Credit Suisse’s Asia Pacific private banking head Francesco de Ferrari is looking to bulk up the firm’s assets under management in the region as the Swiss bank rebalances its risk weighted assets towards its private bank.
“We absolutely will always look at inorganic opportunities but they really need to make sense for us,” de Ferrari told FinanceAsia in an interview in Singapore.
De Ferrari, a native Italian who moved to Asia in 2012, likes the balmy weather in Singapore, where he is based, which is just as well; competition is heating up in the city state. Homegrown players such as Singapore DBS have been bulking up.
The private wealth industry in Asia has gone through consolidation, with a few businesses exchanging hands. RBS sold its overseas private banking business Coutts International to Switzerland's Union Bancaire Privee in March while Société Générale sold its Asia private bank to DBS last year. Credit Suisse was among the banks that had shown an interest in Société Générale's private banking business though de Ferrari declined to comment on specific deals.
When it comes to any acquisition, de Ferrari looks for two things. “Either it helps us gain scale or alternatively, it can be a very targeted acquisition like HSBC Private Banking in Japan, where we specifically needed to gain scale more rapidly in one country, then even a small acquisition would make sense,” he added.
Credit Suisse bought HSBC’s private wealth business in Japan in 2012 at a time when the British bank was pulling out of businesses that lacked scale. In Asia Pacific, Credit Suisse had about Sfr144 billion of assets under management end 2014, making it the third largest player after UBS and Citi.
While growing via acquisition could potentially allow Credit Suisse to leapfrog into a higher position, there is also an opportunity cost. “Since I took over the business in January 2012, on average, we have been growing almost Sfr20 billion in delta assets a year. Any acquisition that’s smaller than that is a trade off because it takes nine to 12 months to integrate the acquisition,” said de Ferrari.
De Ferrari is looking to increase headcount in the region but faces a shortage of talent. “Our business is very people driven so absolutely, we are looking to hire.”
High costs
Asia has seen rapid wealth creation, which has attracted banks to the region. According to a joint study by Wealth-X and UBS in September, Asia boasted the largest billionaire wealth increase over the past year, with the region’s billionaire fortunes growing by 18.7%. Asia also accounted for 30% of the net increase in global billionaire wealth in 2014.
“Asia is undoubtedly becoming the wealthiest region in the world, a lot of private banks are coming to Asia to look for that growth opportunity,” said de Ferrari.
While Asia offers opportunity, it is also diverse. As such, there are many jurisdictions and rules to comply with, raising the costs of banking the very rich. "The wealth here is very complex to access, the business model, operating infrastructure, the systems and breadth of coverage are such that the cost to income ratio on average has traditionally been very high,” he added.
In the US and Europe cost-to-income ratios, a key valuation measure for private banks, are between 70 and 80 percent. In Asia, these rise to 80 to 95 percent, according to a study by consultancy services firm Accenture.
The high costs have forced global banks and new entrants to re-think their proposition in the region. “In the past, a lot of banks were coming to Asia to look for volume growth – acquiring new clients, net new assets and AUM [assets under management], but now with increased regulation and costs that have made the business much more complex, many are focusing on profitability and we have seen consolidation,” said de Ferrari.
Markets are also diverse, with macro-economics defining the needs of each market. For example, in Japan, since Japanese Prime Minister Shinzo Abe took over in 2012 and embarked on quantitative easing, weakening the yen and pushing inflation up, ultra wealthy Japanese investors have been forced to invest.
“Over the last 20 years, if you held yen or Japanese government bonds you were making money by doing nothing, as the yen was getting stronger and there was deflation and just by holding cash you are getting richer every day,” said de Ferrari.
“Today, 52% of Japanese investors’ investments are in cash and government bonds. Right now, by doing the same thing as the last 20 years, they are destroying wealth,” he added.
Staying put down under
In Australia, private wealth firms have struggled to make returns and in May, Swiss rival UBS called it quits from Australia’s private wealth industry.
In a statement explaining the retreat, UBS said that its wealth management business model of providing holistic client advice had become increasingly difficult to fully operate in Australia, which is dominated by a brokerage-based system.
In Australia, private bankers often get paid inducements, or commissions to distribute funds to their clients. This has led to a conflict of interest, as private bankers are giving out advice on which products to buy, while at the same time getting a commission for selling those products.
De Ferrari said that Credit Suisse has no plans to pull out from Australia and that the firm runs a different model from its competitors.
“We run a completely different business model than anyone else in the industry in Australia, we would tend to charge for advice, sell only portfolios that have global strategic asset allocation at the core and not have any inducements,” said de Ferrari. “As a conflict-ridden culture comes increasingly under attack, our business model will prevail,” he added.
Credit Suisse pays its staff a salary and bonus and financial metrics are only one element of how they rate its relationship managers' performance.
According to de Ferrarai, aside from revenues generated, Credit Suisse also looks at other factors including whether clients are giving more money to manage, the performance they have generated for clients for the risk undertaken and their contribution to growing the franchise through helping to recruit new bankers and junior staff.
