ZURICH (Reuters) - Two years after the financial crisis wiped out $12 trillion of wealth, the U.S. and European recoveries are stuttering, so hard-pressed private banks are turning to the wealthy of Asia for growth.
The richest people still live in the West, but scores of new entrepreneurs in emerging markets are closing the gap. China now ranks No.3 in the world with around 450,000 millionaires at the end of 2009, data from the Boston Consulting Group showed.
Last year, the wealth of individuals with investable assets of over $1 million increased by 30.9 percent in Asia-Pacific to $9.7 trillion, erasing the losses of 2008, the Capgemini-Merrill Lynch Asia-Pacific Wealth report showed.
Asset-gathering in Asia could help address private banks’ falling profitability and replace some of the western clients pushed out of the superwealthy bracket by their 2008 losses, experts say.
“The focus on Asia has accelerated in the last few months, and economic conditions in the United States and Europe are a big part of that,” said Catherine Tillotson, head of research at wealth management specialists Scorpio Partnership.
“Independently the Asian market has been growing and developing for a long time, and there’s a lot of wealth being created there,” Tillotson said.
Rising wealth in Asia and the bitter war to hire top talent in the region is likely to be a prominent theme for private bankers speaking at the Reuters Global Private Banking Summit, which kicks off on October 4 in Geneva, Singapore and New York.
Singapore’s rising allure as a wealth management center is putting pressure on rival Switzerland — already suffering from controversy over bank secrecy conventions and a U.S. tax fraud investigation into its biggest bank UBS UBSN.VX (UBS.N).
“Historically Swiss secrecy and banking in Switzerland came at a price. But the cost may not be justifiable going forward,” said Tarek Khlat, Chief Executive Officer of boutique wealth management advisor Crossbridge Capital. “Singapore is efficient, with a robust platform at a fair cost.”
Singapore is drawing boutique funds, advisory firms and brokerages with its light-touch regulation, even as Switzerland gets tougher on bank secrecy.
In September, Morgan Stanley (MS.N) set private banking growth in Asia as a priority and Julius Baer BAER.VX said it could double Asian assets in five years.
Meanwhile Credit Suisse CSGN.VX(CS.N) said net new assets from Asia could grow at more than 20 percent a year and Merrill Lynch (BAC.N) hired its new Asia-Pacific wealth management chief from rival UBS.
“When you see what is going on in Singapore, in Hong Kong, in China, in India, then you see that the economy is going in a way where the people all of a sudden can afford goods they could not afford a couple of years ago,” said Hans Nuetzi, Chief Executive Officer of Swiss private bank Clariden Leu.
“Growth has just started, when you go to another revenue level you have a huge potential of wealth creation,” said Nuetzi, whose bank manages nearly $100 billion in assets.
Douglas Wurth, who heads the International Private Bank at JP Morgan, told a conference this week there is a “merry-go-round among relationship managers” in Asia as banks look to lure talent for growth and smaller private banks set up shop in Singapore and Hong Kong.
Wealthy clients burned by the credit crisis now want a broader service, simpler products and transparent pricing, and will shop around to get what they want.
“People were burned in 2008. With all of their non-correlated funds in the alternatives space, and with all the portfolio management and risk management tools they had, it didn’t prepare them for the losses of September 2008,” said Bruce Holley, a senior partner in Boston Consulting Group’s U.S. wealth and asset management practice.
The level of clients’ annoyance varies according to the extent of the client’s individual losses and whether the investor subsequently recovered.
“Clients are still very angry with their providers, or if not angry just not as happy. The challenge is how will banks start to allay the anger of their clientele,” Holley said.
After the Lehman Brothers collapse brought the issue of counterparty risk to the fore, wealth managers’ profit margins were squeezed as clients pulled back from more complex and expensive structured products.
In Switzerland, still the world’s biggest offshore wealth management center, average revenue margins had fallen to 84 basis points by the end of 2009 from 90 a year earlier and around 100 basis points or more in the pre-crisis boom years of wealth management, data from McKinsey showed.
But as margins narrow and a combination of low interest rates and choppy equities markets depress investment returns, structured products are slowly regaining favor as hedging tools that can be tailored to client needs.
“We see the current desire to hold cash and the little interest in holding complex structures as a short-term situation. We expect to see a trend reversal on that side,” said Rolf Boegli, head of Private Banking Switzerland at Switzerland’s second biggest bank, Credit Suisse.
These could also get a boost from the trend toward emerging markets sovereign and corporate debt as investors seek access to fast growing Asian and Latin American economies while limiting exposure to those markets’ more risky and volatile equities.
Lipper data show Swiss mutual fund investments in emerging markets debt has increased more than sixfold since equities markets bottomed out in March 2009, and asset managers say the trend is even higher among the very wealthy.
Yet, despite the appetite for bigger yields, this time around clients expect products to be leaner and easier to understand.
“Clients are looking for more transparency rather than more simplicity,” said Scoprio’s Tillotson. “They want professional advice and the right solutions to back up that advice.”
Additional reporting by Joe Giannone in New York and Kevin Lim in Singapore; Editing by Andrew Callus