Small Asia private banks at crossroads - exit or acquire

Reuters

By Saeed Azhar

SINGAPORE, Nov 22 (Reuters) - The planned sale of SocieteGenerale's Asian private bank, for which final bids are due nextweek, underscores how high costs are pushing smaller players inthe region to make hard decisions on whether to bulk up and orget out of the business.

Economic growth has led to a surge in Asian millionaires andbillionaires. Their combined wealth, at $6.6 trillion this year,is expected to overtake that of their European counterparts in2017 and U.S. peers in 2024, according to a Wealth-X and UBSWorld Ultra Wealth Report.

But profit margins are thin for the industry's minnows,especially those managing less than $20 billion - asset basesthat don't generate enough revenue to support expensive bankersand cope with rising regulatory costs and technology spending.

SocGen is the third major global financialinstitution selling its Asian wealth arm in the last five years,and more deals are likely to follow, industry experts say.

"There will be continued consolidation over the next threeto four years. Unfortunately some players will exit withvirtually no returns," said Mark Jansen, a partner at PricewaterhouseCoopers.

He added that some banks could miss the boat completely ifthey price too high or their assets don't match buyers'interests - lost opportunities that may harm their operations.

"Without prospective buyers there becomes a real risk offlight of staff and clients. It would be value-eroding for thoseorganisations but will drive other prospective sellers to bemore realistic around the pricing," he said.

BIGGER FISH FAVOURED

The cost-to-income ratio for some small private banks inAsia has exceeded 90 percent, industry sources say, with nearlyhalf of those costs for relationship bankers and front officestaff.

That compares with a ratio for private banks operating inSingapore and Hong Kong of 83 percent in 2012 and 69 percent ona global basis, according to PricewaterhouseCoopers.

Private bankers in the region also often remark that as themoney they receive is usually first or second generation wealth,they act more like brokers than private bankers - an arrangementthat can be costly as brokers are more hands-on.

Additionally, the fastest growth is in the lower to middleend of the Asia wealth management market. That trend servesbigger banks that have the scale to cater to the mass affluentrather than niche firms targetting the ultra-rich.

Banks like UBS and Citigroup, which manageover $200 billion each in Asia, as well as large Asian bankshave the infrastructure, talent pool and network to executebigger trades and investments for prospective clients, areasthat require big capital expenditure.

"These economics are pretty unsustainable for smallerplayers," said Federico Burgoni, partner and managing directorat Boston Consulting Group.

"The survivors will be the big commercial groups or somedifferentiated players with a specific value proposition likeretirement."

AN OPPORTUNITY

SocGen's Asian wealth unit manages just $13 billion inassets - below the $20 billion mark that the industry has cometo see as necessary for critical mass in the region.

France's No. 2 listed bank has declined to comment on theauction, which follows the sale of its Japan private bank toSumitomo Mitsui Banking Corp for an undisclosed sumthis year.

The Asian wealth unit is valued between $300 million and$600 million and has drawn big suitors such as Singapore's DBSGroup Holdings Ltd and Credit Suisse,according to sources.

But it also represents an opportunity for smaller players togain scale.

ABN AMRO, which manages less than $20 billion, is among thebidders for the SocGen arm, people familiar with the deal havepreviously told Reuters. ABN AMRO declined to comment.

There are some smaller players that make no bones abouttheir keenness to grow.

RBS private wealth unit Coutts manages less than $20billion, according to an annual survey conducted by PrivateBanker International. It sees great opportunities in a regionthat is home to eight of the world's ten fastest growinghigh-net-worth populations but only has a small portion handledby wealth management professionals.

"This presents a clear opportunity for Coutts to capture agreater market share - and to that end, we are planning todouble the number of senior bankers in the region in the mediumterm," Coutts CEO Rory Tapner told Reuters.

Other banks that make it onto the top 20 of the PrivateBanker International list and which manage less than $20 billioninclude Swiss firms EFG and Sarasin.

Sarasin, which has merged to become Safra Sarasin, declinedto comment. In October it shut its India wealth joint venture.EFG said its Asia business is growing and highly profitable.

The survey also mentions United Overseas Bank's private bank as managing less than $20 billion, but bankers saidUOB's assets may be spread over various wealth units includingthe one that handles affluent clients. UOB declined to breakdown its private banking assets, but has said in the past thatwealth management is a key growth area.

The SocGen private bank auction follows two major Asianprivate bank transactions since the global financial crisis.

In late 2009, ING offloaded its unit toOversea-Chinese Banking Corp for $1.5 billion. Lastyear, Bank of America Corp sold its Asia and othernon-U.S. private banking business to Julius Baer for860 million Swiss franc. Smaller deals include HSBC selling its Japan private bank to Credit Suisse.

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