BANKING - Safe and solvent: HSBC makes moves to woo the richest

In this age of communicable meltdowns, HSBC has recently opted to head for safety. After the currency collapse in Asia (the region that provides a third of HSBC’s profits) and its knock-on effect in Latin America (where the group spent $2bn buying up banks in Brazil and Argentina) it came as no surprise the bank moved into reliable private banking. Provisions on non-performing loans, particularly in those two crisis-ridden regions, dragged HSBC’s attributable profit down 21% last year. So spending $10.3bn to acquire the Safra group’s private banking empire made a lot of sense. It’s a relatively low-cost business that yields a steady profit stream and returns on equity of 25% to 50%, which are enhanced by a refreshing shift away from the turmoil and volatility of the world’s emerging markets. As banking analyst Simon Samuels at Salomon Smith Barney points out, the writing was on the wall in HSBC’s 1998 report and accounts when the group admitted that “wealth management” was an area where it had lagged behind the best of its rivals. “The acquisition broadly doubles HSBC’s exposure to private banking and brings in about 30,000 international private banking clients,” he says. These clients, the “high net worth individuals” (HNWI) who have financial assets exceeding $1m, are a fertile species. Merrill Lynch estimates that in the next five years their numbers will increase by more than 50%; and by that date the net worth of the world’s HNWIs will exceed $32.7 trillion, a figure that defies comment. “The rise in HNWIs’ financial assets shows no signs of stopping despite last year’s turmoil, which saw many relying more than ever on the advice of their financial advisor,” says Michael Giles, chairman of Merrill Lynch International Banking Group. Some 80% of private banking chief executives expect to see their businesses grow by more than 11% this year and more than half are looking for increased profits in the 16% or more range, according to PricewaterhouseCoopers’ European Private Banking Survey. The most bullish forecasts come from the extremes of the spectrum: from large banks such as UBS and from small ones such as Pictet & Co, one of the small houses around Lake Geneva. This suggests that success is determined by two key factors: the ability to provide a multi-product global range of services, while maintaining the personal touch that distinguishes the elitist private bank from the high street branch of a NatWest or a Barclays. PwC finds that 27% of chief executives believe universal banks are best placed to survive in the world of managing HNWIs’ assets, followed by 23% for the traditional private bank. The rest score between 2% and 15%. The report shows that managing the world’s liquid assets is above all about people, with banks reporting that at least 90% of their business was comprised of private clients. This is all good news for banks struggling to squeeze useful profits out of their customers, particularly given the HNWI’s changing profile. Today, earned wealth is increasing much faster than inherited wealth. The days of the Latin American millionaire in alligator shoes and shades seeking a safe haven for his money are swiftly fading. Today’s mega-rich are mostly information hungry, IT literate, mobile and global Europeans and Americans. Many spend their working hours sitting in front of the same screens as their bankers. “Clients are becoming more knowledgeable and more sophisticated about the investment process,” says Giles. “There is a tendency to be much more a multi-market investor rather than a single market or currency investor.” Savvy clients require sophisticated bankers. The classic “old money” client, who would drop into Geneva to visit his money once a year over a glass of sherry while a bank employee took his poodle for a walk, has raised a family in the 1980s, and his son is likely to be a Eurobond dealer. Rodolfo Bogni, chief executive of UBS Private Banking, went to the extreme of taking a 15-month sabbatical to do a mathematics programme at the Centre for Quantitative Finance. “I did nine months raw maths and six months of financial application to options theory,” he says. “This is very useful for private banking. The client tends to exercise a high degree of sophistication when his money is at stake. The bottom line is that today serious private banking is a personalised brand of investment banking.” UBS’s home country still holds 33% of the world’s offshore liquid assets, but London, with its 15% share of the market, is steadily closing the gap and is now firmly entrenched as the second major destination. Given its vast pool of money-managing expertise and clear Anglo-Saxon legislation, London stands to profit from the move towards greater sophistication in private banking. Also, the trend amongst private investors to move into globally diversified equities favours London, the world’s second largest equity market after New York. The growing importance of London as a private banking centre is underlined by the fact that nearly all the major private banks, including the Americans and the Swiss, are strengthening their operations in the City. Switzerland is still perceived as a top destination in times of economic turmoil and for those concerned about political stability at home. The “safe haven” concept is uppermost in the minds of many HNWIs and favours jurisdictions like the Caribbean because of recent concerns about the future of offshore centres in the EU. Similarly, for Far Eastern investors Singapore is shaping up as an alternative to Hong Kong, given the former British colony’s political uncertainties. The perception is that the EU is keen to tighten the noose around traditional European offshore centres such as Luxembourg and the Channel Islands. And the loss of confidentiality or tax advantages (for example, Luxembourg does not impose a withholding tax on non-residents) because of harmonisation will not augur well for them. Jules Stewart is a freelance journalist.