRS and the complexities it engenders?
[ML] CRS is the end of a cycle. Getting to know the status of your clients is something that is relatively standard. The chain of information [engendered by CRS] is the last 10% of this global tax transparency exercise. It does bring an extra cost, because it is quite difficult to source the data, put it in the right format and send it to the appropriate jurisdiction.
Do you have a clear sense as to what the cost burden of CRS will be on UBP?
[ML] The Swiss Banking Association estimates CHF 300-500 million to implement – there are project costs and there are also running costs. What is clear though, is that these costs will be recurrent and that there is no turning back.
In terms of competitiveness, we have to take into account all tax-related impacts. Today, we must take into account that your competitor is, for example, a wealth manager from a bank somewhere in the world, for instance in Jakarta, which has solutions that are totally tax efficient for clients in that region. This dynamic will have a huge impact on our offering, particularly for an international private banking business, going forward.
How are you addressing concerns from bankers and clients regarding CRS?
[ML] We are spending a lot of time on training, we are adjusting our offering to make sure that we do not do anything that will penalise clients on the tax side. If you don’t do this, you cannot be part of the game – if you produce good investment returns, but didn’t realise that you onboarded incorrectly, sold too quickly or used the wrong instrument, at the end of the day you just cannot compete.
“There is a real opportunity to look at clients that have interest in the Indonesia market. This is why we hired Febby, that’s what Febby will focus on, and this will be a key area of focus for us this year.”
What are your immediate priorities in Asia for 2017.
[MB] From a geographic perspective, the focus is Indonesia, under Febby Avianto’s leadership, and Greater China. It’s a good time to be re-focusing on Indonesia, post-amnesty. Clients will have made their decisions and so there will be a greater willingness to engage. The amnesty also has a levelling effect. There is a real opportunity to look at clients that have interest in the Indonesia market. This is why we hired Febby, that’s what Febby will focus on, and this will be a key area of focus for us this year.
With regards to Greater China, three quarters of the Hong Kong business is very much focused on the traditional Hong Kong families. The opportunity for us is in capturing international flows connected to the Mainland and in addressing entrepreneurs’ needs between Hong Kong, Taiwan and the Mainland. We’ve been hiring and will continue to hire to build out the Greater China team.
What are Mainland clients banking offshore looking for from UBP?
[MB] They are more open to the idea of an international wealth management relationship than perhaps they were ten years ago when they were focusing on growing their businesses. Back then, the best thing they could do was reinvest excess capital into those businesses. For a number of reasons, this has changed. The economy in China has matured, and Mainland Chinese have become more international in their outlooks. Also they are far more open to a conversation around diversification. What they are looking for is a classic wealth preservation solution, which UBP is very well placed to provide.
But with many Asian HNWIs still in a wealth accumulation phase, are you hamstrung by the fact that you don’t have an investment banking platform to leverage upon?
[ML] Helping the client find the solution is what we can do. Not having an investment banking arm is not a real problem. It’s very difficult to combine an investment and private bank into a single entity for many different reasons. We prefer to remain in our area..
[MB] It’s a huge market with huge potential and it’s important to be clear on what your value add to clients is.
CEO Private Banking
CEO Private Banking Asia