I would be very happy if that were the case. But I cannot say the private banks have developed the same brand value. None have acquired such a reputation in China, that it will cause a client to stand in a queue to open an account û as ladies do to acquire a Kelly bag! I hope it will come over time!
Do you view gold as a good investment?
Gold is back in fashion. It is a supply-demand situation û with a lot of demand out of China and India. There is a limited supply, which is fundamental. And whenever we have crisis situations, gold does well. So, for us, gold is more than an alternative investment. It is a hedge. So we definitely recommend adding gold to a portfolio, although the size of the position will depend on the risk profile of the individual.
Are you optimistic on financial markets in the next 1-2 years, or do you have concerns?
We are constructive. We will see a choppy market, and we can easily foresee a repetition of the correction that occurred between June and September 2006. For the rest of the year, I believe we will see indices go higher in the third or fourth quarter than where they are now.
Our overall view is that we believe we will have a soft landing in the US. I expect a deceleration in Europe, and we expect the emerging markets û and particularly China û to propel growth. But we are not expecting returns to be so high in 2007 as in 2006.
In the old days, and in Hollywood movies, you were rich if you were a dollar millionaire. Nowadays, how much does it take to be ærichÆ?
In the sense that rich means you can afford many things without really worrying, I would say that the amount is $20 million. With property prices here in Hong Kong, if you have $10 million, you are well off, but you are not rich. And seriously rich is when you have in excess of $100 million.
How many seriously rich clients would you target for the Asian business?
We want to have the full range. We donÆt want a concentration of assets in a few clients. A situation where 20% of your clients are 80% of the assets, is a bit dangerous.
Is it the case that the seriously rich clients û being so sophisticated, and using so many banks û are not as profitable a segment as those with $1-10 million?
That is clearly so. The higher the amount, the lower is the return on assets (for the private bank) in terms of basis points. The best clients are, yes, between $1-10 million. The average return on assets for the whole bank is 100bp, and that is where you want to be. The absolute minimum is 90bp and if you are at 120bp of assets under management, then you have a very good business indeed.
Here in Asia, UBS is the clear market leader by assets under management with more than $100 billion. What do you think is the necessary scale to operate successfully in Asia?
We have defined the critical mass as $10 billion for each region. We are growing rapidly, and we are not there yet. Then it also depends on your business model and whether you are going all the way down to target affluent individuals, or you really keep it on the high net worth individual level. In our opinion we are staying on the high net worth side. We have several larger clients but we are shooting for an average of between $3-5 million per client.
For entry level clients we are also looking at their potential wealth; because once you close the door on a client it will close for the rest of their life. So we donÆt want to be so arrogant as to say we will only deal with clients with $5 million.
Are you finding it challenging to hire bankers in Asia to manage this expansion?
Interestingly enough, we have been quite successful in hiring from others, mainly from the very large global banks û specifically where private banking is not a core business. We have met our hiring targets in Hong Kong, Singapore and Jakarta, where we have just opened an office.
Where we really have more difficulty is hiring in the support areas. It is evident that the costs are rising due to a shortage of talent û both in the client-facing and support functions.
Do you worry that this shortage of talent and the rapid expansion of firms in the region, will lead to problems?
In the short term it can. The strategy that firms such as UBS and Credit Suisse have of establishing private banking business schools is a good one. But it will take time to deliver results. If the market continues to grow, then we will face shortages, and that will affect all the major players. If I add up all the statements I have read from major players and their hiring requirements for 2007, the figures simply donÆt add up.
In Asia there is clearly growth in assets, but the costs are rising faster. Does that mean margins are declining?
The margins are declining, depending on the business model. We want to be purely focused on private banking; we are not branching out into other areas such as corporate finance. We are not in the affluent market, or real estate. So if you manage to keep your focus, you are in a better position to manage your cost. But clearly there is pressure on costs. Clients are very demanding, and it is very often the case that they are shopping around and get price concessions û especially from those newer firms that want to enter the market.
So you have a compression on the revenue side, and an increase in costs. This could easily squeeze out some of the recent entrants.
How do you define the crossover between someone who is affluent and a private banking client?
We are looking at clients who have potential to bring bankable assets of more than $1 million. If it is clearly below that, then that is not something we are interested in.
You have opened an office in Jakarta. Where do you see the growth in terms of private banking assets in this region?
Indonesia is a very interesting market, as its economy recovers. The other countries in Southeast Asia are all interesting, but I would say Indonesia is, by far, the most interesting. And the medium to long term growth will come from China. So we are very well positioned in both Singapore and Hong Kong.
And another very important growing market is India, which we cover partly out of Dubai, Switzerland and Singapore.
In terms of China, what is the roadmap for growing that business?
The roadmap is today to start building relationships, and making prospects and clients understand how private banking works and what it is about. Chinese private clients donÆt have any experience of private banking. It is a struggle to make some clients understand the value of having a nest-egg and not just investing everything back into opportunities in China. The trend at the moment among entrepreneurs is more the latter.
There are clearly some regulatory roadblocks as to what foreign private banks can do, are there not?
For regulatory reasons we are not in a position to give advice onshore to Chinese clients.
Assets have been growing strongly in Asia for the last few years. Do you see that trend continuing?
It is a direct correlation between GDP growth and wealth creation. In our target markets, the distance between rich entrepreneurs and the working class gets wider all the time. It is even more pronounced in Asia.
If a Chinese client has a dollar-based account in Hong Kong, and it is designed as you said before to be a ænest eggÆ. What sort of return should they expect, given the current interest rate environment?
The client absolutely wants the risk-free return. So we are starting at 5%. And for us to add value, we need to give more than that. Our long term aim would be to get returns between 8-10%.
Swiss private banks have traditionally seen their first priority as preserving wealth. Do you worry about the global imbalances in the world today and a dramatic correction occurring at some point?
All market participants, and those that have created these imbalances, are very aware of the danger. Central bankers and governments have a very tough job to do. Having said this, I sense an increased will to co-operate and co-ordinate action on a global scale.
What are the changes that have occurred at Clariden Leu and what do they mean for your business in the region?
The starting point was that Credit Suisse had four independent private banks, and one independently managed asset management company. They were all pretty successful and profitable, but we came to the conclusion that the critical size for an internationally successful private bank was higher than any of them individually. So we decided to merge them into a new unit which today has in excess of $100 billion of assets. By doing that we have formed what is today the fifth largest pure private bank. The merger was made from a position of strength, and pre-empting the pressure that exists for further consolidation in private banking, particularly in the Swiss private banking industry.
Do you think further consolidation is necessary in the Swiss private banking industry?
It is inevitable for a number of reasons. One is that most Swiss private banks are onshore and oriented towards central Europe. Both are areas where there is very small wealth creation, and therefore little opportunities for growth. If a bank wants to grow, it has to do so internationally. It has to go where there is wealth creation, and that is notably in Asia and Eastern Europe and Russia. Such expansions require investment, and a bank with below $20 billion in assets does not have the financial muscle to do that.
Secondly the requirements of the regulators are ever increasing, and the cost of doing business is increasing. So you have a high fixed cost.
Thirdly, clients expect good research and product development. Both research and product development are costs. So these are the three main reasons, and in our case they were the driving factor.
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