EFG Private Bank's CEO, Lawrence Howell talks to FinanceAsia.
Can you explain a bit of the history of EFG?
EFG, as an entity, came into being in the late Summer of 1997 when a number of previously non-consolidated entities owned by the Latsis family came under a central bank holding company. Prior to 1997, there had been a bank in London called Private Bank & Trust, a bank in Greece called Euromerchant Bank, a bank in Luxembourg called the Banque de Dep(ts Luxembourg, a finance company in Monaco called EurofinanciFre, and a bank in Switzerland called Banque de Dep(ts. These entities were to various extents owned by the Latsis family.
In 1997 all those different entities were renamed EFG-something. The holding bank became EFG Bank European Financial Group and that was the former Banque de Dep(ts, the Swiss bank. This bank had been acquired by the Latsis family from the Onassis family in the early 1980s.
EFG Private Bank was the former Royal Bank of Scotland AG, which we acquired and renamed in April 1997. We then folded the Zurich branch of Banque de Dep(ts into the new EFG Private Bank.
What is the history of the Latsis family and how involved is it in the bank today?
There is very little I can say about the family. They are very private. The family is, however, very much hands-off. The bank is very much run by professional managers. So it is an 'investor family' rather than a 'banker family'.
The family are Greek?
It is much more complicated than that. They were originally of Latvian origin, then went via Albania to Greece in the early 20th century. Now most family members are either residents or citizens of Switzerland.
So the family is not very involved in the bank?
Spiro Latsis, the acting head of the family, is the chairman of EFG Bank Group and is also on the board of EFG Private Bank of which the holding company owns 68%. Through that position, he has the ability to influence strategic issues and does so.
Have family members worked in the bank over the years?
Basically, the family members have remained outside the bank.
What are the pros and cons of the Swiss family private banking model?
There are a whole series of business models. One of them is the Safra/Republic model, where a business is built almost on the back of one individual, who is an insider and has a network of friends.
A second model, is the classic Swiss private banking model, where families have over the years built up relationships and a clientele. Most of them are multi-generational and multi-family. The advantages of family continuity are that clients are handled by grandfather, father, son, etc. That creates a certain business stability. The reverse of that is there can be a little less flexibility and creativity.
However, some of the traditional family run Swiss private banks have brought in non-family members in the last five years, which shows they are starting to change.
But it depends on what clients are looking for. Traditionally, they are not going to get a Goldman Sachs-level of creativity. On the other hand, there is a high level of stability and continuity.
There is a place for this business model, but I am not over-confident long-term because there is a genetic aspect that is not inherently meritocratic, and I personally prefer models that attract people based on experience and bottom-line contribution.
In the typical Swiss family private bank, how many generations would have worked in the institution?
Most of the Geneva banks were founded around the 1750-1850s, and if you use 25 years as a rough estimate per generation, you are talking about around 10 generations of founder families on average.
Does history then suggest that these families do have the genetic capability to keep producing banker after banker?
The advantage of the larger partnerships such as Lombard Odier Darier Hentsch or Pictet, is that they are large enough so there is usually someone in the family who can come to the fore.
These have been partnership structures, with a series of partners serving clients and not all of them have always been financially successful. Until recently, very few of them looked at the capital value of the banks in public. All they seem to have needed was to generate enough business for four or six partners, to keep you afloat plus your assistants. There wasn't this drive to get 20% compound earnings growth.
So until the 1980s, the private banks were very small, meaning between Sfr500 million and Swf5 billion of assets under management, because they weren't designed to be great, globe-spanning entities.
So you're saying they've entered a new stage of development and that is a challenge for them?
Some of them have changed. Julius Baer has, as has Pictet and Lombard Odier Darier Hentsch. But others have stayed small. For example, some private banks only have about 100 people, and one office. They say, why have more offices because then you just have more risk, because you have partners who are personally liable. The partnership and its unlimited liability makes them more risk averse.
Asian clients typically come from strong family structures. Do you think they prefer dealing with family banks?
I have been in this business for 25 years and the only determinant I have been able to find out for the Asian business is that Asians do business with people they trust.
We have 100 people in Asia. We're a big player among the Swiss private banks in Asia [UBS and Credit Suisse are not defined as private banks, but as universal banks, according to the Swiss definition]
In general, the Swiss private banks have not been hugely successful and therefore have not made a big effort in Asia. One reason is because they are so family-oriented, it has been required to take a family member or a trusted Swiss and to send that person out to Asia. 'Trusted' means he has worked for the bank for a long time in Switzerland. Usually, however, they are not familiar with doing business in Asia, and so some Swiss private banks have put people into rep offices who are not necessarily equipped to build a business.
Therefore, these banks find it tough. They don't publish balance sheets, so they can't come along with a balance sheet and show it to the client. They don't have people in place who have the long-established relationships. So building trust in Asia is harder for them. It's been the great barrier to their success.
So is this lack of financial reporting and transparency a real concern for these Asian clients?
Certainly it is a contributing factor. But more important is the fact that Swiss private banks have been so focused on Europe, that they don't have the personal relationships with the Asian clients.
We opened in Asia two years ago, and nobody had heard of EFG Private Bank. But we hired the former head of Republic Private Banking in Asia, and we hired Client Relationship Officers from major global banks. We basically acquired the goodwill and relationships these people had built over time.
Most private bankers in Asia work out of banks not rep offices. So we decided to open a branch, not just a rep office. Most Swiss private banks have not made this investment, because the theory the Swiss private banks had was that wealthy Asian clients wanted to invest off-shore, and preferably with a Swiss private banker. Actually, in our experience, the average Asian prefers to talk to someone who is a professional, experienced private banker. Someone whom they can build relationships with because they share the same culture.
