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Small Asia private banks at crossroads - exit or acquire

By Saeed Azhar

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

Economic growth has led to a surge in Asian millionaires and billionaires. Their combined wealth, at $6.6 trillion this year, is expected to overtake that of their European counterparts in 2017 and U.S. peers in 2024, according to a Wealth-X and UBS World Ultra Wealth Report.

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

SocGen is the third major global financial institution 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 three to four years. Unfortunately some players will exit with virtually no returns," said Mark Jansen, a partner at PricewaterhouseCoopers.

He added that some banks could miss the boat completely if they 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 of flight of staff and clients. It would be value-eroding for those organisations but will drive other prospective sellers to be more realistic around the pricing," he said.


The cost-to-income ratio for some small private banks in Asia has exceeded 90 percent, industry sources say, with nearly half of those costs for relationship bankers and front office staff.

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

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

Additionally, the fastest growth is in the lower to middle end of the Asia wealth management market. That trend serves bigger banks that have the scale to cater to the mass affluent rather than niche firms targetting the ultra-rich.

Banks like UBS and Citigroup, which manage over $200 billion each in Asia, as well as large Asian banks have the infrastructure, talent pool and network to execute bigger trades and investments for prospective clients, areas that require big capital expenditure.

"These economics are pretty unsustainable for smaller players," said Federico Burgoni, partner and managing director at Boston Consulting Group.

"The survivors will be the big commercial groups or some differentiated players with a specific value proposition like retirement."


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

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

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

But it also represents an opportunity for smaller players to gain scale.

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

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

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

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

Other banks that make it onto the top 20 of the Private Banker International list and which manage less than $20 billion include Swiss firms EFG and Sarasin.

Sarasin, which has merged to become Safra Sarasin, declined to 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 said UOB's assets may be spread over various wealth units including the one that handles affluent clients. UOB declined to break down its private banking assets, but has said in the past that wealth management is a key growth area.

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

In late 2009, ING offloaded its unit to Oversea-Chinese Banking Corp for $1.5 billion. Last year, Bank of America Corp sold its Asia and other non-U.S. private banking business to Julius Baer for 860 million Swiss franc. Smaller deals include HSBC selling its Japan private bank to Credit Suisse.