Oversea-Chinese Banking Corp emerged as the winner on Thursday from a fierce fight to buy Barclays’s private banking business in Singapore and Hong Kong with a $320 million (S$434 million) cash bid.
The auction was a rare case of all three of Singapore’s major banks – OCBC Bank, DBS and United Overseas Bank – competing head-to-head.
Contestants were seemingly not put off by China’s crackdown on wealthy citizens sending money overseas either to Hong Kong or Singapore, nor by the intense scrutiny of offshore wealth management structures in the wake of the leaked Panama papers.
Barclays's Asian private banking arm has had relationships with more than half of the top-50 names on Forbes China Billionaires List, according to OCBC's presentation explaining the rationale for the deal.
One person familiar with OCBC’s thinking said the Singaporean bank wanted to benefit more from the long-term wealth creation in China and to diversify its exposure across the region so as to weather national regulatory changes more easily.
The deal also comes as private banks in Asia fight to recruit each others’ relationship managers, the people who talk to and manage the personal finances of the growing ranks of Asia’s billionaires.
UBS and Citigroup run the biggest private banks in Asia, while third-ranked Credit Suisse is rapidly filling out its ranks of relationship managers. “They come from everywhere,” said chief executive officer Tidjane Thiam when asked by FinanceAsia on Tuesday whether he had targeted Barclays’s private bankers.
Standard Chartered had already picked off last December Didier von Daeniken, who was the head of Barclays’s private banking business for Asia Pacific, Middle East and Africa.
Bank Julius Baer, which also bid for the Asian private banking business of Barclays, said on Thursday that it had hired David Shick to head of private banking for Greater China, poaching him from Credit Suisse where he was most recently private banking market leader for China and Taiwan.
In the fight for the Barclays' unit, OCBC and UOB were looking to bulk up their teams of relationship managers while DBS was playing defensive, looking to lock out its rivals, according to one of the people involved in the deal.
Barclays had 88 private banking relationship managers with an average tenure at the British bank of more than five years. Following the completion of the acquisition, OCBC’s private banking unit, Bank of Singapore, will employ about 400 relationship managers, more than its rival DBS.
The Barclays unit had more than 1,800 clients, with assets under management of $18.3 billion as of December 31, which will boost Bank of Singapore’s AUM by 33.3% to $73.3 billion, propelling it into the region's top-10 private banks in Asia by AUM. In 2015 it was eleventh in the Asian Private Banker rankings.
The consolidation of Asia’s private banking industry is partly driven by the need to achieve efficiencies of scale. Cost-to-income ratios, a key valuation measure for private banks, are between 70% and 80% in the US and Europe. In Asia, these rise to between 80% and 95%, according to a study by consultancy services firm Accenture.
Commissions make up nearly half of all private bank revenues in Asia in contrast to a more stable and mature industry such as Switzerland's private banks, which is founded on asset management fees as old-moneyed families look to transfer their wealth to the next generation in an often-complicated fashion.
How to value a relationship?
OCBC’s offer looks to be in line with other recent deals in Asian private banking and a lot cheaper than its previous acquisition of ING's Asian private banking business.
The purchase price will equal 1.75% of the AUM that are transferred to Bank of Singapore upon completion of the transaction. Credit Suisse advised OCBC on the deal, Lazard advised Barclays.
In comparison, OCBC paid the equivalent of 3.4% of AUM when it acquired ING's Asian private banking business for $1.46 billion in 2009. However at that time, OCBC was starting from scratch in private banking and as a result paid a premium to acquire the franchise.
In March 2014, DBS said it bought Société Générale’s Asian private banking business in Singapore and Hong Kong for $220 million in cash, or about 1.75% of AUM based on SocGen’s Asian AUM of $12.6 billion as of December 31, 2013.
And 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, estimates one person familiar with the matter.
Keeping relationships warm
The key to a successful deal for OCBC will be its ability to keep hold of Barclays’s relationship managers in Asia.
OCBC Bank said it has experience in the best ways to retain staff based on its purchase of ING Asia Private Bank, which it acquired in 2010 and renamed Bank of Singapore and Wing Hang Bank, which it bought in 2014.
The acquisition is expected to be accretive to OCBC Bank’s earnings per share and return on equity after the first year.
The transaction is subject to the approval of the Singapore High Court for the transfer of the Singapore business. OCBC expects the transaction to complete towards the end of 2016.
OCBC is looking to deepen its presence in its four core markets – Singapore, Malaysia, Indonesia and Greater China – and particularly in its wealth management business.
This platform comprises private banking services offered by Bank of Singapore, life insurance by Great Eastern Holdings, asset management by Lion Global Investors, brokerage services by OCBC Securities, as well as other wealth management products and services offered by the bank.
OCBC Bank’s consolidated wealth management income across its group of companies has grown steadily over the years. That income reached S$2.35 billion ($1.74 billion) in 2015, up 6% from a year ago, and amounted to 27% of the OCBC group’s total income.
“We see attractive value in Barclays’s strong and complementary private banking client base in Singapore and Hong Kong, as well as in its experienced and service-oriented wealth management team,” OCBC Bank’s CEO Samuel Tsien said in a statement.