Issue 97 March 2016 Lite

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ASIAN PRIVATE BANKER MARCH 2016 • ISSUE 97

MARCH IN NUMBERS 15% The slice of Asia private

SET FOR TAKEOFF

US$1.8bn 170 US$50m

banking DPM assets invested in ETFs, pg 11 The amount collected from targeted UK UHNW taxpayers between 2009 and 2015, pg 13 The number of private wealth industry experts at the Asian Private Banker Awards for Distinction Gala Night, pg 16 The size of a pure ETF fund that was an “exceptional” request from a private banking client, pg 18

STRAIGHT TALK

FRANCESCO DE FERRARI, CREDIT SUISSE ASIA PACIFIC, p8

MARCH 2016

CONTENTS 4

Letter from the Editor After the awards...

4

APB On-the-Spot Online poll results

6

Editorial The Scoop: A unicorn’s perspective

7

Editorial Crow’s Nest: Asia’s untapped HNW gold mine

8

People Straight Talk: Francesco de Ferrari, Credit Suisse Asia Pacific

11

ETF ETFs gain private banking boost

13

Regulation In the eye of the storm

16

Industry A gala of a time: APB Awards for Distinction

18

ETF The ETF strategy

20

Industry Eye on the Middle East

21

Technology Private banks to fintechs – come play in my sandbox

23

People Moves Movers & Shakers

CHIEF EXECUTIVE OFFICER Andrew Shale EDITOR Shruti Advani ASSOCIATE EDITOR Vince Chong EDITORIAL Richard Otsuki, Priyanka Boghani, Tom Wan

MANAGING DIRECTOR Paris Shepherd OPERATIONS

DIGITAL DIRECTOR Tristan Watkins

BUSINESS DEVELOPMENT Madhuri Chatterjee, Sonia Lam, Michael Chan, Sam Chan, Stacey Wong

PRODUCTION DG3

Benjamin Yang, Koye Sun

PUBLISHED BY KEY POSITIONING LIMITED 1205 The Dominion Centre, 43-49 Queen’s Road East, Wanchai, Hong Kong Tel: +852 2529 5577 Fax: +852 3013 9984 Email: info@asianprivatebanker.com

2 asian private banker

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# ETFs

he growth of active management using exchange traded by investors’ increasing awareness Fig. B: Hong Kong ETF funds (ETFs) is an emergent investment trend that is quickly of the impact of currency returns on Market Landscape as of end-Feb 2016 gaining prominence — both as a standalone strategy, and as overall portfolio volatility.

Additionally, the rise of smart beta a combined approach where ETFs are held alongside security # of Hong Kong ETFs ETFs, which offer exposure to factors positions.

The increasing appeal of asset allocation as a primary tool for portfolio such as quality and income, means Mainland China A-share 46 builders has been driving interest and asset growth for these strategies. that asset allocators can also capitalise Hong Kong Equity 21 This is largely because the overwhelming market impact of macroeco- on traditional biases of active managAsia Pacific Equity 43 nomic events, both positive and negative, has an impact on asset classes ers to create portfolios while keeping Other Equity 13 and geographies as a whole, which lessens the impact of the return dif- costs low.

Fixed Income As the ETF industry grows and ferentials between individual stocks.

9 & Currency matures, the expanded investment Commodity 6 choices are not only available globally TRUE DIVERSIFICATION Total 138 By tactically shifting between asset classes using ETFs, asset allocators (see Fig. A) but also closer to home Source: The Stock Exchange of Hong are able to achieve instant diversification in an exposure, as the ETF will (see Fig. B). Increasingly, new and Kong (HKEx), ETF Market Perspective, as typically hold most of the securities in that asset class. This is a signif- unique ETFs offerings in the Hong of end-December 2015; ETFs listed on HKEx from December 2015 to end-Februicant benefit relative to buying individual positions where achieving a Kong market from BMO, and other ary 2016, including iShares MSCI China diversified exposure is both difficult and potentially costly, especially in managers, are providing local invesA International Index ETF, BMO NASDAQ 100 ETF, BMO MSCI Asia Pacific Real tors access to global and regional harder-to-trade asset classes such as fixed income.

Estate ETF, BMO MSCI Japan Hedged to market exposures in the Asian time USD ETF and BMO MSCI Europe Quality Hedged to USD ETF zone, while allowing asset allocators THE COST ADVANTAGE greater diversity of choices in managETFs are low-cost investment vehicles, which give asset allocators better flexibility in making investment decisions. Investors recognise that ing portfolios. unlike returns, fees are something they can control, and the focus on fees today is greater than ever before.

BUILDING PORTFOLIOS WITH ETFS ETFs are effective tools for asset allocators based on the abovementioned core benefits in portfolio construction. Further, institutional pairing GROWTH MEANS MORE CHOICES The growth of the ETF industry has meant that asset allocators have strategies have become very popular with asset allocators. By pairing far better choices when it comes to building portfolios. The expanded a passive ETF with an active manager, either within regions or asset investment choices with ETFs include the ability to access fixed income, classes, an asset allocator can maintain the outperformance potential of which means that what was traditionally covered broadly has now the active manager while lowering costs and maintaining market expoevolved toward the delivery of precise positioning tools capable of slicing sure by blending in ETFs. Also gaining traction are “core-and-explore” strategies, where ETFs through the credit spectrum such as investment grade bonds; the ability to tactically allocate assets to specific equity sectors such as real estate; can form the low-cost building blocks of a portfolio, surrounded by and the ability to express currency views with hedged offerings, driven active solutions in less efficient markets such as high yield bonds and emerging markets. Alternatively, asset allocators can build a core around active managers that have delivered consistent outperformance, with Fig. A: Global ETF Asset Growth as of end-Dec 2015 ETFs as satellites, where the goal is to achieve low-correlation market 3,500 4,500 exposure, or explore smaller markets or niche sectors.

ETF assets # ETFs 4,000 3,000 The growth of the ETF market, both in terms of product offerings 3,500 2,500 3,000 through smart beta and currency options, and through growing investor 2,000 2,500 interest and trading, is turning ETFs into powerful tools that effectively 2,000 1,500 address market volatility and repositioning portfolios. The unique ben1,500 1,000 efits of ETF structures and exposures make them a popular choice for 1,000 500 500 investors, and an important tool for asset allocators to enrich any invest0 0 ment portfolio.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 For more information, please contact us at BMO at Source: ETFGI data sourced from ETF/ETP sponsors, exchanges, regulatory filings, Thomson Reuters/Lipper, Bloomberg, publicly available sources and data generated in-house +852 3716 0990 or visit www.bmo.hk/etfs asian private banker 3

LETTER FROM THE EDITOR

After the awards...

The first few months of the year are awash with awards – for cinematic brilliance, musical genius and of course for financial performance. For the private banking industry in Asia, February is the month when we congregate to the celebrate the best of the best – the winners of the Asian Private Banker Awards for Distinction.

And what a night it was! It was my immense pleasure to see so many of you – some 170 private banking luminaries – gathered together that evening (see pg. 16).

Furthermore, I was both proud of and moved by the collegiate spirit that pervaded the room – I saw more than a few of you on the front tables applaud your colleagues and contemporaries with as much enthusiasm as you did your own wins.

The Scoop with Shruti (pg. 6) is an extension of the research that is part of the process of identifying these winners, and reflects the views of a private banking client.

