Banks in Asia have been leveraging off their private banking arms to generate investment banking deal flow. In the post-global financial crisis world, banks are required to do more with less. The days of easy returns are gone amid rising competition and dwindling fee pools. Banks are forced to play to their strengths and, as such, those with private banking arms have placed a greater emphasis on cross-selling services to their wealthy clients.
Wealth has been growing rapidly in the region. According to a joint study by Wealth-X and UBS in September, Asia boasted the largest billionaire wealth increase over the past year, with the region’s billionaire fortunes growing by 18.7%. Asia also accounted for 30% of the net increase in global billionaire wealth in 2014.
“Asia is a very fast-growing economic region. In comparison to more mature markets, you find more family ownership and a lot more family needs for private market and public market advice,” Andrew Cohen, head of JPMorgan Private Bank in Asia, said in an interview with FinanceAsia.
But Asia’s private banking industry faces headwinds too and is undergoing consolidation as costs increase and banks that lack scale are forced to exit. For example, Bank of America Merrill Lynch sold its international private wealth business to Julius Baer in 2012. Société Générale last year also sold its private banking business to DBS and Royal Bank of Scotland is in the midst of selling Coutts. As such, it could move towards having more dominant players.
“Scale has become more important these days, especially with the onerous regulations that are continually increasing, both in Hong Kong and other markets,” said Antoinette Hoon, a partner at PwC. “The cost to income ratio in Asia is on average 70% which is reasonably high compared to globally. Some of the bigger banks have lower ratios compared to the boutique banks. For some of the newly-set up private bank branches, they could have ratios of almost 100%.”
Banks in Switzerland, traditionally a haven for wealth, are also battling with onerous capital requirements, with calls to split the investment bank from the private bank.
Here’s a look at the collaboration strategies pursued by some of the private banks in Asia.
In Asia, UBS’s investment bank was primarily focused on IPOs before 2008 but since the global financial crisis the Swiss bank has pushed for greater collaboration with its private wealth arm, which has a total of Sfr269 billion ($281 million) of asset under management in Asia.
“While wealth management and the investment bank had a long history of working together, the financial crisis prompted everybody to sit down and think about what could we do better,” Matthew Hanning, head of Asia Pacific investment banking at UBS, said. “Our approach since 2009 has been to further steer the investment bank towards collaboration with the private bank.”
To meld the private banking and investment banking arms more closely, UBS in 2012 set up the institutional solutions group, which sits physically with private banking client advisers. The bank has a team of about 25 investment bankers in Asia, who sit within the firm’s wealth management business and work with private bankers and wealthy clients to originate deals.
To be sure, not all wealthy clients need investment banking services – outside of the US only a tenth of UBS’s 17,000 ultra high net worth clients do. But having a dedicated team enables the bank to identify those clients that do have investment banking requirements, which has helped to drive revenues.
“Last year we completed 79 transactions for wealth management clients in Asia, which were executed by the investment bank,” Bryan Crawford, head of institutional solutions group for Asia at UBS told FinanceAsia in an interview. “Over the last 18 months, we have doubled the institutional revenues that we generate from wealth management clients. We’re expecting that business to continue to grow quite strongly.”
Structured equity, which includes corporate equity derivatives and hedges, is another key area that has benefitted from collaboration, and UBS has grown its structured equity business at an annual rate of about 40%, with revenues in the triple digits compared with the single digits prior to the crisis.
A recent example of collaboration between investment banking and private wealth is Guangdong-based developer Times Property, which is controlled by Shum Chiu-hung. UBS has a long-term private banking relationship with Shum and on the back of that has handled a number of deals for the company, acting as a bookrunner for its $200 million Hong Kong IPO in 2013. It was an arranger for the company’s most recent high-yield bond in March, and a previous high-yield bond in 2014 and also helped the company raise pre-IPO financing.
The Swiss firm has also harnessed its private wealth clients for its distribution of high-yield bonds and IPOs, helping it to rise up the high-yield bond league table rankings. “Our private wealth clients in a post-crisis, low-yielding world wanted yield, and we had access to issuers that were willing to provide yield and we connected those pieces. Private banks have made up about 50% of the book for high-yield bonds,” Hanning said.
Rival Credit Suisse has renewed its focus on private banking since the global crisis, cutting back on capital-intensive parts of the investment bank and extending more of its balance sheet to its private banking clients.
“We have been rebalancing resources and the use of balance sheet between the investment bank and private bank, which means shifting risk-weighted assets from the investment banking business into the private bank,” said Francesco de Ferrari, Credit Suisse’s Singapore-based head of Private Banking for Asia Pacific.
