SINGAPORE Asia's private banking sector will consolidate further as the costs of serving wealthy clients make the business profitable for only the big firms, the head of Asia-Pacific private banking at Credit Suisse Group AG said on Monday.
With a cost-to-income ratio of at least 80 percent, most private banks are losing money even as the ranks of the rich explode in fast-growing Asia, Francesco de Ferrari told the Reuters Wealth Management Summit in Singapore.
The ratio, a key measure of profitability, shows private banks spend 80 cents on costs including salaries, office space and compliance for every dollar they bring in from clients.
"The industry at the current cost-to-income ratio is not really sustainable," de Ferrari said. "So we will see a lot more consolidation in the private banking industry over the next three to five years in Asia for sure."
The shakeup in the region has accelerated.
Significant deals include Bank of America Merrill Lynch sold its overseas wealth management business to Switzerland's Julius Baer Gruppe AG last year, and HSBC Holdings Plc sold its private bank in Japan to Credit Suisse in December 2011.
Standard Chartered Plc recently agreed to buy the Indian wealth management unit of Morgan Stanley, helping the British bank expand its private banking business in Asia's third-largest economy.
Asia has about 3.5 million people who are millionaires, many of whose fortunes are relatively new and tied to family businesses.
Their need for a variety of products and services means banks must have investment and private banking operations that "are very focused on partnering together to service these clients," de Ferrari said.
"It will be very hard to approach them with traditional wealth management solutions," he said. "They are looking for what we call private-investment banking type of services."
Credit Suisse tracks how much business the private bank brings to the investment bank, he said. The target is for this "collaboration revenue" to be 18-20 percent of overall group's net revenue.
In Asia, de Ferrari said, collaboration revenue leapt 125 percent in 2012 and is growing at more or less the same pace this year because clients in Asia for Credit Suisse's private and investment arms are often the same.
"The private bank in Asia is profitable. We have been growing extremely well over the past two years," de Ferrari said, declining to discuss profit figures.
Credit Suisse grew its asset base in Asia by 22 percent to 107 billion Swiss francs ($111.5 billion) last year. That rose to 112 billion Swiss francs in the first quarter of this year.
"Right now we are focused on really scaling the business in the five booking areas - Singapore, Hong Kong, Australia, Japan and Switzerland," he said.
The entire industry is now more selective with acquisitions, he said, but Credit Suisse would consider moves to expand its onshore network if there were suitable opportunities in places where Credit Suisse wants to grow, including Indonesia.
"We are growing north of 20 billion (Swiss francs) a year," he said. "When you can generate organic growth in your business of that size, you look at doing an acquisition very carefully because there are not a lot of players of that size." ($1 = 0.9596 Swiss francs)
(Editing by Daniel Magnowski)