Crow’s Nest (pg. 7) tackles the business of referrals between the private banking arm and the rest of the bank – a current in thing, with major banks restructuring to focus more on that part of the equation. Truth is, it’s been around for much longer than that and

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the good news for private banks is that there is plenty of potential business bubbling from the corporate/investment side of things.

The bad news? It’s much easier said than done.

Further, it is common knowledge that most discretionary mandates use ETFs for efficient implementation, and we explore this development in ETFs gain private banking boost (pg. 11).

We will also explore the distribution of ETFs in Asia in The ETF strategy (pg. 18).

For all those who have submitted feedback for the previous issue, I’d like to take this opportunity to extend my gratitude. For those of you who are picking up a copy of Asian Private Banker for the first time, I welcome you to join in on the conversation. Your feedback and comments are tremendously valuable and helps us to create the very magazine that you hold in your hands. Join the dialogue by emailing editor@asianprivatebanker.com. I look forward to hearing from you...

Until we meet again,

Shruti Advani Editor, Asian Private Banker

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28/12/15 1:50 pm

EDITORIAL

A unicorn’s perspective

I

spent much of the last quarter of 2015 asking myself which is the best private bank – in Asia? In Hong Kong? In Singapore?

For Alternatives? For the seriously moneyed?

Much of this exercise was directed toward finding a winner for the Asian Private Banker Awards for Distinction.

Part of the process involved reaching out to various industry stakeholders – those working at private banks, those consulting to or manufacturing products for private banks and from those who use private banks. The latter – the clients – often provide the most disparate and hence worthy perspective, but often for anyone other than their immediate relationship manager/gatekeeper, it is easier to get honest feedback from a unicorn.

Well, I found a few unicorns and here is my chat with one.

Show me the money. Period.

Everything else is irrelevant.

How many private banking relationships do you have?

Three. My primary relationship is with my onshore bank – the people who know about my corporate and personal finances. I have a legacy Swiss bank account out of Zurich which I inherited, and I have a Jersey-based account which used to be tremendously useful up until a few years ago but is less so now.

What do you look for in each of these relationships? Where do you think your private bank adds value?

Without evading a direct answer, I really do believe each bank brings a different piece to the puzzle. Ironically, the smallest of these three banks has the largest chunk of my money – and they provide a whole spectrum of services – monetising assets, extending leverage, structuring specific investment vehicles.

The largest of these banks – the Swiss bank – is the one I transact the least with. Having said that, I think it is important to be able to book out of Zurich from a portfolio perspective – both because of diversification and also because it is possibly the most efficient clearing house for funds. So for example, any fresh infusions of capital, private equity investments, etc I make are from this account.

Do you see yourself closing any of these accounts over the next year?

Absolutely no way. Unless I literally catch someone with their

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hand in the cookie jar. The paperwork and time involved with opening a new account are just not worth it. Even if banks start charging a fee on deposits, it is easier to commit to a cash management product (and in the last six months there has been a fair bit of innovation on this front), than close the account.

Have you ever referred friends to one of these private banks?

I have recommended products over the years to friends but as far as referring them as clients – most of them are multi-banked and have some relationship in place with these banks anyway. If not an actual account, then the relationship could be more tentative but most of them will have spoken to the same guys at some point.

We have spent some time talking about the awards for the last few years – do you believe the criteria for these awards are aligned with a client’s priorities? Even though the awards are meant to be an intra-industry recognition rather than an external validation.

I think the more sophisticated investors out there value the same things you do – breadth of the product shelf, innovation, balance sheet and above all, constancy. I think clients that had a singular focus on price have learnt that in the long run it will cost them dearly. I have certainly learnt that over two unfortunate investment experiences.

What were your best and worst investments in 2015?

I’ll take a slightly longer perspective than that. I wouldn’t say they are the worst investment but I am loathe to put any money into mutual funds for a number of reasons not least of which is the layered fee structure. I am not averse to using funds for implementation but I would limit myself to ETFs (exchange traded funds).

Over the last few years, high grade corporate paper has returned well as have more bespoke investments into real assets, provided adequate due diligence was conducted into not just the asset but the wrapper/structure.

What are you wary of going into 2016?

Counterparty risk. Not in the way the more sensational headlines imply – I don’t believe banks are on the brink of collapse. But I believe investors will need to be more mindful if there is any level of structuring involved – is it the bank that is the counterparty or is it another party whose risk they may not be comfortable with?

What do you want to hear in an elevator pitch from a private bank that wants your business?

Show me the money. Period. Everything else is irrelevant.

EDITORIAL

Asia’s untapped HNW gold mine Although assets under management (AUMs) at Asia’s leading private banks have maintained steady growth in recent years – the top 20 private banks grew these by 11.2% and 16% in 2014 and 2013 respectively to accumulate an additional US$350 billion – there is a general undertone that large integrated banks are not tapping enough into the supply vein that is their other local businesses.

I

nvestment banks are one area where the mining of potential clients has not faltered. Private banks with wellintegrated investment units, such as UBS and Credit Suisse, have long been the beneficiaries of newly unlocked wealth.

According to Dealogic, the two Swiss giants (who rank as the first and third largest private banks in Asia by AUMs respectively) have, since 2013, collectively raised more than US$73 billion in equity capital markets for corporates in Asia ex-Japan. This is more than 10% of the cumulative capital raised by the top ten investment banks in the same period.

And the benefits are not limited to postIPO activities alone. As the region faces headwinds from a global slowdown, an increasing number of Asian high net worth individuals (HNWIs) are directly selling businesses or strategic assets, like oil rigs.

For these banks, it comes as no surprise when their private banking AUMs rise in tandem with such activities. But the story differs for others.

For instance, a veteran advisory head shared an observation of affluent retail banking branches holding tightly onto “numerous accounts” with north of US$60 million in cash assets. But the managers at these local branch managers are little incentivised to export clients to the private bank, especially when considering lost future revenue. In addition, costs are often lower when client needs are plain vanilla, such as the mere trading of stocks, bonds, FX and deposits.

This echoes sentiments from a head of a private bank that has strong local consumer and commercial banking sister units dealing with small- and medium-sized enterprises (SMEs). He says the

private bank should ideally source up to 70% of net new assets internally.

“We are sitting on a mine and doing nothing with it,” he laments.

“There are conflicts of interest in play; incentives that need to be implemented and; structural silos to overcome.”

NOT CLEAR CUT

But even when clients are successfully converted, behaviours vary widely.

Given the fact that many wealthy individuals or families in the region, who are often sole owners of businesses, don’t differentiate between corporate and personal wealth, many of the brokerage activities that they would otherwise engage in at the private bank have already long been executed through commercial banking relationships.

Unless there are needs for more sophisticated products or portfolio solutions, the practicality of holding two accounts for the same purpose becomes questionable. Though it is true that many SME clients do in fact yield to internal requests, sources have confirmed that their intentions are less driven by the allure of the private bank.

“Many will open it either as a face-saving exercise or as a means of leveraging from the ‘total relationship’,” says a senior China banker, noting that there are as a result many largely inactive private banking accounts that just hold cash and stocks and, give or take, the occasional trade.

“Some private banks’ overall books in Asia will be holding up to an average of 15% in cash. But the outliers can often be holding even more than 50%. They did not open accounts to do business. They

are using this relationship as leverage for their corporate activities, such as better lending rates.”

