The Value of a Private Bank

Transcription

1 Independent M&A Advisers to the Global Financial Services Industry The Value of a Private Bank Strategic Considerations and Pitfalls Ray Soudah 6 th Private Banking Summit, Zürich, 5 th September 2007 Copyright Restriction: This document is limited for the use of the addressee and his company and may not be circulated to any third party, reproduced, published or used in any way or form without prior written approval of MilleniumAssociates AG. Disclaimer: MilleniumAssociates AG accepts no responsibility and makes no promises with respect to the accuracy and the information contained in this document and the potential success of any projects related to it.

2 Key Questions 1. What makes a private bank valuable and for whom? 2. Will onshore private banks really take off? 3. Why many players will fail strategically and exit? 4. Why markets save the banks and why they will bring some down in the next/(current?) downturn? 2

3 Key Value Drivers of a Private Bank Industry fundamentals trends HNWI segment grows faster than other segments Mature industry environment/regulations Intimate Client relationships Stable and growing client base/healthy age mix Ability to attract and retain client advisors Ability to deliver good service/ performance Demonstrate impressive skill levels Track record Brand Lean, clean and efficient processes For majority of banks, importance of Brand will decrease, but for global players it will increase Size Fully compliant setup State-of-the-art IT and operations Many factors make a private bank valuable, but at the end it is only worth what somebody is prepared to pay for it at any particular time 3

4 Onshore vs. Offshore Private Banking In today s difficult geopolitical environment private banking assets are attracted by rejuvented financial centres such as Switzerland, Monaco or Luxembourg In the past, the banking secrecy and a favourable tax environment were key arguments for clients Nowadays, clients are more looking for a safe haven in the difficult geopolitical environment we are currently experiencing Financial centres like Switzerland have regained attractiveness as one of the world-leading wealth management centres due to its excellent reputation and high regulations (e.g. toughest ALM rules worldwide) as well as its status as safe haven Given current unstable outlook for global geopolitical environment, we expect further growth in net new money in centres like Switzerland or Monaco on a sustainable level in the short- to mid-term Net new money is primarily coming from new growth markets such as Middle & Far East, Eastern Europe, and to some extent also Latin America Net new money gained from Western European clients is limited Substantial wealth is created in new growth markets which are the Middle & Far East, Eastern Europe, and Latin America and that is where significant net new money is coming from Clients based in jurisdictions with unstable political or economical systems or less developed banking industries are expected to continue to place assets offshore mainly for asset protection Access to clients in those regions is seen as one of the major challenges for most private banks; and this is the only source to gain substantial net new money The US will remain and even strengthen their position as the most attractive onshore Wealth Management market. The US is expected to continue its significant wealth creation. On a global scale it remains the most attractive onshore private banking market by far The gradual change of the business model towards a more client-centric approach,but with specialist investment products, to Private Banking will continue. This will unlock a significant potential for margin upgrades. 4

5 Onshore vs. Offshore Private Banking - Conclusions Onshore private banking initiatives have proven to be very expensive and require a long breath Only large organizations with AuM > 500bn will be able to build a viable onshore private banking business It is recommended to focus any onshore private banking activities on few selected markets and get it right there. Opportunistic testing will get you nowhere The US is and will remain the most important onshore private banking market. Any player with global ambitions should focus on the USA. Emerging markets, just about to get to investment grade should be carefully examined to become a new onshore private banking market,eg Brazil 5

6 Strategic Pitfalls Why Players Will Fail and Exit Inability to adapt to industry changes Upgrade skill levels and deliver credible performance Rejuvenate client base Retain client advisors (eg. by offering quasi ownership) Dissipate one s energies Focus is becoming even more important Abandon opportunistic and/or non-growth activities Align incentives of key people Loose or reduction of ambition level Stand-still is no option 6

7 The Next Downturn and its Implications A sustained market downturn will hamper private banking revenues significantly A market downturn will impact business flow and client confidence. Depending on the magnitude and the timing of the downturn up to 50% of private banking revenues could be at risk (annual and performance fee sharing). Most private banks enjoy significant excess capital and comfortable cost-/revenue ratios to financially digest such a down-turn, but other non-financial risks pose a significant strategic risk to some private banks. Non-financial risks of a market downturn Client confidence might be impacted Ambition/motivation level of management /key people will be impacted (shall they continue another cycle?) Non-prepared private banks will loose clients and client advisors to the perceived winners. Prepare for the downturn Adapt the business model to an absolute return approach Upgrade skill levels especially investment products and approaches Ensure enough young and hungry talent is attached to the organization in order to have sufficient breadth and depth for a whole next cycle If a decent preparation for a downturn scenario is not plausible, consider linking the organization with somebody stronger in order to fill the gaps. 7