Fund Management

Private Banks: The Winners and Losers in Europe

Contributing Editor, 10 May 2005

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Private banks will need to transform themselves as the battle intensifies for the management of the wealth of high net worth individuals ove...

Private banks will need to transform themselves as the battle intensifies for the management of the wealth of high net worth individuals over the next five years. The gap between offshore and onshore private banking will intensify, particularly in Europe. These and other findings were the conclusions of a major survey by IBM Business Consulting Services on European private banking and wealth management.

The survey found a growing gulf between the top players and others, with the leaders achieving better cost-income ratios, returns on assets and net new inflows than the average, and significantly ahead of the under performers.

IBM said the bigger banks have pulled ahead, although they are not universally successful, but the mid-sized banks face growing cost pressures.

Those banks best placed to succeed in the European market are banks with their own brand that are part of a larger group or the private banking division of universal banks.

“With regards scale, more larger players are now performing well although we still see some who are finding life tough,” Ian Woodhouse, co-author of the report, told WealthBriefing.

“The key criteria are shown to be cost ratios, return on assets and net money inflows—this is pretty clear and will lead to better identification of the larger high performing players as well as the underperforming ones, the same applies for the mid-tier and small banks.”

Mr Woodhouse argues that it will not just be the mid-tier wealth managers that will potentially suffer, but boutique operations are also likely to be under pressure.

“Many boutiques who are stuck in the old model of private banking are struggling due to increased costs, regulatory, systems, etc. They are also experiencing competition from newer models such as hedge funds and family offices, whereas those that have a clear focus on the newer markets, client and products/services are doing well.”

The survey went on to say that most private banks need to improve their service, innovation and agility to retain clients, who have become averse over the two years since the last survey, and more willing to switch.

“Private banks are facing multiple challenges both at the business level with regulation and increased competition and at the client level with reduced loyalty and increased service expectations,” said co-author, Philippe Theytaz, and partner at IBM.

Private banks, argues the survey, need to make more conscious choices about the type of clients they pursue, taking account of the changes underway in sources of their wealth, their geographic requirements, and the level of service that they are expecting.

Winners will clearly understand where they are positioned in the market places they serve as well as developing the capabilities they need to deliver to their chosen clients.

They need to provide clients with a more holistic approach to advice and asset allocation.

“Not every player will succeed as it requires the appropriate combination of process, people and information technology support together with change management skills to enable the organisation to become truly client centric,” said the report.

Many banks need to rethink their business models to create more flexibility, possibly through more sharing with a parent or outsourcing to a third party provider.

“For all private banks, it will be an increasing challenge to design and implement the most effective business model which reduces managerial complexity. It also reinforces our opinion that further consolidation of the private banking sector, although difficult, will continue,” said Mr Woodhouse.

The survey found that respondents expect that the gap between onshore and offshore operations in Europe to continue to widen as regulation forces European offshore operations into gradual long-term decline.

While European onshore operations are expected to experience growth of up to 10 per cent in 2005, European offshore operations are barely expected to see above inflation growth in assets under management.

The survey said as some European offshore assets migrate out of Europe and further wealth is created in Asia and the Far East, European respondents expect Singapore as an offshore centre to grow faster than Switzerland. Similarly in the onshore arena, wealth creation in Eastern Europe will mean that it overtakes the UK as the fastest growing European onshore centre.

“In terms of the Eastern Europe, the issue here is to focus on the word growth as old Europe economies are expected to turn down. Here the point is that many expect a lot of business owner/manager type wealth to be created quickly in the new European Union accesion states,” said Mr Woodhouse.

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