Some private banks are already making the move to improve their internal conversion rates. Wary of the excessive cost of servicing smaller HNW accounts, banks like DBS and Citi are making inroads through their “super-affluent” banking segment (DBS Treasures Private Client and Citigold Private Client respectively) targeting the marginal HNWI (US$1 million). Standard Chartered in mid-2015 announced its decision to restructure commercial and private banking under the same remit in a move that its new CEO, Bill Winters, said would “reduce its cost base and bureaucracy, improve accountability, and speed up decision making.”

Tougher markets and geopolitical risks are expected to continue to act as tailwinds for capital inflows into offshore hubs like Hong Kong and Singapore.

Even in a year where no market was left unscathed, especially those with close links to China’s slowing economy, the region registered 7.2% in HNW wealth growth to total US$56.4 trillion.

Chinese authorities have added a cherry on top by committing to the convertibility of the yuan to become an international reserve currency by 2020.

The emblazoned battle to acquire new offshore assets continues to steal headlines as well, as wealth hunters venture deep into the corners of China, Indonesia or other untapped markets.

But while the romanticism of exploring unchartered wealth and unlocking new networks is certainly appealing, the real immediate opportunity is, in fact, local.

asian private banker 7

PEOPLE

Straight Talk:

Francesco de Ferrari, head of private banking, Credit Suisse Asia Pacific, CEO Southeast Asia The Asian Private Banker Private Banker of the Year 2015 talks about what it takes to survive, thrive and ultimately – win.

Congratulations – Credit Suisse has won Best Private Bank – Asia twice on your watch and this year you have been recognised as Private Banker of the Year 2015.

Francesco de Ferrari (FdF): Thank you, the recognition means a lot. Especially since I first discussed my plans for the region with Asian Private Banker almost four years ago and over that time we have implemented and seen many parts – such as our onshore focus – succeed.

Last month the bank posted its first annual loss since 2008. Do you believe we are back – in economic terms – to where we were before the global financial crisis (GFC)?

FdF: I think the situation is dramatically different from what it was in 2008. But to address your point about the loss, I think we need to qualify the loss – we announced a new strategy in October 2015, which may not have gone as far as the market wants us to but which was (nonetheless) a dramatic change from our earlier strategy and organisational set up.

This is bound to have consequences on the business model, which is what we see in the fourth quarter results. We did a significant goodwill write-off [goodwill charges for the fourth quarter were at CHF3.8 billion (US$3.8 billion)] which is what triggered the loss. This prompts me to qualify the loss as an accounting loss rather than an operational loss.

If you look at the core operating business it generated CHF4.2 billion in profits last year, in fact, Asia Pacific Division was a

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PEOPLE

particularly bright part of the story – revenues have grown 27% between 2013-2015. In 2015 alone, we saw a 27% increase in adjusted pre-tax income from the region and historical record CHF17.8 billion in private banking net new assets, CHF3 billion of which was generated in the fourth quarter, which as we have already mentioned was challenging for the industry.

If you look at the core operating business it generated CHF4.2 billion in profits last year, in fact, Asia Pacific Division was a particularly bright part of the story – revenues have grown 27% between 2013-2015

From a topline and bottomline perspective, the numbers are impressive. Within the APAC division results, private banking revenues were at CHF1.1b billion and private banking pre-tax income was at CHF344 million, up 14% and 11% respectively on a year on year basis.

I spoke last year about increasing headcount – we saw a net increase of 70 relationship managers to a total of 590 and yet our cost income ratio at the end of 2015 was at 69% versus 70% at the end of 2014.

Are you then saying that the annual loss for 2015 was an anomaly rather than a trend?

FdF: If you look at the results across most banks, it is clear the fourth quarter of 2015 was a challenging environment for global markets but for Credit Suisse this [the loss] was an adjustment to the new strategy. In fact, our capital position has never been stronger, which is evident from our CET1 ratio of 11.4%.

Tidjane Thiam’s appointment as group chief executive in May 2015 was accompanied by a lot of hopes for the wealth management division. Have you started to feel the impact of the new leadership?

FdF: Overall, our biggest change is that we are taking a very different approach to how we are running the bank. For example, we have one APAC division now so we have tremendous regional empowerment – this is quite a unique model.

This means, in Asia we are running the investment bank and the private bank as a combined unit and taking decisions closer to our clients rather than centralising them as we did before.

A number of other banks are going the other way, in these moments of pressure they would tend to centralise functions

even business decisions like credit which in fact need to be taken closer to the client.

As you’ve mentioned, we began discussing your plans for the region when you first came to Asia in 2012. Since then the competitive landscape has changed dramatically with a fair bit of consolidation, some confirmed and some implied. Who do you benchmark the business with when you make plans now?

FdF: The pie is big enough to accommodate a whole set of different players. In reality, it is very important for banks to find out what they are really good at and carve out their space based on a clear value proposition.

But this is also a marathon and not a sprint. So a lot of athletes get excited and run the first 10 km at top speed and create a lot of disruption for everyone else. And yet it has been proven time and time again that these players never make it to the finish line.

I think we are only at the halfway point of the marathon so I am tempted to ask how many will be able to keep the pace for the second half of the race when things get more challenging? That’s why I am so excited about the next three years, it is in times like these that great teams make the difference.

I’ll interpret this “disruption” you refer to as banks offering significant premiums to market in order to secure talent. We discussed this on the 2015 CEO panel when you said private banks must collectively decry “promoting to hire” if we are to survive as an industry. Have you been able to implement this at your own bank given that some of the headcount additions you made in 2015 were fairly senior bankers?

In fact, our capital position has never been stronger, which is evident from our CET1 ratio of 11.4%

FdF: We have absolutely been able to stick to that resolution because investing in building out a private banking business in emerging markets has to be a long term game. You have to endure the cycles, and it has a lot to do with client trust. Clients do not want to keep following a relationship manager across three or four different banks, and they are starting to tell the market that stability is really what pays. I believe that there is enough talent out there for us not to take a shortcut on trust, Someone who is not getting promoted in their bank but expects to get promoted just because he moves is not necessarily a good indication.

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PEOPLE

For people who have earned their MDs (managing director) at Credit Suisse, the title means a lot. And if you compromise on those standards, it corrupts the culture.

Growth is important but not at any cost. I think clients appreciate that as well.

How we play China onshore will be the key to the next stage

Optically, your business is still tilted towards South Asia like it was when we first discussed your strategy for the region. Is this something you are working on or is it a case of mining business where you are strongest?

FdF: Our business historically has been tilted towards Southeast Asia but I would say over the last two to three years we have seen very good growth in our Greater China business and the upside is significant.

How we play China onshore will be the key to the next stage.

We are tackling this question from a One Bank (investment banking and wealth management) perspective. If I look at our competition, we also have a lot of room to grow in Hong Kong and like any domestic business, that actually is a very safe bet for us to make.

You’ve consistently made this point about onshore business.

Indeed, in one of our earlier conversations you said private banking would quickly become an onshore only game. What are your plans for the India onshore business?

FdF: In addition to Australia and Japan, we have an onshore private bank in India and under the new regional organisation I referred to, this is now a part of APAC business. We have made big investments in our NRI team and I am very excited about running a high quality NRI business. We have also onboarded a Non Resident Pakistan team and so we are slowly getting our strategy in place for the Indian subcontinent.

