private banking sector stands firm as rest of industry suffers
Sector appears to escape some of the worst effects of the credit crunch; M&A activity remains constrained
The global private banking and wealth management sector – responsible for US$100,000bn of wealthy individuals’ assets – remains in confident mood amidst the turmoil affecting the financial markets, claims professional services organization KPMG International.
KPMG International’s insight into this sector comes from its annual research report, “Hungry for More?”. While the research was commissioned by the organization shortly before the credit crunch began, release of the report was delayed to see how the summer’s events would affect this sector. KPMG International has now published the results, claiming that nothing has occurred to seriously change its view that private banking remains the current bright spot in the global banking landscape.
Ostensibly designed to test the sector’s appetite for consolidation and M&A activity, the research depicts an industry in excellent health, making bold predictions for its future. A massive 93 percent of survey respondents were predicting improved growth prospects for the sector over the next three years.
Key findings of the survey:
• Almost half the respondents are actively seeking target businesses to acquire, with 20% of respondents planning to invest more than US$1 billion in acquisitions over the next three years …
• … although smaller banks are under less competitive pressure than in previous years, and hence are not actively seeking partners
• Confidence levels are highest in Asia Pacific and the Middle East
• China, Russia, the Persian Gulf, Eastern Europe, and India represent the strongest growth potential
• Deals continue to be frustrated by unrealistic price expectations from vendors, especially in North America
• Regulation is cited as the single largest barrier to M&A
• Three in five bankers say they had a formal plan in place to track benefits and synergies from their largest recent deal
Commenting on the results, Phil Knowles of KPMG in the UAE said: “These results, combined with our member firms’ subsequent anecdotal evidence, help you realize that it is not all doom and gloom in the global banking sector. Changing patterns of wealth distribution are driving demand for private banking services, especially in the Middle East. In fact, in some ways, the private banking sector resembles the sector that the credit crunch forgot.”
“Before we get too carried away though, let us not forget that commission income from share dealing is a key driver of wealth management revenues. Therefore, if global share prices were to suffer a prolonged fall as a result of the credit crunch, then the private banking sector could suffer accordingly. At the moment though, it is comfortably escaping the worst ravages of the credit crunch.”
Further, the research found only a mere 117 M&A deals took place within the sector during 2006, while only 50 percent of the survey respondents claim to have made an acquisition during the past three years despite the industry being a highly fragmented one. This is inspite of the fact that a number of indicators point to this being an industry ripe for consolidation. The reason for this relative lack of activity is simple; the sector is enjoying a period of unprecedented prosperity and even the smallest players feel under no pressure to sell up just yet.
Mr Knowles continued: “If, at some point in the future, the sector’s fortunes do take a downturn, the sight of increased M&A activity should tell observers that all is not well. This is a highly fragmented industry, toiling under increased overheads, dealing with skill shortages which are driving wages higher and the rising costs of IT infrastructure. Anywhere else, this would be a recipe for sector-wide consolidation; but not here. They are simply doing so well that even the smaller banks feel little compulsion to succumb to suitors. If market conditions do deteriorate though, this situation could quickly change.”
“A downturn could saddle these banks with some fairly onerous fixed overheads and could potentially force downsizing measures. Consolidation may help address such concerns but clearly it will take a very sharp dose of austerity for banks to really start addressing structural concerns.” If the credit crunch is not quite causing private banking firms the sleepless nights that their banking brethren are experiencing, a growing skills shortage is. Indeed, the report suggests that this could be an issue which pushes more firms down the consolidation route. Over the past three years, acquiring qualified client relationship managers has been an important objective when pursuing an M&A transaction.
The issue shows no sign of abating in importance, both as the industry grows and the available talent pool dwindles. Many of the banks surveyed believe that human capital is the single most important factor in distinguishing one private bank’s performance from another. Mr Knowles added: “With a number of prominent players in global private banking seeking to establish or grow their presence in DIFC, any skills shortage is a serious concern for their Middle East strategies. The success of private banking and wealth management businesses is based almost exclusively on the ability of their staff to serve the needs of their high net worth clients.”
The sector may be standing firm at the moment and resisting the problems sweeping the rest of the industry – but plenty of issues remain around the fringes which could yet spoil its success.
