DBS Asia

DBS bulks up in battle for Asia's billionaires

DBS Bank’s purchase of Société Générale’s Asian private bank underscores the importance of scale in the cut-throat world of banking the ultra rich.
DBS Chief Executive Piyush Gupta calls acquisition a "watershed event"
DBS Chief Executive Piyush Gupta calls acquisition a "watershed event"

DBS said on Monday that it was buying Société Générale’s Asian private banking business in Singapore and Hong Kong for US$220 million in cash, handing it deep relationships with some of Asia’s most wealthy individuals.

The move boosts Singapore’s largest lender’s high net worth assets under management (AUM) by more than 23%, prompting DBS’s Chief Executive Piyush Gupta to dub it a “watershed event” for the bank.

DBS is bulking up at a time of growing competition and rising costs for private bankers even as their wealthy clients grow even richer.

"By integrating SGPB Asia into a larger platform, DBS could achieve a combined portfolio with greater cost efficiencies, given the potential to reduce expenses related to infrastructure, information technology, and other redundancies," said Gene Fang, an analyst at credit rating agency Moody's.

Many private bankers have hung out their shingle in Asia in recent years, attracted by the region’s growing affluence. However, profits have remained elusive for smaller players even as AUM have grown. “There will be consolidation in the market, in Asia in particular,” said Olivier Gougeon, Regional Chief Executive of SocGen’s private banking business in Asia, who is joining DBS.

UBS and Citigroup run the biggest private banks in Asia. Smaller players with AUM of a similar size to SocGen include: EFG, Sarasin, Coutts, ABN AMRO and UOB estimated one banker. 

In the US and Europe cost-to-income ratios, a key valuation measure for private banks, are between 70 and 80 percent. In Asia, these rise to 80 to 95 percent, according to a study by consultancy services firm Accenture. Asia's familiy offices demand the lower fees paid by institutional investors but don't offset this by trading in the volume of large asset managers such as Blackrock. 

Private banking in Asia has also evolved more from a broking relationship with clients than a higher-margin advisory relationship - so profits in Asia are also crimped by a relatively greater demand for transactional services. Commissions make up nearly half of private banks' revenue in Asia versus a more stable and mature industry in Switzerland founded on asset management fees where old-moneyed families look to transfer their wealth to the next generation in an often complicated fashion.  

Profit dampener

Banks such as DBS are looking to create efficiencies of scale to keep a lid on costs. In 2010, DBS’s high net worth assets under management was SG$39 billion with a cost-income ratio of 95%. By 2013 its AUM had grown to SG$69 billion and its cost-income ratio had fallen to 62%.

“Size matters in this industry,” said Jean-François Mazaud, global head of private banking at SocGen, which has decided to redeploy capital to markets and businesses where it has critical mass.

DBS’ Gupta said at a press conference on Monday that he sees wealth management growing from close to 12% last year of the group’s revenues to 15% within three years. DBS said its private banking business has grown by about 20% a year in the past three years, making it one of the top-10 players in Asia.

SocGen’s Gougeon said the French bank had also captured market share in Asia in the last two years. 

“In 2012 the Asian business turned around and in 2013 it had a good year, from a revenue-generation point of view as well as from an asset-gathering point of view,” SocGen’s Mazaud said in an interview with FinanceAsia.

How to value a relationship?

Many banks showed an interest in SocGen’s auction of its Asian private banking business, including HSBC, Credit Suisse, Standard Chartered and ABN AMRO, as opportunities to grow inorganically in Asia are rare.

However, SocGen is almost exclusively focused on ultra-high-net-worth individuals, that is clients with AUM of US$20 to US$25 million, and other banks that cater to this small elite figured out during the process that they already had relationships with many of the French bank’s Asian clients.

For Singapore-based DBS, which has grown its wealth management operation out of its retail banking franchise, there was little overlap in terms of clients, geographical coverage or product and service offerings. SocGen’s relationships with Hong Kong-based tycoons were particularly attractive, said people familiar with the matter.

"North Asia will be one of the most exciting places for private banking globally because of the wealth creation in China," said Sebastian Paredes, the CEO of DBS in Hong Kong. 

One yardstick for the deal was OCBC's acquisition of ING's Asian private banking business for US$1.46 billion in 2009. OCBC paid the equivalent of 3.4% of AUM. 

But OCBC was starting from scratch in private banking and as a result paid a premium to acquire the franchise. “DBS didn’t have to pay top dollar to acquire AUM,” said one person familiar with the matter.


Tough times for private bankers in Asia

Also private banking in Asia has become less profitable since the OCBC-ING deal, weighed down by new regulations in higher-margin areas such as structured products. At the same time clients have become more risk averse.

When Julius Baer acquired Bank of America Merrill Lynch’s wealth management division outside of the US it paid 1.2% of the eventual AUM transferred. But the portfolio was not entirely Asian and Julius Baer paid integration costs upfront – which if factored in would push the purchase ratio up to around 1.5% of AUM, estimated one person familiar with the matter.

DBS is paying about 1.75% of AUM based on SocGen’s Asian AUM of US$12.6 billion as of December 31.

JP Morgan, Allen & Overy and PWC advised SocGen. Meanwhile Deutsche Bank, Ernst & Young and Singaporean law firm Allen & Gledhill advised DBS.

Keeping relationships warm

The key to DBS' success in private banking will be its ability to keep hold of SocGen’s relationship managers in Asia, which the French bank has recruited over 17 years in the region, and transfer across its AUM.

“We hope to get as much as we can … we’d be happy to see about $10 billion or so come over,” said Tan Su Shan, DBS’s head of consumer banking and wealth management. 

SocGen employs about 330 people in private banking in Asia in Singapore and Hong Kong.

The final purchase price is still subject to adjustments based on the net asset value and AUM of the business when the transaction is completed, which DBS expects in the last quarter of this year.

DBS said the deal would be earnings-accretive within one year and lift EPS by more than 1% within two to three years.

To help bed down the relationships, SocGen private banking clients in Asia will have access to DBS’ universal banking platform, including retail, corporate and investment banking. At the same time, through a memorandum of understanding, DBS’ clients will have access to Societe Generale Private Banking’s offering in Europe as well as SocGen’s Corporate & Investment Banking solutions.

“To meet the needs of high net worth clients, a bank needs to provide either capital market solutions or/and structured products,” said SocGen's Mazaud in the interview with FinanceAsia.

In addition, SocGen’s clients will have access to DBS Private Bank's services in Asia. 

“We have a very robust integration plan,” said Gupta.


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