LAST WEEK, THE head of Singapore’s DBS Group, Piyush Gupta, sounded the alarm over shifts in the banking model that could push many banks out of business in a relatively short period.
He spoke of the “cataclysmic disruption” facing the industry over the next five years and suggested that banks unable to adjust to this disruption over the next decade would “die”, adding that perhaps a decade was being a little too generous on the timeline front.
You don’t need to be reading the runes to see where he’s coming from. One area which is clearly facing a seismic shift is private banking, where online startups are threatening the bread and butter of the large European, American and Asian private banking operations.
The question is whether private clients – I’m thinking of those based in Asia – will be willing to eschew the handholding and bespoke service they get from private bankers in return for paying less in fees. I’m sure some will, and are already doing so. The rest will have to ask themselves some searching questions.
From the debt perspective there are a few areas that the online operations will not be duplicating. Not yet, anyway.
So when it comes to new issues, the client of a DBS or a Credit Suisse can be sure of being shown paper and of getting onto deals which perform well. They can also, if they are of sufficient net worth, be assured of being offered leverage on new issues they buy, in some cases of up to 75%.
That “pay to pay” dynamic makes the annual fee they pay on the assets managed by the private bank – and a commission charged on capital gains in the account – well worth the trouble. The cosy clubbiness of the private banking/ investment banking cabal, which allows private banks to take on board large chunks of new issues, will be a challenging arena for any startup to enter. But of course it can happen.
CHINA ONLINE GIANT Alibaba in 2013 teamed up with Tianhong Asset Management to create Yu’e Bao, a mutual fund. Within nine months, the company had reeled in around US$80bn-equivalent and Tianhong was propelled from being a minnow with just under US$2bn in assets to one of China’s largest asset managers thanks to the Alibaba halo effect.
Meanwhile, China Asset Management has started selling its funds through the ubiquitous phone application WeChat.
Gupta, speaking at a conference in Singapore, observed that many Western banks have become so obsessed with dealing with the fallout from the financial crisis – including capitalisation, liquidity and corporate responsibility in the face of massive public outcry and a rising regulatory burden – that they are neglecting to fight “the battles of tomorrow”.
The regulators are, of course, at the crux of this problem. Thinking of the United Kingdom, my home country, it would have been a stretch a few decades ago to imagine that one might bank with Tesco or Sainsbury’s, which are primarily supermarkets. But it has happened.
And there must be a few bankers quaking at the thought of Google or Facebook stepping onto their turf. The regulators might yet allow a Facebook bank to come into operation, although I dread to think how they might manage their targeted marketing.
Interestingly, Gupta’s comments came around the same time Singapore’s United Overseas Bank closed its first offshore loan in Myanmar, just six months after the bank was granted a licence (together with eight other foreign lenders) to operate in the country. The deal was for a France-Myanmar joint venture looking to develop real estate.
That was quick work, and music to the ears of the traditional loan banker. Game-changing dynamics do not yet apply in the more frontier countries, where it’s still going to be old-boy-style deals for a long time yet.
The reduction in European bank balance sheets has prompted a vast contraction in lending to emerging markets
SMALL WONDER THAT banks continue to trawl the developing countries for business that shows no signs yet of being usurped by shadow lending institutions or any other rinky-dink alternatives. UOB itself has seen its cross-border loan book double in size over the past three years, primarily via lending to South-East Asian companies.
And the bank will have had far less competition to contend with than in the past: the reduction in European bank balance sheets has prompted a vast contraction in lending to emerging markets, allowing local Asian banks to take up the slack.
But, to return to private banking, I wonder whether the markets will shake up the industry or produce a cheaper, better alternative. I’ve long been a critic of the book padding and rebate process which, in my opinion, fundamentally distorts the execution process. Nevertheless, the clients have done rather well out of the arrangement, the odd dog deal notwithstanding.
The question is how the private banks will go about managing those portfolios when the big unwind in fixed income comes to pass, as it surely must. It might well be that today’s friendly face, who lends you money to buy bonds issued by a company you’ve never heard of but who’s made you a tidy sum over the past seven years or so, becomes the devil incarnate after everyone has rushed to the exits.
It’s a stretch, but après moi, le deluge. Facebook Private Bank? That may, in those circumstances, do quite nicely.