Feeding an appetite for innovation

The aggressive growth strategy pursued in recent years by international private banks in Asia, aimed at capturing a portion of the region’s rapidly expanding wealth, is well illustrated by BNP Paribas Private Bank. Having established its wealth management businesses in Hong Kong and Singapore over four decades ago, in the past five years the French firm doubled its staff to 650 people, opened new onshore offices in India, China and Taiwan, and tripled its assets under management from $10bn, at the end of 2002, to $30bn at the end of 2007. Although the three new locations have all contributed to the firm’s expansion, with the Indian operation increasing its assets to $1.2bn from $250m in 2004, the large majority of new assets were sourced from Singapore, the bank’s regional headquarters, and Hong Kong, explains Michel Longhini, CEO Asia at BNP Paribas Private Bank. These two international hubs today account for over 85 per cent of the private bank’s total assets under management. “The growth of Hong Kong and Singapore will continue to be extremely strong, but in terms of size, potential, and onshore market India, China and Taiwan are really the future of the private banking in Asia.” Adapting to investors’ needs But to succeed in the competitive and crowded Asian market, foreign private banks need to adapt their service and product delivery models to meet investors’ needs and expectations. Most Asian millionaires are first or second generation rich, they are young and want to be closely involved in the management of their own money. “Around 90 per cent of our clients are businessmen,” says Mr Longhini. “Having built their wealth with their own means, they tend to believe that they can be as successful when investing in markets. This often turns out to be true; it is impressive what investors can achieve, with the private bankers’ help. “They also like to bargain on the price of the investment. That is part of the traditional mentality.” Investors are on average very sophisticated, have a developed trading attitude, and have a deep knowledge of technical instruments. The use of derivatives as a way to optimise investments is extremely common, not only in the private banking world, but also in the affluent type of solutions proposed by local banks, even to optimise the yield on deposits, explains Mr Longhini. “Investors in Asia have a set of skills, sophistication and understanding of these types of instruments which on average is much higher than what we find in Europe.” This explains the popularity of structured products in Singapore and Hong Kong. “When you know the markets and you are quite active, as are many of our clients, structured products are an easy way to play a certain idea, or to take advantage of the volatility of the market, or to get a better yield on your investments or to gain capital gain.” Structured products can be extremely conservative and can be extremely aggressive. “We have clients who invest only in capital guarantee products and clients who ask for leveraged structured products which increase the risk very substantially,” explains Mr Longhini. While in China structured products cannot be used yet, new regulation in India has now opened the market to these instruments. “The reputation of BNP Paribas [in the derivative area] is extremely strong and it is a very positive point for us, but we are in open architecture and any of the structured notes we do is in the best interest of our clients,” states Mr Longhini. In Hong Kong and Singapore the product range is very international. “Open architecture is an absolute standard; you need to have a very strong selection and validation process.” In a prevalently advisory environment like the Asian market, looking for the best solutions in each asset class implies an approach which is even more systematic, he says. In addition to the distribution agreements that the French bank has in Europe, a few local fund companies are also employed in Asia, although BNP Investment Partners remains the main provider in the mutual funds and hedge funds arena. “We are continuously sourcing new ideas and new products,” he says. In fact, this continuous research to launch new ideas may be partly encouraged by the fact that, as Mr Longhini says, there is a clear premium for innovation in Asia. “Clients are very investment savvy and quick to react to investment opportunities. I would say that the appetite for new products is greater in Asia than in Europe.” New generation products, such as equity derivatives, often debut a few months earlier in Asia than in Europe, he says. A lot of potential growth is in the mutual fund area. “One of the major risks with Asian investors, who tend to be extremely dynamic in their asset allocation, is that when an asset class is doing very well they tend to concentrate a lot of their investments into it. This is the case with equities. Our constant target is to convince our clients to use more mutual funds and funds of hedge funds to diversify their portfolios.” Broking or private banking? Unlike their European counterparts, private banks in Asia cannot rely on the predictable flow of revenues coming from management fees. As almost all business is managed on an advisory basis, transaction fees represent a large component of a bank’s revenues. And this brings with it the risk of product push and portfolio churning. “In Asia, portfolio churning is certainly higher,” says Mr Longhini, “but it is part of your role as a private bank to manage and control this type of risk. Although it may look like it, in Asia private banking is not brokerage.” At the French bank, the discretionary part represents only 5 per cent of total assets; the remainder is on an advisory basis. But 40-50 per cent of the total revenue still comes from deposit spreads and margin on credit – which is more utilised in Asia than elsewhere and lots of investments are leveraged – as well as management fees in discretionary portfolios, he says. “The goal of a private bank is to increase assets under management and build long-term relationships with your clients. If the clients feel that you are just churning the portfolio they will go to another bank.” The competition resulting from the high average number of banks per client, 3.5 in Asia against 2.5 in Europe, keeps banks on their toes. Whether private bankers become professional product pushers or not can depend very much on the structure of their salary. Some banks may have very strictly formula-based bonuses, but at BNP Paribas packages are not solely based on revenue; this also plays a strong role in keeping front office turnover low, states Mr Longhini. “We ensure packages take into account parameters such as relationship managers’ team spirit, their ability to give quality advice, build quality relationships with their clientele and keep a book of clients over a period of years.” Low turnover of private bankers helps to retain clients, who tend to be very loyal to the BNP Paribas brand, he says. Product specialists, investment counsellors and management, not only the private banker, interface the clients and help forge the relationship. “The stability of the relationship is shown by the long term relationships we form with clients that span generations. And when relationship managers leave, the majority of assets stay with the bank.” TOUGH FOR LATECOMERS Increased competition, rampant poaching, soaring salaries and bonuses have raised service quality standards tremendously, and pose very high barriers to entry, believes Mr Longhini. “I believe that the latecomers in this market may find it quite difficult to succeed.” The need to match demanding and sophisticated clients with highly skilled private bankers certainly exacerbates the war for talent and the need to train new relationship managers. This has spurred many major banks to create their own training centres in Singapore. The number of people who are sufficiently trained and with some experience is growing, says Mr Longhini, admitting that the pace of this growth is certainly not enough. A number of good candidates are coming from Europe or other parts of the world to serve an increasing number of European or Middle Eastern clients that the region is attracting, he says. But currently the large majority of the bank’s clients are Asian and this poses constraint in terms of the language skills required from a banker. The scarce pool of talent may be an old story but it is now driving some banks to make some mistakes and hire less experienced people as private bankers. “We hired a few people from related areas, but we tend to prefer to hire those with experience in the private banking area. I don’t believe that you can take somebody from another industry and make him a good private banker overnight.”

Michel Longhini, BNP Paribas Private bank