The Panel:
Pakorn Boonyakurkul, managing director for HSBC Private Bank
Alex Fung, chief executive officer Hong Kong & North Asia SG Private Banking
Anuj Khanna, managing director and head of Credit Suisse Private Banking North Asia
Kees Stoute, managing director, EFG bank
Sam Tse, managing director, North Asia region head, Citi Private Bank
Private banking is divided into two major camps. There are boutique firms, many based in Switzerland, and there are private banks that are part of multinational firms. What do you each think are the benefits of each model?
Kees Stoute: For me, an advantage of being a part of a boutique firm is that the focus on private banking is from top to bottom: all individuals in the bank are working for and dedicated to the same cause. In bigger firms what you see very often is that the first real private banker only comes in at level three or even level four in the organisation. And the people on top of that often have a different kind of mindset, so you tend to have a struggle over how private banking is being approached and
what you're going to do with the private banking business.
In the past few years, there was not much that could go wrong. But the fact is that many banks increasingly treated their private banks as pure sales organisations and distribution platforms for their products from other units within the organisation. As a result many of these organisations drifted away from the focus on developing long-term relationships.
And I still believe that a key characteristic of traditional, boutique private banking is the strong focus on long-term relationships. With the recent problems in the markets -- to a large extent caused by the financial sector -- the focus on relationships will be even more crucial for the success of private banks. A lot of clients don't trust banks anymore, but they often probably still trust their bankers. In other words, if you had a pure sales kind of relationship with your clients, it's now tough to face your
clients -- after all, what are you able to tell them now? But if you had a relationship based on trust, you are now still in a position to continue your relationship. And though you might also have suffered with your investments, at least the feeling is that the suffering is shared. So the boutique firms don't face a focus challenge at present, but just go on with their business. For others, much time will have to be spent reviewing the future of their private banking units.
Sam Tse: I strongly believe that our global presence, a global business network, and a strong balance sheet will benefit our clients. Of course when we look back, 2008 will be remembered as a year in which our conventional beliefs, be they about asset class correlations or the benefits of geographic diversification, were challenged. With the exception of US Treasuries, nearly every other asset class saw negative returns last year. But this doesn't mean that diversification is no longer relevant. Our clients continue to look for diversification when it comes to their portfolios, and I would say that our global expertise helps.
Clients who are entrepreneurs or senior corporate leaders are looking to tap into an institution's strength in terms of networking and in terms of global resources, to help expand their business. These capabilities, I think, are becoming more and more important for many clients' holistic wealth management needs. This trend is not going away.
Pakorn Boonyakurkul: With this financial crisis, most people, before they look at the model, look at the safety and stability of any bank. They look to see if they are working with a good banker, one that the client likes. And they also look to see if it's a good bank that provides safety and stability from the crisis. And with that outlook, then either a global bank or a boutique bank can be an option. The advantage of the global banks is the ability to provide a broader range of products and services -- which suits clients who want access to a variety of products for their private banking needs, for their family banking needs and for their corporate banking needs as well. The global bank can provide all those services. It comes down to the choices of the client, as to whether or not they want a wider variety of services and options.
Do you think the client even looks at the model?
Tse: Well, an interesting observation, at least from my end, is that most high-net-worth clients have more than one relationship bank. They are clear about the benefits of diversification. They know how to leverage what they perceive to be the particular strengths of individual financial institutions...
Boonyakurkul: I agree with you. Clients look at both the relationship manager and the bank. Of course a good relationship manager will always get some sort of support from their client. If the client likes the relationship manager and he moves to a new bank, it's likely the client is going to give something to that relationship manager at that new bank. But not everything.
I think that's a fact. And what's happened over the past few years is that many clients ended up with multiple banks. Instead of having three or four banks, they have 10 or 12 or even 15 banks. And while that was okay during the good times, now that everything has contracted, I think many clients are looking at their bank allocations and rethinking things. Nowadays why would you want to be
just a small client in all of these banks? If the client consolidates to a few select banks then he becomes a more meaningful client for the bank and naturally can derive a lot more benefit from the relationship with these selected banks.
So I think it's both. I think clients look at the bank and the relationship manager, but I think we have larger forces at play right now than looking at just those two and that's the market. I think right now, that seems to override all of the issues we have experienced in the past few years.
I think you will see some consolidation within private banking -- I'm not talking about the banks consolidating, I'm talking about clients consolidating which banks they chose. At the same time, I think that the clients realise that they have to get the most out of each bank by being a meaningful client.