Entrepreneurs in Asia typically need lending, as most of them are in the early phase of building up their businesses or need leverage to diversify their portfolio. “Last year there was a strong push to grow lending to ultra high-net-worth private banking clients, and Asia plays a key area of focus [in] this global drive,” de Ferrari said.
Credit Suisse has expanded investment banking services to ultra high-net-worth clients through Solution Partners, a dedicated unit within private banking comprising 50 people in Asia Pacific, mostly with investment banking backgrounds who originate and structure solutions for rich clients – be it IPOs or share-backed lending. The group was set up in 2005 and operates in four key hubs, namely Hong Kong, Singapore Australia and Japan, supporting the bank’s 490 relationship managers.
Credit Suisse has brought private wealth clients investment opportunities to diversify their portfolios. For example, it advised Hong Kong-based Integrated Whale Media Investments’s acquisition of US-owned Forbes Media last year, an example of a deal that was originated and packaged by the private bank.
Integrated Whale Media comprises international investors and is led by Integrated Asset Management, a company founded by Hong Kong businessman Tak Cheung Yam that makes public and private investments. Tak was previously the chairman of Hong Kong-listed Fornton group, which started off as a knitwear company and turned into a financial leasing company for the coal mining industry. Another significant investor is Singapore-based entrepreneur Wayne Hsieh, the co-founder of PC vendor ASUSTek Computer.
Having what is, effectively, an in-house investment banking team of Credit Suisse’s scale is a luxury few banks can afford and enables Credit Suisse to identify opportunities at an early stage.
“Typically, the investment bank would have frequent coverage of the larger clients. But there is so much wealth being created in Asia that the opportunity not only comes from the largest clients,” de Ferrari said. “A lot of the wealth in the region is not very public or transparent and at a private bank we are better placed to know who the entrepreneurs are today and who the next tycoons will be tomorrow.”
Revenues have grown as a result of collaboration. “In Asia, collaboration revenues generated by providing private wealth clients with investment banking services have tripled in the last three years and are now in the triple digits,” said de Ferrari.
The Swiss bank has Sfr143.5 billion ($150.4 million) of assets under management in Asia Pacific and its share of the ultra high net worth sector – which has the greatest potential in terms of cross-selling investment banking services – has grown from 50% of total private banking assets under management in Asia Pacific to 60%.
At Goldman Sachs, the private wealth arm often collaborates with its merchant banking division, which handles private equity investments introducing very wealthy clients to co-invest in deals.
“We have a private equity business and one of the things we can do is bring in our private wealth clients in private equity investments,” Ron Lee, Goldman Sachs’s head of private wealth management in Asia [pictured below], told FinanceAsia in an interview.
The bank also has an active principal investment arm and has leveraged on relationships with companies, often introducing its private wealth clients at a pre-IPO stage, both in Asia and globally. For example, in January, Goldman Sachs helped taxi app company Uber raise $1.6 billion through its private banking clients. The US bank had invested in Uber in a previous round of financing in 2011.
At present, Uber is privately held but it is expected to go for an IPO at some point, which will result in its founders getting rich and potentially putting some of that money to work with the private bank. Uber was founded by Travis Kalanick and Garrett Camp in 2009.
Goldman Sachs also invested $450 million in social networking site Facebook back in 2011 and then conducted a fund-raising for Facebook with its private wealth clients. It was subsequently one of the underwriters for Facebook’s IPO in 2012.
In Asia, Goldman Sachs was one of the early investors in Alibaba, with the firm’s principal investing arm taking a stake in the Chinese internet company as far back as 1999. It was an arranger for Alibaba’s IPO last year, which made its founder Jack Ma the richest man in China. Today, Goldman Sachs counts some of Alibaba’s founders as private wealth clients.
Lee, who ran Goldman Sachs’s investment banking business for Hong Kong prior to moving over to the private wealth arm in 2011, continues to cover many of his former investment banking clients.
“Many of our private wealth clients have roles that are part-institution and part-individual. Our whole model has been to cover them as individuals but also to meet the needs of the companies they run,” Lee said in an interview held on the 68th floor of Cheung Kong Centre, one floor below Hong Kong tycoon Li Ka-shing’s office.
Goldman Sachs has been the house banker to Li-controlled companies and has worked on deals such as Power Assets’ Hong Kong electricity spin-off listing in 2013, advised on the strategic review of ParknShop and advised Hutchison Whampoa on the sale of AS Watson to Temasek Holdings.
Goldman Sachs focuses exclusively on ultra high net worth clients, which requires a minimum of $10 million of investable assets and average assets of about $50 million. Industry estimates put Goldman Sachs’ assets under management in Asia at $45 billion.