Costs and scale
Second, there is a continued pressure on margins. Regulatory change and competition for talent mean costs are higher, while revenues are struggling to recover in the aftermath of the financial crisis. In the last few years, Asian clients have tended to favour safer, simpler investments, resulting in lower income for banks. Well-run large private banks will cope better in this tough environment as they can spread resource, technology and regulatory cost across a larger client base. And, if they are part of a universal banking group, such banks have the added advantage of being able to share infrastructure costs with other parts of the business, leveraging existing resources and systems.
Clearly, economies of scale give larger banks the upper hand when it comes to managing costs. A survey conducted in 2010 by Scorpio Partnership showed an average cost to income ratio for larger banks of 75 per cent versus 85 per cent for smaller banks. At the same time, larger banks – with their ability to tap into their existing SME and wholesale banking client pools – are able to acquire new business at a lower cost.
Third, the fierce competition for relationship manager (RM) talent is unlikely to blow over anytime soon. All private banks depend on experienced RMs who can offer relevant, timely advice, based on in-depth understanding of their clients’ needs.
However, large private banks have an advantage in that they can recruit from within their own ranks. With the right training and support, commercial and investment bankers can transfer their skills to private banking relatively easily for Asia’s entrepreneurial client base. Faced with a shortage of experienced RMs, this allows large private banks to ‘grow their own’. They may also have greater luck attracting talented RMs in the first place as – with their larger, international organisations – they are able to offer more in the way of career opportunities and professional development.
The core purpose of any private bank is to grow and safeguard the wealth of its clients. Large or small, the winners in the current environment – and those best able to capitalise on the extraordinary growth opportunities in Asia’s wealth market – will be private banks who focus on meeting their clients’ needs at the same time as staying operationally efficient.
While no private bank should attempt to offer everything to everybody, I am convinced that well-managed, larger private banks with broad-based geographical footprints, platforms and capabilities, are likely to emerge the stronger in Asia in the coming years.