The other country we are focusing on is the onshore business is Thailand.

By and large Swiss banks do not have a very positive track record in the mass affluent business outside their home country. Credit Suisse’s DNA is based on quality of advice delivered by the best human capital; mass affluent would be a very different business model

Many of your competitors are also assembling high net worth/ mass affluent platforms in Asia. Is this a route you may explore given you have some experience of it in your home market?

FdF: High net worth is a very important business for us and accounts for one third of our asset base and perhaps a little more of our revenue base. In this space, we can play very well.

Going further down scale requires a whole different infrastructure. Right now, there are so many low hanging fruits in terms of doing better with the clients we have and extending our reach to potential clients in the markets we cover, the world is complex enough for us to consider the mass affluent business. By and large Swiss banks do not have a very positive track record in the mass affluent business outside their home country. Credit Suisse’s DNA is based on quality of advice delivered by the best human capital; mass affluent would be a very different business model.

There was a lot of speculation around Thiam’s appointment regarding his appetite for acquisitions – especially given his successful track record of them. In October last year, he promised to reallocate resources to Asia and emerging markets. Is an acquisition on the cards?

FdF: [Laughs] I am not making any comment. But I will say that in the last four years we generated CHF70 billion in net new assets organically. That is the size of some our large competitors here in Asia. We are pretty happy with that.

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ETF

ETFs gain private banking boost Just less than three years ago, the distribution of exchange-traded funds (ETFs) at private banks in Asia was still in its embryonic stages, and it was anybody’s guess when or if the market would grow to rival its western counterparts. This is no longer the case, with ETF assets owned by wealthy Asian investors rising by as much as 200% in 2015.

D

ialogue about the passive vehicle few years ago still largely revolved around the basics: the benefits of passive versus active management, the cost of fees, and liquidity alongside creation and redemption mechanisms.

Numerous private banks were delegating the management of the product to equity specialists, treating ETFs as stocks rather than the funds that they are. Flash forward to 2016, ETFs are now all the rage as discretionary portfolio asset growth persists in Asia and selectors scramble to justify the cost and performance of a growing number of active managers.

MANAGED INVESTMENT DRIVE

Traditionally known for heavy self-directed trading and limited allocations to managed investments, high net worth individuals (HNWIs) in Asia are beginning to dial down such activity in light of heightened volatility and the growth of managed investments, both in funds and discretionary mandates, are inching up slowly but surely.

This publication’s proprietary data indicates that fund and discretionary penetration rates in the region have, on average, exceeded 20% and 8%, respectively, a figure that is even higher at pure play private banks.

According to a recent report by Greenwich Associates, a global provider of market intelligence and advisory services, nearly two-thirds of multi-asset managers in Asia use ETFs and of this subset, 12% of assets are invested in ETFs. This figure climbs as high as 15% in Asia’s discretionary mandates, according to multiple sources.

This spells a significant opportunity for ETF providers to tap into a space where the gap is still pronounced compared to Europe where discretionary penetration is as high as 30%.

“A lot of the ETF growth in the region has to do with growth in discretionary portfolio management in the region,” says Geir Espeskog, head of distribution, at iShares, who notes discretionary asset growth of up to 50% among his clients.

“This trend of using more ETFs in multi-asset portfolios is occurring across the broader investment management universe and we see a lot of similarities in how private banks, discretionary portfolio managers and asset managers behave. This is especially the case in light of the current markets and how it has underlined the importance of diversification and scrutinising costs.”

SCARCITY OF OUTPERFORMANCE

But the growth of ETFs in the region is fuelled not just by the increasing allure of managed investments, but also a shift in allocations from active to passive funds.

In the wake of diverging monetary policies coupled with an oil price plunge and a China slowdown, compressed benchmark gains are to be expected and gatekeepers continue to undergo rationalisation to justify a fund’s allotment on the platform, versus its risk-adjusted returns and cost. As a result, many are seeing a reversion to conventional wisdom.

“ETFs may be suitable for more efficient liquid markets such as the US or in markets where we currently do not have an active fund recommendation,” says Rodolphe Larqué, head of funds and ETFs at Credit Suisse’s private banking arm in Asia. He adds that the private bank

currently has 2,000 ETFs on its platform and of the fund assets of Asian clients, ETFs make up “a much larger part of our allocation” than Credit Suisse’s global private banking average of 10%.

“In addition, we reckon that ETFs provide a compelling solution to clients with a shortterm investment horizon, enabling intraday trading at low costs. As such, we have been working on strengthening our ETF platform so as to continue providing our clients with a comprehensive ETF offering for both strategic and tactical purposes.”

But even this rule is facing exceptions.

Aside from prospective alpha generators who fail to pass risk requirements of global private banking platforms, even the broader pool of emerging market of managers are beginning to struggle to perform.

“You would think that passives, by convention, would be used in mature and efficient markets,” observes Marco Montanari, head of

asian private banker 11

ETF

as structured product underliers.

But the road to further DPM penetration of Asia AUM 8% ETF diversification still has some way to go in Asia, even when Average 2015 DPM growth 20-40% accounting for the budding size of assets being delegated. % of DPM assets invested in ETFs 15% For one, the transactional or advisory ETF business remains Source: APB Mandate scant. This obviously has to do with a lack of private banker incentives which will require the abolishpassive asset management, APAC, Deutsche ment of trailer fees, mirroring regulatory Bank Asset Management.

“But in Asia, this is not always the case. developments in mature markets like the UK We also noticed that within the same coun- or Australia that many expect will first be try, (markets were) becoming increasingly brought to Asia by Singapore. While some highly correlated, (making) it more difficult to private banks are witnessing a greater variety generate alpha in stock-picking. This has also of flows – for instance, at Credit Suisse, over been a big motivation for many institutional 75% of ETF holdings of its Asian clients are invested outside of China and Hong Kong – investors.” client-directed flavour remains concentrated in Greater China benchmarks.

THE ROAD TO ETF Secondly, even gatekeepers are not extenDIVERSIFICATION sively familiar with the overall ETF universe.

In 2015, ETF assets owned by HNWIs in Asia grew 11%, 20% and 200% for global provid- One case in point is the severe lack of use of ers iShares, db X-trackers and Vanguard, fixed income ETFs, and the continuous insisrespectively. General growth of managed tence on trading managers or even the taking investments aside, the product was being on of liquidity risk on single bonds.

“Unlike in Europe, the use of fixed income researched with increasing depth and utilised not just in discretionary portfolios but even ETFs in Asia is still very low which is a pity

12 asian private banker

because they share all the same advantages as an equity ETF,” notes Montanari.

“Private banks and investors in Asia continue to rely on direct bonds and many are not even familiar with how ETFs can be sued in this asset class. Sometimes, thanks to secondary market conditions, we are in fact in a situation where ETF spreads are even tighter than the underlying bond in Europe and the US.” In Asia, ETF assets are estimated to have grown to exceed US$200 billion, representing approximately 7% of the global total of US$2.99 trillion. Continued innovation and improving education, coupled with Chinese investors growing integration with global markets, has some forecasting the market to grow to US$500 billion by 2020.

“Correlations will vary over time and there will be cycles where active managers have a chance of performing better,” says Espeskog.

“But I believe what we are seeing is a structural growth for ETFs. In more mature markets, ETFs could make up more than a quarter of the portfolio but Asian portfolios are still just seeing single-digit penetration.”