But it's also harder for them to move, because they've made longer-term calls, so now they have to sit it out.
Boonyakurkul: It is, yes, but it's a function of time. If some clients want to move today, and it's not possible, it's just a case of how you view the market -- maybe it's three months, six months, or whatever -- that opportunity will arise.
Stoute: Our experience, obviously, is that clients look more at the relationship than the bank. EFG Bank didn't exist before 1995 and only 12 years later it was the third largest bank in Switzerland in terms of tier-1capital. So it has grown tremendously and impressively without a brand. The people are the brand. In general our experience is that once clients have found a banker they really trust, they tend to stick to that banker. In a way it's an extension of what you saw before -- and still see -- especially in Switzerland. There are many independent financial advisers and external asset managers -- if I am not wrong more than 3,000. These are mostly companies without brands but with clients. They have started these companies most of the time together with their clients. They say: 'For the management of the relationship we don't need the management of that bank. We only need the bank's platform and their products. Let's go on our own.' If you have a really good relationship with your client you can get that kind of thing done.
As our chairman Jean-Pierre Cuoni says, 'It's much more difficult for a client to find a banker than for a bank to find a client.' And I think that is the reality. If you have a really, really trusted relationship with your client then the client will follow you. If you don't really have that experience with your client -- and a lot of bankers overestimate themselves in that respect and think they have that relationship when in reality they don't -- you can really decide, almost together with your client, what you want to do with your life and how you think the relationship should be nurtured going forward.
Alex Fung: To me it's very difficult to say which is more important, the banker or the bank. In general I think both complement each other. I think during all our recruitment processes we discover very well that all of the good private bankers identify the right bank, the right house that is suitable for them and the client. In response to Pakorn's comments, I think he's right -- you see in Hong Kong, and a lot of emerging markets, that clients bank with many banks. But also the recent scenario has surprised me a bit in seeing which banks have benefited from some of our peers' problems. That signifies to a certain degree that clients from now on may not be as willing to deal with as many banks and that they are closing accounts when there is bad news about those banks, and really selecting which of the several banks they will continue to do business with...To be fair, some regions have clients who are more loyal, if you want to use that word, than clients in other regions.
But to me, personally, the main dream is to be the key banker of clients. To a certain extent this has become much more difficult to make real after what happened to Lehman Brothers in September. Clients are starting to really look at counterparty risk. So if they were dealing with two or three banks before, they are now dealing with four or five banks; if they were dealing with one bank they are now dealing with three banks. It comes back to the fact that inevitably they are now looking at all the banks they are dealing with and looking at what those banks are offering.
This shows that both models can exist, doesn't it?
Stoute: I read some research that asked high-net-worth individual entrepreneurs if they would want their private account at the same bank where they keep their corporate account. And something like slightly more than 50% said they would not like to have it at the same bank, which means that almost 50% wouldn't mind. So it's indeed very difficult to generalise, but it's really up to each individual. And that again is typically what describes this business best: there is no formula for making this business work, it's a very individual, relationship-driven business. But if you as a bank respect and appreciate that, then I think you have a chance to be a successful private bank. If you try to put all of these clients into one pot and say we have a formula and the business will just run itself, then I think you have a major challenge.
Anuj Khanna: Usually clients move with the bankers when the bankers trade up with the brand name. It is much more difficult to bring your clients with you when you trade down on your brand name. When bankers move from a retail bank to a private bank, when they move from a smaller private bank to a recognised global private bank, the level of services you can provide is broader, and you can easily bring your client with you, but not vice versa. That's the general trend.
Do you think that the traditional private banking values of wealth management have been skewed due to aggressive target demands by some clients?
Tse: I would have to say it has been a bit of both. We've seen clients' risk-reward expectations tempered significantly over the past 12-15 months, in large part due to the general market environment. But in some cases, bankers and investment counsellors will work closely with clients to position their portfolios to ride out this downturn, for example, to have structures in place with shorter tenures to better hedge against risk.
Boonyakurkul: Our clients are quite diverse. Of course, in the past high yield has been the norm in the market. So I would say that many clients, whether they were new rich or old rich, they wanted high yield. And yes, some were more conservative. But I think what happened to the market is that it has changed that dynamic in such a way that some clients have become more conservative than before. At the same time, there are other clients who feel that this is probably the greatest opportunity ever for them -- but the question is how to take advantage of that and how to present themselves so they are ready.