Citibank used local branches and was more successful than the average private bank- with rep offices and a focus on off-shore private banking services.
Asians are very keen on brands and cachet; doesn't that extend to these Swiss private banks?
That is certainly true, but in banking, and especially in private banking, the brand is the private banker. Let's take the example of watches. If you're out competing on the watch front for a luxury watch, it's the brand that is a key factor in the buying decision. But if you're talking about money, it's not a question of buying a luxury item; it's about what you have worked your whole life for. So of course cachet helps. But am I going to trade risk for cachet? In this case, cachet is defined by how well a client knows someone.
In my view, the private banks would have to set up a branch in Asia, and hire good local people, who are established in that market and then leverage the brand. That could work.
How is EFG set up that makes it different?
The staff own 32% of the equity. We've gathered a team of entrepreneurs. We've given them the freedom they need to serve their clients with flexibility and expertise.
We are a private bank with the mission of being a global private bank, both onshore and offshore. One that is largely managed and partly owned by staff.
Most of the big global banks such as UBS, Credit Suisse, and Citibank follow a different strategy. They have lots of different businesses and are not focused exclusively on private banking as we are.
Ultimately, we want to be a publicly-quoted Goldman Sachs-like private banking operation.
Are the volatility of earnings in a private bank much lower than in investment banking?
In general, it's lower. You have recurrent fees, and recurrent spreads. There isn't as heavy a deal-dependence. But if you look at the past couple of years the assets under management have dropped on average 10-20% since the end of 2000 and your revenue levels have dropped on average 20-30% for the last year and a half or so. At the end of phases of the boom in 1999-2000 you had very high brokerage volumes. Then those volumes collapsed. That's why there is a lot of turmoil in the private banking sector, with mergers and acquisitions, as well as layoffs in some cases.
What would be the typical return on equity for a pure private banking operation like yours?
We're a little bit difficult to categorise.. But your average return on equity for a private bank is 25-50% which is relatively high. Ours right now is in the range of 10-15%.
But we had a good year last year because we grew revenues by 50% and assets under management by 55-60%. We are growing very rapidly. In the last six years our compound growth rate has been 40-50%.
How much is Asia?
Out of our Swf10 billion now, Swf2 billion are Asian.
What will that grow to?
In five years Asia will have Swf10 billion under management and we'll have over Swf20 billion total. So Asia will be somewhere between 35-40% of the business. Our fastest growth will unquestionably be in Asia.
How are you approaching the Chinese market?
We have 60 people in Hong Kong and 10 in Taiwan. So we can help Taiwanese and Hong Kong Chinese who are investing in China, and in so doing we're getting to know their Chinese business counterparts. They all have an export business and that ends up with cash offshore, and it's that money that we're targeting. There's very little separation between what is personal money and business money. So it's the Chinese diaspora who are enabling us to build relationships on the mainland.
Private bankers in Asia say universally that there are too many private banks competing in Asia. How much overcapacity do you think there is?
Let's be precise. How do you define 'too many'. Asia has 3.5 billion people. How many banks do you think there are in Switzerland. There's about 500. And if you throw in the investment advisory houses it goes up to 2000. The population here is 7 million, so there is one for every 3000 people. Is that justified?
What I can tell you is the density of private bankers in Asia is lower than anywhere else in the world - except Africa.
So the fastest growing market in the world, with over half the world's population has only 80 private banks, with in the aggregate 1500-2000 private bankers, of which half have the experience levels we are looking for. Of those, you've got 500 people that are highly professional and we are looking to grow to 250 bankers over the next five years. Our mission is to hire the best.
Our proposition is not to be an employee. But to be a true entrepreneur with a stake in your bottom-line contribution We free our bankers from the traditional confines of bureaucracy in order to ensure that response times are faster and that they have the freedom to explore new opportunities for their clients. That's a different proposition to what other banks offer.
Does the fact that staff own stock mean you have less staff turnover?
We have had just about zero turnover of client relationship officers over the past seven years. Because we hired from a network of people we knew were good. And no one who joins us is particularly interested in leaving us - they like our business model and join us because of it. And because it is difficult to build up a private banking business, but when you do so with us, you have the best of both worlds: the capital base of a strong group combined with our approach that gives our Client Relationship officers the creativity and flexibility they need to serve their clients. Plus we are run by private bankers, not commercial bankers, or retail bankers, or investment bankers. So people tend to feel a personal incentive to stay, both financially and culturally.
And our people get paid based on net income after cost. So our people manage costs just like any businessman does. So I do feel we have a different system.
Does anyone else have a similar organizational system?
There was a bank in Zurich which adopted a similar system, but the problem was they didn't hire private bankers as the general management, and so far it has not been a massive success.
So the lesson is, you have to hire the right staff. You've got to know who the good private bankers are.
What do Asians want from private bankers. Obviously they want intelligence, but do they want someone who can give them advice on buying art, or do you think the local Asian client base is not interested in that sort of thing?
It's difficult to identify peoples' deepest desires, but in general all the peripherals that people associate with private banking - dog walking, school hunting, jewelllery finding - take an effort that is disproportionate to the reward.
In my experience, Asians want people they trust, and an institution that falls into the general area where they trust it because of its capital or name recognition, but it all starts with an individual who speaks their language and has a cultural affinity.
Asian are less focused on performance, because they don't give out many discretionary mandates. They are more likely to look for a dialogue; and this will involve helping them with their credit problems every now and again.