“We think we are on the same growth trajectory as we are seeing in the US ten years ago or Europe five years ago.”

REGULATION

In the eye of the storm Compliance is, to put it nicely, a real headache for Asia’s private banks. Lawyers suggest that one way to better avoid legal pitfalls is to change the way deals are done. They also tell Asian Private Banker that compulsory information exchange – a global trend aimed at combating tax evasion and terrorist financing – erodes the banker’s common law duty of secrecy.

B

oards are urgently trying to distinguish their banks’ risk profiles from that of competitors, but some of them face real difficulty in achieving a universal global understanding of best practice.

So say lawyers like regulatory expert Jonathan Peddie, a dispute resolution partner at law firm Baker & McKenzie’s London office. He certainly knows what this is about, given his former role during the 2008/09 global financial crisis (GFC) as global head of financial crime at UK lender Barclays.

“It frustrates regulators when they hear that firms don’t think that they face a challenge just because they’re not in the heat of the issue in Washington DC, New York or London,” he tells Asian Private Banker during a recent visit to Hong Kong.

“There isn’t a hiding place from these extra-jurisdictional laws and regulatory expectations.”

It is no longer a matter of hard law, lawyers note, with wealth management regulators now looking to balance the interests of the high net worth (HNW) individuals with public opinion.

The need for transparency, Peddie continues, runs “in the opposite direction to customer demand for opacity” in relation to issues like trust arrangements, banking secrecy and offshore tax convenience.

“The challenge for banking, asset and wealth management is to do business which falls on the ‘right side’ of public opinion which sometimes holds that lawful activity is still unacceptable,” he says.

At the same time, HNW clients are the hardest community to persuade to release further information on their source of funds.

“The most offensive question to an ultra HNW individual has to be ‘where does your money come from?’, but this is the one question that the regulator expects a firm to be able to answer with full precision,” Peddie says.

The global implications are huge. For instance, the UK tax unit that was set up in 2009 to focus on some 6,000 taxpayers with at least £20 million (US$28.6 million) in wealth, has since collected more than £1.3 billion in extra income for the government.

In 2014-15 alone, it reportedly secured £414 million more tax from this group, an increase of over 50% from the 2013-14 period.

The US Internal Revenue Service (IRS) meanwhile, noted last month that avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams – known as the “Dirty Dozen.” And since its Offshore Voluntary Disclosure Program began in 2009, the authority has obtained more than 54,000 disclosures, and over US$8 billion from this scheme alone.

IMPLEMENTATION KEY

Anthony Fay, Clifford Chance’s Hong Kong-based tax expert, adds that in Asia at least, regulators “have established a set of ambitious but reasonable goals.” The issue however, lies in implementing them.

“The underlying motivation and policies are legitimate and reasonable. Regulators are looking ultimately at customer protection and also protecting their tax base,” he says.

“One of the key struggles for regulators is for them to match with the bank’s business and its realities.”

Just last May, Hong Kong’s Securities and Futures Commission said it found instances

of “unsatisfactory” know-your-customer (KYC) procedures at Hong Kong intermediaries. In a circular, it detailed breaches found during a recent supervisory review that included reliance on mobile phone videos when on-boarding clients, and lapses in investigating multiple clients using the same addresses.

The city also recently concluded a public consultation for a new global standard on Automatic Exchange of Information (AEOI). This is similar to the US Inland Revenue’s Foreign Account Tax Compliant Act (FATCA) legislation, of which Hong Kong is a signatory.

Under the AEOI, financial institutions will identify account holders who are foreign tax residents and report information regarding their financial accounts to the local tax authority. The latter will then transfer this information to counterparts in the jurisdictions of tax residence.

Such information exchange will be automatic on an annual basis, and as of March 2015, 58 jurisdictions have committed to undertake the first AEOI by 2017. Another 35, including China, Hong Kong and Singapore, have committed to doing so by 2018.

Legislative amendments are expected to be introduced in Hong Kong in early 2016 and finalised by year-end. And institutions will need to start preparing and conducting due diligence procedures in 2017 in order to meet the 2018 date.

“What we observe is that financial institutions are mostly interested in understanding key differences between AEOI and FATCA in terms of how they need to comply,” Fay notes.

“They’re also very interested in having us assess whether or not their existing pro-

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REGULATION

cedures and client forms are up to date, or what changes are needed… What I’ve been telling a lot of clients is that… it’s important to, one, assess what it will take to overlay AEOI on FATCA and, two, build awareness internally so people understand.”

Mini vandePol, the Hong Kong-based chairperson of Baker & McKenzie’s Global Compliance Group, notes also that clients have asked for advice on whether they need an independent, internal investigative group to look into possible compliance breaches.

Other broader enquiries, Peddie adds, include how banks should spend on compliance, given finite budgets.

“What are the priorities? It’s critical to identify the bare minimum improvements that an organisation must undertake,” he says.

“If I had to choose two areas out of all of the risks that I should be prioritising... I’d say effective KYC due diligence controls to support anti-money laundering and counter-terrorism efforts, and adequate bribery and corruption procedures. These are global public agenda items and that’s why they are top of the regulators’ agenda.”

ISSUE GOES MUCH DEEPER

VandePol adds that the root of the issue lies in “the link between remuneration structures and the business being developed in wealth management.”

“They’re directly correlated.

Bankers are going to be driving the business and they’re going to personally benefit,” she says.

“As long as you have that sort of link, it’s going to be extremely challenging to drive a compliance culture of ‘we want good business, we want clean business, we want business that is transparent and anything less than that, you’ll have to turn away.’ ” The European regulatory environment, she and Peddie agree, is “several years ahead” compared to Asia.

“I believe that we’re in the eye of the storm here in Asia as the significant growth of business

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in wealth management is expected to be driven from this region, and I don’t think our regulators are at the same level as European regulators in relation to enforcement,” she says.

“They’re grappling with how to deal with these issues themselves. Equally, companies are being challenged because they’re facing a very competitive market, margins are low, and therefore, losing business or sale stars because of compliance concerns, is highly unattractive.”

The AEOI regime will not be a game changer, vandePol adds, because jurisdictions are already exchanging information, just not under any official umbrella.

“When you’ve got China and US regulators communicating, cooperating to bring Chinese citizens back to the PRC under Operation Foxhunt – those alleged to have taken ill gotten gains to the US from China, it’s already happening,” she notes.

“If someone had told me five years ago that there would be such a level of cooperation between Chinese and US regulators on that front, I wouldn’t believe it.

What the industry needs to do, she suggests, is to review its remuneration structure like what the pharmaceutical sector did. This generally means, for example, winning businesses as teams, rather than individuals, with businesses shifted around groups, rather than staying with one individual or team.

In the broader banking context, Peddie adds, “it’s about articulating what a sustainable business model looks like.”

EROSION OF BANKER’S COMMON LAW DUTY OF SECRECY

Meanwhile, lawyers note too that rules like the AEOI clash with traditional banking tenets such as client secrecy.

“Speaking as a lawyer, proposed AEOI regulations... go against the well-established common law principle that a banker must keep his customers information secret except in certain specific circumstances,” notes Simon Deane, a partner at Deacons, one of Hong Kong’s largest local law firms.