Khanna: In Asia, many of our clients are first or second generation high-net-worth individuals as opposed to European countries where many private banking clients are into third generation wealth and prefer to focus on wealth preservation. Here, we're dealing with more aggressive high-net-worth individuals who are more trading-oriented and are trying to earn more out of their savings. The financial crisis is reminding these clients of the benefits of a long-term approach to investing with the help of professionals.
Are clients more inclined to listen to you now, rather than tell you what they want?
Tse: They are all hungry for ideas. Of course, everybody is nervous, everybody has been asking questions like: ‘What is going to happen next?', ‘Is this the bottom already?' and ‘What is the next investment opportunity?'
Clients are receptive to good ideas but they tend to adopt a much more considered and deliberate approach, which to me is a good sign. At the same time, there are signs that there is still a fair amount of cash sitting on the sidelines, at least in the Hong Kong market. For example,
we ran a time deposit campaign last December to offer clients a better yield in this low interest rate environment, and to be honest, I was overwhelmed by the response from our clients in Hong Kong.
We've also been hosting a series of investment seminars and discussions with our clients and again, the response has been enthusiastic. So there are signs that there is still a healthy level of liquidity in the market and that clients are on the look-out for the right investment ideas. But I don't
think clients will jump in aggressively, they will probably start slow and unlike in the past, the ticket size will likely be much smaller as well.
Fung: Generally speaking, if you can generalise, clients are much more conservative. But I think advice is all the more important. During this kind of market people are looking for quality, independent advice.
Tse: And the whole notion of risk assessment has changed now. Counterparty risk embedded in our offerings are finally recognised as real risks, and not just a disclaimer on offer documents. This stands in stark contrast to the past when "risk" pretty much meant conducting a sensitivity
analysis to see how the risk-reward relationship stacked up. Not anymore.
Khanna: One of our strengths is our structured advisory process which has stood the test of time and which clients have appreciated. When the markets are producing phenomenal returns for a long period of time, it tends to numb our senses. It numbs the senses of the clients, it numbs the senses of the bankers. As a result, something like what we have been through in the past 18 months forces us to go back to basics and follow the advisory process.
But who was expecting Lehman Brothers to go down?
Tse: Absolutely. Events of the last 12-18 months have made investors focus more on risk in its totality. But it's not easy to develop a good, thorough understanding of this complex issue overnight. This is why clients tend to move slower and much more carefully. Investor mindsets have to adapt
to a new set of realities. You could say that a number of our traditionally-held beliefs and assumptions about investing were destroyed in 2008.
Boonyakurkul: I totally agree with what Sam just said: There's a new reality. The most important thing and the hardest thing is to accept that new reality, because without that acceptance we cannot move forward... But that's just the first step. The next step is to ask: What is the new reality? I don't think we know what the new reality is. So everybody is trying to figure out what to do and what not to do...
So that means we really need to understand each other more and communicate a lot more. But while I think the wider wealth has been reduced somewhat, there is still substantial wealth in the marketplace. It's just not being deployed right now. Everybody is saying, ‘Ok, maybe this
is the bottom,' but everybody has been calling the bottom for the last few months.
As a result, it's important to deal with our clients' mindsets as much as with their investment aspirations. So for now, we're spending a lot of time talking to our clients. In the past you spent five minutes on the phone and were able to conclude a transaction or deal. Now that five minutes turns into 50 minutes and after 50 minutes there is no transaction, which is probably the right thing to be happening at this point in time.
Do you have to manage expectations of the bank, because you're spending time on a client and not bringing in revenue?
Fung: I think from the bank's perspective, if I may speak on behalf of the bank, we have to recognise that this is a correction. It's a long overdue one, but it's the natural course of doing business. And I think that what we have to look at is the whole structure of our offerings, and we have to change how we present our products and services, perhaps, and cater to 2009 as compared to 2007. All that has to change somewhat because the environment has changed. But I think from the bank's perspective, the wealth is still there, and the wealth creation will continue, I think particularly in Asia, so for the long haul for this business I don't think this is a problem at all.
In recent weeks banks have announced that net-new investments are up. Are people playing musical chairs with their money amongst their banks?
Fung: If you look at just the recent period it is just a bit of that - money moving around from different banks. I don't think there's new wealth creation, in fact, there's erosion of wealth. For most of our clients, yes they are still growing and still making money, but from the investment side of it, I think it's much less.
Boonyakurkul: I agree with Alex, I think the net new money is mostly musical chairs. Though I think some of the money is coming from some clients' businesses as well. Most of our clients are entrepreneurs and own businesses. The businesses have been growing in the past, however now they are not growing as much. For some of the clients, they are questioning: ‘What do we do - not only with our businesses, but with our private banking investments?' So some of them are cashing out and putting their money into private banking. And we're not at the bottom yet - we don't know how this is all going to pan out.
