Relationship managers at some Asian private banks are not in a good mood. The last two months of the year tend to be ‘a honeymoon period’, they say. Their annual targets have usually been met by that point, allowing them to cut their workload ahead of the Christmas break.
But not this year. After struggling to hit their revenue targets, some relationship managers have been told their performance reviews — and as a result, their bonuses — are being delayed. They are now working overtime to generate any revenues they can from an increasingly reluctant client base.
The problem, as these bankers tell it, is that their clients have switched into ‘risk-off mode’. This is something more senior bankers in the market agree with.
“There has been a bit of risk-off in the equity markets,” said Kevin Herbert, co-head of North Asia at HSBC Private Bank. “Clients are also starting to trim back their exposure to high-yield bonds. As part of this process clients are looking at diversifying across asset classes which includes some allocation to the area of alternative investments.”.”
This is an issue facing private banks across the market. Those who can prosper in this environment are the institutions that can accept the lack of appetite for traditional asset classes — and push their clients in a different direction.
When Ernst & Young surveyed the private banking world in 2013, it was bullish about the potential for Asia. The firm said Asia was going to overtake North America as the biggest source of revenues by 2015. It did note that the success of some international banks masked “a tough reality”, but the underlying message was clear: Asia was where the growth is coming from.
That prediction has largely played out. But talk to bankers on the ground now and it becomes clear that the tough reality has become a lot tougher.
This is partly because competition has been rife in a region that is constantly creating new ultra-high net-worth investors. But that problem is being exacerbated by the fact the private banking clients are stepping back from the once risky — and lucrative — bond and equity bets they previously made.
‘There were just too many black swans this year,” said a private banker at a European firm in Hong Kong. “Most of our clients are in wait-and-see mode.”
The expectations of a US rate hike have left private bank clients uncertain about entering the bond market. Growing doubts about China’s economy — and other risk factors such as Britain’s vote to leave the European Union — have made them take a backseat from the equity markets. The US election has further dampened risk appetite.
“Private wealth clients tend to be more active during a trending market,” said one private wealth manager. “It’s much easier to ride on a wave when the trend is clear. However, this year’s range-bound market has put a lot of clients off investing.”
In this environment, private bankers are being forced to think outside the box. One way they are doing this with their Chinese clients is by lending against universal life insurance premiums, allowing their mainland clients to invest the proceeds in the overseas markets.
“We love the concept of universal life,” said a mainland Chinese high net-worth investor. “In this market condition where we don’t know what to invest, this kind of low-risk and high flexibility insurance product is the safe heaven, especially when it could also help fund and facilitate cross-border transactions.”
But this is not enough to shift the needle for banks who are seeing not just a loss of risk appetite among their clients, but also an increasing burden from regulators.
Private banks are being forced to grapple with increasingly frustrating regulations. The issue is not so much that a new wave of regulations have been imposed on these institutions. It is rather that the old rules are being applied more studiously, and executive committees are becoming more wary.
“The regulators don’t tell you exactly what to do,” said an Asia private wealth management head who asked to remain anonymous. “It’s very different from securities regulations, which are a lot more black and white. Banking regulations are more grey.”
Among the issues that several bankers told FinanceAsia was a burden were know-your-customer (KYC) rules, which can be especially difficult when applied to Chinese clients with sometimes difficult-to-track original sources of wealth.
Private bankers complain that KYC rules do not just increase the time it takes to open an account: they also threaten to damage hard-won relationships. After all, few of the mega-rich will be patient when asked to provide details that, just a few years ago, were deemed unnecessary.
“Definitely 2016 has been a volatile and difficult year,” said Andrew Cohen, chief executive officer of JP Morgan Private Bank. “In terms of the industry, the regulatory changes over the last few years have really made management in any private bank reevaluate their strategies.”
The regulatory burden is being reflected among junior hires in pressure to upgrade their qualifications, particularly in Hong Kong, This is something several junior bankers complained about.
It is not the ideal time, then, for private banks operating in Asia. But speak to those on the ground, especially in senior positions, are some level of optimism still shines through. There is plenty of money remaining for these banks to win — they just need to figure out what to do with it.
“The goal is not just to attract the client’s AUM, it is to manage it,” said the private wealth head. “That doesn’t mean they need to be actively trading the whole thing. They could be in a money market fund. But we need to be utilising the money they hold with us to make a profit.”
In reality, that means finding asset classes that can attract clients who are otherwise reluctant to take on new risk. Since so many of Asia’s mega-rich already own large property portfolios — and have done well with them — this is one obvious area where banks can help.
One way of doing that is allowing clients to share the cost of a new property. It is the rare client that can buy an entire commercial real estate project on his own. But a handful of these clients between them certainly can.
“Within the area of alternative assets we do look to provide some wider diversification for clients by accessing opportunities to invest into real estate markets such as the UK and US,” said HSBC’s Herbert. “Subject to clients individual risk profile and financial objectives, we can look to package club deals in which commercial real estate is purchased and structured to allow a smaller entry level to clients wishing to invest in this space.”
The choice of countries is appropriate. Bankers say their clients are not just looking at safer asset classes, they are also looking at safer regions — or at least those perceived as being safer. The US and the UK come up as prominent examples.
These strategies make sense for the clients, and for that reason, it makes sense for private banks to help them.
But executives could be forgiven for looking back to a time when the equity markets were raging — and high-net-worth investors did not have to be convinced to take the plunge.
For the latest insights on compliance and regulation in the region, join FinanceAsia for its 5th Annual Compliance Summit North Asia in Hong Kong on November 17.