REGULATION

“This principle was established by the well-known case of Tournier v National Provincial and Union Bank of England (1924) which was followed by the Hong Kong Court of Appeal in Chase Manhattan Bank v FDC Co Ltd (1985).”

In that case, the Hong Kong court held that the Hong Kong branch of a US bank was not obliged to disclose customer information to the US tax authorities, Deane explains. Hong Kong law provided for banking secrecy and the US authorities did not have power to override Hong Kong’s jurisdiction in this case.

“If and when the AEOI law comes into force, the banker’s common law duty of secrecy will be further eroded,” he tells Asian Private Banker.

Whether it is a “healthy development” depends largely upon whether you are a foreign government trying to recover taxes from recalcitrant citizens or one of those citizens, he adds.

The Hong Kong government has stated that with “the global trend of moving towards greater tax transparency, the...

Government has expressed its commitment to implement the AEOI standard on a reciprocal basis with appropriate partners... and ensuring proper use of the data.”

This, Deane notes, indicates “that there is a desire to prevent ‘abuse’ of exchanged information and it is to be hoped that the government keeps to its word here.” After

all, the vast majority of banks’ customers are “law abiding and pay their taxes, whether in Hong Kong or elsewhere.”

If tax regulators find that a regulation is not having the required result, Clifford Chance’s Fay adds, they can take “kneejerk reactions which create what businesses hate the most – uncertainty.”

“The most important help regulators can give to financial institutions is to provide sufficient time for the industry to digest and prepare before a regulation kicks in,” he says.

“Cost is one thing, but time is just as important. What businesses don’t like are uncertainty and surprises.”

Reaching the right policy, especially for tax purposes, Fay continues, is “very difficult” for regulators because such laws stem from traditional brick-and-mortar business models. This means they are not “as nimble and well equipped to deal with rapid changes, especially with financial products that come online all the time.”

INACTION TO LEAD TO MORE SEVERE PENALTIES

Lawyers add that banks will increasingly have to devote more resources as regulatory rules tighten, particularly with regulators seeing substantial returns. As law firm Pinsent Masons points out, the UK tax unit that focuses on high net worth individuals recovered £29 for every £1

spent on investigations over the 2014/15 fiscal period, up from £18 per £1 spent on investigations the year before.

Joseph Kwan, another partner at Deacons, notes that banks will “have to... identify and provide the information to (authorities) within the deadlines imposed and they have to ensure that the information is complete and accurate.”

In some cases, he adds, banks might also have to deal with regulatory investigation at the same time as a threatened civil claim by the customer. And on top of these, institutions will also have to stay updated with latest developments in the law and train staff on statutory obligations.

Peddie adds that those who fall short of such standards may face even louder music, particularly as regulators will “increasingly be funded to turn the fire up.”

“It is very refreshing to talk to organisations which see the problem (even if they haven’t had their own cases of misconduct to deal with) and who want to improve global standards of risk control,” he adds, in light of a “growing mood” in the regulatory camp to seek out those who have not learnt from the misconduct of others.

“I think there’ll be an aggravated element to penalties in the future in all jurisdictions for failure to learn... That’s not been articulated yet but it’s going to happen.”

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INDUSTRY

A gala of a time: APB Awards for Distinction

S

ome 170 key members of Asia’s private wealth industry gathered last month for the presentation of the Asian Private Banker (APB) Awards for Distinction 2015.

The gala at Hong Kong’s JW Marriot hotel saw over 30 awards being presented. These included Private Banker of the Year, which was won by Francesco de Ferrari, private banking head for Credit Suisse Asia Pacific. Credit Suisse also emerged as the big winner in 2015 with seven awards including Best Private Bank – Asia.

In his speech, de Ferrari noted that “Asia has all the fundamentals” of being a successful private banking hub.

APB’s Awards For Distinction 2015 also introduced new awards to mirror essential business trends. Best Private Bank – Digital Innovations pays close heed to how banks are ramping up digital strategies to both cater to more tech-savvy clients and better cope with rising regulatory demands. Best Private Bank – Employer of the Year, meanwhile, comes at a time when banks are striving to retain and hire best talent. Credit Suisse and Goldman Sachs won these accolades respectively.

Asian Private Banker once again congratulates the winners of our Awards for Distinction 2015 for their commitment to excellence and persistent efforts to grow bigger and better despite turbulent market conditions.

The Credit Suisse team that picked up the Best Private Bank – Asia award

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Francesco de Ferrari collects the award for Private Banker of the Year

INDUSTRY

The UBS Wealth Management table

Albert Chiu (left) and the EFG team

Amrit Singh (left) and Mark Smallwood

Pamela Phua and Benjamin Cavalli

Todd James (left), Andrew Au (centre) and Andy Shale

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ETF

The ETF strategy The exchange traded fund (ETF) tailwinds of expanded research, decreasing appetite to make macro calls and increasing opportunities for tactical trades are resulting in the passive vehicle gaining a larger share of Asia’s discretionary mandates, albeit with still low penetration rates.

B

ased on Asian Private Banker internal estimates, discretionary portfolio management (DPM) penetration rates in Asia currently average 8%, representing growth rates of 10-15%. Of this pool, ETFs are estimated to make up 15% of allocations.

But how are discretionary managers using the passive tool?

Parallel to growing market risks and lack of directionality, the growth in discretionary mandates has triggered opportunities for trading to be imported from the client’s hands to the professionals. Short but often violent ripples are expected to test investors as various key inflection points – ranging from potential subsequent US Federal Reserve tightening to People’s Bank of China weakening – will offer tactical risk opportunities, market players note.

“We have to be courageous in 2016,” said Sean Taylor, Asia Pacific CIO of Deutsche Bank Wealth Management, earlier this year.

“This is not the time to be making huge macro calls. Investments are going to be made tactically and when targets are met, money should be taken off the table.”

Credit Suisse is among those who are big on the tactical deployment of ETFs. According to its Asia head of funds and ETFs, Rodolphe Larqué, the bank will launch a tactical fund recommendation list this year, consisting largely of ETFs. “[The list] will include the most appropriate ETFs to invest into our highest tactical conviction calls, backed by our research team,” Larqué tells Asian Private Banker.

“The ETFs identified for tactical trading may differ from the ones for strategic investing. For example, bid-ask spreads are more relevant for short-term investing, whereby management fees and taxation aspects are more relevant for strategic investing.”

One such tactical opportunity Asian discretionary managers have taken advantage of has been in the Japanese and European markets. In late January, the Bank of Japan announced the introduction of its new negative interest rate policy (quantitative and qualitative monetary easing, or QQE), reducing rates to -0.1% and committing cuts “further into negative territory if judged as necessary.”

And last month, European Central Bank chief, Mario Draghi, said that it was ready to “do its part”, hinting at another round of QE.

QE POSITIVE FOR ETFS

Sean Taylor, CIO Asia Pacific, Deutsche Bank Wealth Management

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A flurry of private banks share an optimistic view on the two developed markets, believing that the respective central bankers are ready to step in to stimulate economy when need be.

UBS Wealth Management noted in a January report that it was positive on the two markets and expects the Eurozone to register “superior” 8-12% earnings growth in the next 12 months. In late 2015, Deutsche Bank Wealth Management was specifically overweight on Japanese ETFs on the back of attractive valuations and improving corporate governance.