Khanna: First of all, not all banks are producing net new assets. As far as Credit Suisse is concerned, we've benefited from senior bankers moving to higher quality banks and looking for a stable home, and when these bankers come to us they bring with them their loyal clients. The
number of bankers joining us are far more than those leaving us. The second reason for net new investments is that currently the level of penetration of private banking is still very small. There are still many families that are not being served by private banks yet, and that's also our growth opportunity.
Many banks for which private banking is not a core business are reducing their scale of operations which is bound to happen when the market gets worse. It becomes difficult for smaller players to sustain global operations. The number of players will reduce, and the fight for bankers will not be as severe as it used to be.
On that note, when is the bottom?
Tse: If you look at all the research, most of them will refer to 2009 as being a tale of two halves. The first half will continue to be difficult, and some form of modest recovery will likely only occur in the latter part of the year. But nobody can tell. What's most important is that we need to continue to "hand-hold" the client, and keep a look-out for the right investment opportunities. Even during a downward trend, there are opportunities out there, and it's our job to bring them to the right client. Credit has been extremely cheap, for example, and is still relevant to some investors, but only if it is deployed in a thoughtful manner, and not indiscriminately, as may have been the case previously.
There're a number of ways to go about achieving decent returns even during these difficult times. Of course it won't be the same returns between 20% and 30% seem of the past, but I believe that clients' mindsets have changed and they now understand that it's just not possible these days.
Fung: It's very difficult. You know, as I say we don't have a crystal ball. We don't. This is a question that not only do we ask ourselves here, but one that our clients ask themselves everyday. I'm not a feng shui master, I cannot say that the markets will recover on November 9, 2009 or 2010. For me,
fundamentally I don't see the macro picture getting better until we see credit normalising and until we can put our fingers on the earnings prospects. For investors in general, it's very difficult to predict earnings.
But if the sky remains cloudy, it doesn't mean we stay home and sleep all day. There's still things to do - for example, our house likes oil - and we just talked about this, this morning in an investment meeting that there are short-term bonds that are worth looking at. Those are some of the things that we have to talk about, and manage the return expectations with our clients. It's a different set of investment parameters that we are dealing with now.
Boonyakurkul: It's going to continue to be difficult. And what happens tomorrow very much depends on what happens today. And a major new reality is that there's a new player: governments around the world. And they have a major say in this now. So the game has changed. In the past, we could predict how banks would behave, we could assume they would be profit seeking. But now with governments coming in, and rightly so, around the world, I think the objectives are different. And it's harder to predict what will happen. So a big factor now is government action because they will have a big impact on the markets in terms of how fast they will go up or down.
And with more regulations, which I think are on the way, we're going to see the day-to-day activities of the bank changing. I don't think we have seen anything really yet, in terms of what new regulations will be imposed. But they will come out in the next few months. And so what we will do may remain fundamentally the same, but on a day-to-day basis it's really going to change.
Khanna: We believe the global equity markets are still vulnerable to sharp reversals and may test new lows of this cycle in the coming months. Latest economic data suggests some initial stabilisation of global leading indicators, which show that while the contraction in most economies was ongoing at the beginning of the year, the pace of the global downturn is now abating. We believe 2009 will remain a year of high volatility for equity investors against the backdrop of a deep and long recession in the major economies.
Looking ahead, we expect to see a silver lining in the later part of 2009, as the tentative bottoming of forward-looking economic indicators in December and January could eventually lead to stabilisation and then a gradual improvement of the global economy in the second half of the year. We expect the equity markets will likely bottom out ahead of the recovery of the real economy, though the bottoming process will be bumpy and lengthy. A bright spot for Asia is China's massive fiscal stimulus plan and monetary easing, which will drive a recovery of the Asian economy in the second half of the year, in our view. We expect the Asian economy will bottom out towards the end of the second quarter, which will offer a positive catalyst to support a more sustainable recovery of the Asian equity markets in the second half of this year.
For the first half of the year, we recommend investors adopt a defensive equity strategy on lingering macro and earnings risks. Investors should focus on blue-chip, strong cash flow companies with low gearing as they are the recession winners which are best positioned to withstand the global downturn. For the more dynamic investors with higher risk appetite, we recommend selected cyclicals with direct exposure to China's massive infrastructure-led stimulus programme.
This roundtable first appeared in the Spring 2009 issue of Private Capital, which was published together with the March issue of Financeasia.