The ETFs identified for tactical trading may differ from the ones for strategic investing. For example, bidask spreads are more relevant for short-term investing, whereby management fees and taxation aspects are more relevant for strategic investing

Consequently, ETFs tracking the two markets have come under the spotlight as leading passive investments sold to private banks in Asia. According to db-x, Deutsche Bank’s ETF arm, USD-hedged ETFs with European and Japanese underliers have been the most popular trade in the last six months as discretionary managers took on tactical bets.

But exploiting easing markets are not the only opportunities for the deployment of passive vehicles to capture broad market exposures. Especially as layman investors

ETF

ETF ALLOCATION STRATEGY MIXED

Rodolphe Larqué, head of funds and ETFs, Credit Suisse Private Banking Asia Pacific

and talking media heads overreact to other inflection points, more and more potent buying points are emerging following correction, experts say.

“We may use ETFs in the form of index trackers to play short-term tactical moves, for example, when our indicators show that markets are oversold and may experience some rebound, irrespective of the index’s components,” notes Pascal Meilland, Indosuez Asia DPM head.

“In the current volatile environment driven mainly by investor sentiment, the use of ETFs to play tactical rebounds may be useful.”

Garth Bregman, head of discretionary portfolio management Asia, BNP Paribas Wealth Management

But when it comes to making strategic asset allocation with ETFs, industry views remain divided.

“We don’t use ETFs in our strategic allocation,” Meilland continues.

“We believe that active management – proper stock and sector selection – can deliver outperformance over the long-term.”

BNP Paribas Wealth Management’s Asia DPM head Garth Bregman felt the same in a conversation last year, when he said that more than three-quarters of the French private bank’s discretionary assets comprised direct cash stocks and bonds.

On the other hand, there are those who see benefits in allocating ETF assets.

Indeed, in addition to including them in the mix of allocation instruments, some are building portfolios made purely of ETFs. As a source from a US private bank shares with this publication, there was “an exceptional case” where a single client requested that the firm tailor for him a US$50 million ETF fund.

Credit Suisse head of portfolio solutions Tan Wei Mei adds that the bank also offers a discretionary mandate comprising just passive instruments such as ETFs. “For most European investors, they have found this solution efficient and it allows them to capture the market beta and benefit from the tactical asset allocation calls implemented based on our CIO house view,” she says.

“For Asian investors, most of them still prefer discretionary mandates using a mix of ETFs, mutual funds, direct stocks and bonds.”

One such pure ETF strategy that has taken hold elsewhere, but less so in Asia’s private wealth markets, is smart beta. Certain private banks, such as UBS Wealth Management, are already employing smart beta strategies through its high dividend yield discretionary mandates.

“Smart beta is perhaps most interesting in that it points out that there is such a thing as ‘unintelligent alpha’,” says Sean Cochran, UBS Wealth Management APAC head of portfolio specialists.

“Is a manager outperforming the index because of strong stock selection skills?

Or because of a style difference versus the benchmark? Alpha isn’t always telling the full picture when taken without further examination. We pay attention to the beta exposures we take on and we also reflect on what index construction implies when it comes to funds that are benchmarked to indices.”

USD-hedged ETFs with European and Japanese underliers have been the most popular trade in the last six months as discretionary managers took on tactical bets

Still, according to Blackrock research, the industry is still in “early days” for distributing and explaining smart-beta strategies to end-investors. While institutional investors have started using smart beta, and performances year-to-date have been strong, manufacturers believe there is still some work to be done before this part of the market reaches private banks in Asia.

Tan Wei Mei, head of portfolio solutions, Credit Suisse Private Banking Asia Pacific

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INDUSTRY

Eye On: The Middle East

This month, we take a look at some of the private banking activities in the Middle East, home to US$2.1 trillion in high net worth wealth.

A

s second-generation business owners grow increasingly concerned with the challenges of balancing the need for capital with the need for liquidity and structuring leadership transitions, there is an unparalleled opportunity for private banks in the Middle East to bolster their platforms. For instance, Bank of Singapore (BOS) and EFG have outlined plans to open new desks in Dubai.

Which products have been popular in the Middle East and how do you see this changing in 2016?

KC: In 2015, good quality fixed income bonds, structured products and short dated fixed maturity funds were among the popular products with HNWIs in Middle East.

We see a substantial disconnect between the weakness in financial markets so far in 2016 and the probability that global growth will remain in the 3.0-3.5% range of the past few years. Of course there are risks, related to US monetary policy, the oil price or the transition in the Chinese economy, but these have not changed much in the past couple of months.

We had been expecting 2016 to be a volatile year with broadly flat markets and, if anything, we see the recent market declines as an opportunity to increase exposure.

Equities – In fact, BOS’ asset allocation team has just turned positive on equities as indiscriminate selling is revealing some attractive valuations.

CL: We do not focus on specific products but take a broad portfolio view. We strive to bring a global and multi asset class oriented investment opportunity designed for our client base in the region. The framework to do that is our strategic asset allocation and the tactical tilts we apply within it, based on our views across nine different asset classes.

European equities – We have an overweight to continental Europe, because that is where corporate profitability has the greatest scope to recover.

High yield bonds – We have also added back to high yield and emerging market

20 asian private banker

Here, experts from Barclays, HSBC and BOS share their thoughts: Kirit Chauhan (KC), market head, Middle East, BOS Cedric Lizin (CL), head, Middle East and Africa, and head of business, Japan, Barclays Wealth and Investment Management Sobhi Tabbara (ST), global market head for global private banking, Middle East and North Africa, HSBC

bonds, where we see very attractive yields despite some risks.

Cash is king – We are still overweight on cash, with the aim of protecting the notional value of client portfolios in turbulent markets. In addition to the above, for clients in the region who require sophistication, we have been suggesting derivative based strategies to generate income.

ST: Over the last two years, equities, bonds, mutual funds have proved popular. Understandably, people have been repositioning their portfolios as they look to navigate the increased market volatility.

Cash, fixed income – In this sense, cash and fixed yielding products have become popular, which reflects a shift from growth to value.

Hedge funds – Another trend is the increased appetite for hedge funds, which are less vulnerable to market volatility.

Which parts of the Middle East show the most potential for private banking and why?

KC: The UAE is our core market at the moment, but we are also looking at other GCC countries as a growth market, not only within the Non-resident Indian segment.

Many of the high net worth individuals in this region are entrepreneurs with keen interest and strong links in other Asian markets.

ST: Total household wealth in the Middle East is more than US$4 trillion. Even with a lower oil price, wealth in the GCC is significant. While Qatar has the highest wealth per person, Saudi Arabia and the UAE are

the region’s largest markets. Globally, the region has the largest share of private wealth booked offshore, which is where we can offer clients bespoke investment ideas.

What will you be doing differently for this segment, given the falling oil prices, expected economic slowdown in China?

CL: Our investment principles are based on diversification, which is the only reliable way of reducing risk without giving up expected returns. Our base recommendation to clients in the region is to always maintain a globally asset allocated portfolio that has greater resilience to different environments.

ST: Wealth in the Middle East is significant.

Against the backdrop of a lower oil price, the region’s wealth issues become more complex. The objective becomes preserving capital, rather than taking unnecessary risks, and keeping enough cash available.

This is exactly where ideas tailored to a specific client’s needs become most important.

How many relationship managers do you have on your Middle East desk?

KC: We have about 50 staff supporting our Middle East office, among which 26 of them are relationship managers.

CL: We have teams of bankers focused on the MENA market, based out of Dubai International Financial Centre as well as in London and Geneva.The team... is supported by the experience and expertise of over 130 investment professionals located globally across nine strategic hubs.

TECHNOLOGY

Private banks to fintechs – come play in my sandbox Credit Suisse Private Banking Asia and UBS Wealth Management have set up the region’s first private banking-only innovation labs in their search for premium financial technology (fintech) opportunities. But is this simply a kneejerk response to the recent wave of fintechs sweeping through the industry? Asian Private Banker steps into their sandbox to find out.

F

rom afar, it looks like a factory, with few clues as to its contents.

Inside, a sprawling flat floor plan plays host to over 100 people who are either pacing the floors in their black blazers and Converse sneakers or glued to screen monitors, fervently muttering codes under their breaths.

The walls surrounding them are polkadotted with colourful Postits, idiosyncratic of many startups that use the sticky squares as a tool for collaboration and brainstorming. Red and aluminium-foiled pipes run along the ceilings. A cemented staircase leading to a glass-cubed office in the middle of the floor creates a makeshift mezzanine. And encased in their air-conditioned cocoon are banking and tech experts eager to flesh out new designs and ideas.

In short, the factory turns out to be a private banking innovation lab, and the epitome of a banker-startup collision looking to produce the next big thing in the world of finance.

TICKING THE “INNOVATION” BOX

Big banks say that these innovation labs are a testing kitchen for

various products that will ultimately roll out under an institution’s branding machine.

“Bringing digital business leaders together with technologists under one roof in a creative environment has been and will be a critical factor in improving the quality and speed to market of our offerings,” says Francois Monnet, then COO at Credit Suisse Private Banking Asia Pacific and now the bank’s head of Greater China.

The Swiss major’s innovation hub sits in the middle of the Light Industry Factory Complex mentioned above, along Singapore’s Serangoon North Avenue. Around 240 members, 90 of which are Credit Suisse specialist staff, work with 150 external partners under one roof.

The innovation labs represent physical or tangible manifestations of their company cultures, they say, one that they can boast to their clients.

“The innovation lab was set up to help our clients understand investments, carry out suitability testing and carry out workshops with external vendors,” says UBS Wealth Management’s chief digital officer, Ketan Samani.

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TECHNOLOGY

Francois Monnet, Credit Suisse Private Banking’s head of Greater China, at the bank’s Singapore inovation lab

Unlike Credit Suisse, UBS chose to locate its innovation lab in a building adjacent to the UBS Business University at Kheam Hock Road, Singapore. One room is used for clients to discuss their ideas while the other is reserved for brainstorming.

Since 2008, by some accounts, global investment in fintech has tripled to nearly US$3 billion, and an Accenture report earlier this year forecast that this will again nearly triple to US$8 billion by 2018. To date, Singapore has an estimated 90 fintechs compared to Hong Kong’s 50, which many attribute to the city state government’s more aggressive promotion of the sector.

However, Credit Suisse and UBS are the only big banks in Asia that are directing such efforts at private banking first; many other similar ventures typically prioritise the retail sector. Their hubs opened in March and June 2015 respectively. Other major banks like DBS and Citi Bank have had these sandboxes for a few years now, with the likes of Nomura, HSBC, Standard Chartered and ANZ Bank opening theirs last year.

“We will also use the lab to look at startups that help disrupt the financial services vertically,” Samani adds.

Monnet agrees, adding that while the success of the lab should be based on the quality and impact of the products brought to the market, the fintech space should very much be on a private bank’s radar.

“Fintech is a topic of great interest to financial institutions as it is widely accepted that technology will continue to disrupt how financial services are delivered to clients. Many financial institutions have opened labs in Singapore recently and this is positive for the industry and the fintech sector,” he notes.

SUBSTANCE OVER FORM

While hefty investments are required to build and buy infrastructure and technology for such innovation labs – so as to create a Silicon Valley-like atmosphere and provide a catalyst for creative thinking – naysayers believe there is yet nothing to prove sound return on investment (ROI).

Unsurprisingly, Monnet disagrees, pointing to the fact that two core products are currently being tweaked and finetuned; these will focus on client facing issues and the relationship manager workplace.

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“Our plans for 2016 are well established, with a strong focus on building a more sophisticated advisory capability into the offerings for eligible clients and to further expand the reach of our products to clients across the region,” he says.

Samani also adds that in UBS’ lab, electronic client onboarding has been the focus: “How can we help clients with information that is relevant and in a paperless process - including right from onboarding the client to regulations to sales and acquisition and market knowledge? This is where we are now.”

Charles Ng, director at the Hong Kong government’s InvestHK department, says that private banks need to look at innovation labs with a different mindset.

“While the ROI and risk levels are different to the current investment models, the upside in investing into the right innovative, globally scalable and high impact startups can be extremely rewarding,” he says.

A SANDBOX FOR UNICORNS

It is clear that banks, particularly private banks, will continue to experiment with ways to keep pace with fintechs through various catalytic strategies, be it innovation labs, accelerator programmes or fintech challenges. As a result, more innovation labs will appear, Samani says.

“Currently, private banks are at differing stages of maturity in terms of technology adoption. Therefore, you will see more innovation labs, centres or partnerships due to the disruption by start-ups and fintech industry,” he continues.

However as fintechs navigate through the new age, they will face regulatory hurdles and high costs of going to market. High costs resulting from keeping compliant with regulation can hurt fintechs that are already running on venture capital. Also, with regulatory bodies still dealing with ways to classify portfolio advisory services through automated algorithms, the adoption of robo-advisers will also be slow. Eventually, fintechs will flock to such private banking sandboxes to stay afloat and to say relevant, Monnet concludes.

“The biggest barrier for many fintech start-ups is not innovation or execution capability, but the regulatory complexity and other high costs of going to market; it is much more attractive to partner with an established industry participant, like Credit Suisse,” he says.

Ng agrees, noting that there has been an influx of Asian ultra and high net worth individuals returning from the West, adding to the innovation landscape in Asia.

“In the coming years we expect to see more banks jump on the innovation lab/fintech journey,” says the Hong Kong government official.

“They have a lot to gain in embracing the massive change being brought about by fintech entrepreneurs who can help them become more competitive and offer unique value added products and services complementary to their existing offerings.”

And as fintechs find new homes in these innovation labs, private banks are no doubt hoping that some will achieve the fabled “unicorn” status, which are startups worth over US$1 billion. The resulting returns to these institutions in the long term, may be nothing short of mystical.

PE O PL E MO V ES

MOVERS & SHAKERS

Movers & Shakers is a monthly compilation of the private banking industry’s key talent moves.

For the full version of Movers & Shakers, login or register at:

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apb.news/rs2016

RISING STARS, SINGAPORE 2016 07 APRIL 2016 @ THE FULLERTON HOTEL, SINGAPORE PARTNERS

apb.news/iashk16

INVESTMENT ADVISORY SUMMIT, HONG KONG 2016 11 MAY 2016 @ THE CONRAD HOTEL, HONG KONG PARTNERS

apb.news/iassg16

INVESTMENT ADVISORY SUMMIT, SINGAPORE 2016 17 MAY 2016 @ THE FULLERTON HOTEL, SINGAPORE PARTNERS

For further information, please contact: stacey.wong@asianprivatebanker.com (+852 2529 1977)

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