GENEVA (Reuters) - Private bankers are rallying behind the one-bank model of cross-selling investment banking services, insisting that it is essential to the pursuit of richer rewards from the wealthiest clients.
Activist shareholder Knight Vinke has called for UBS UBSN.VX to hive off its investment bank, saying it poses risks for the Swiss bank’s wealth management arm, but the proposal found few followers among private bankers attending this week’s Reuters Global Wealth Management Summit in Geneva.
The call to split is an attack on how investment banks are increasingly trying to sell their capital markets expertise through their wealth management divisions, ramping up sophisticated and tailor-made products and services to win more business from existing relationships and increase referrals between the two operations.
The two cultures seeking to work together couldn’t be more different, however. Investment bankers are typically called on to close transactions quickly and have little patience for the delicacies of private banking, where it can take years to forge relationships to manage clients’ money.
But the unification of these disparate cultures is seen as the holy grail of universal banking and key to winning the most desirable clients, usually defined as those with more than $50 million to bank.
“When the one-bank solution does work at the highest echelons it can be spectacular,” said Sebastian Dovey, managing partner of London-based wealth consultancy Scorpio Partnership. “But it is a bit like Halley’s Comet: it does not come round very often.”
One example of the benefits is thought to be Thai billionaire Dhanin Chearavanont’s $9.4 billion purchase of a 15.6 percent stake in Chinese insurer Ping An (601318.SS). Sources told Reuters in April that Chearavanont’s private bank, UBS UBSN.VX, arranged a complex financing package for the deal.
Markets such as the Middle East, Asia and Latin America, where heady economic growth has fuelled a rapid rise in very wealthy entrepreneurs, are fertile ground for private bankers.
“Looking at it through the angle of the wealth management franchise, you will find me being a very explicit advocate for the investment banking services,” said UBS’s UBSN.VX private banking head Juerg Zeltner at the Reuters summit.
“Especially if you look in emerging markets like Asia, where you first need to develop capital markets - and that is usually done by investment banks.”
Strict client secrecy laws prevented Zeltner from commenting on whether UBS was involved in the Ping An transaction.
A study published by Boston Consulting Group (BCG) last month said that so-called ultra high net worth clients held about 5.5 percent ($7.5 trillion) of global private wealth last year.
The margins on business with such customers are lower than with those outside the top echelon, but the segment remains highly lucrative and is growing fast. BCG’s study estimates that clients with more than $100 million at their disposal will hold a total of $11.6 trillion by 2017.
“As for the rumor banks may spin off their investment banks, I don’t think that’s a serious approach,” former Deutsche Bank (DBKGn.DE) Chief Executive Josef Ackermann said at the summit. “You need the investment bank to add value to the other businesses: you cannot be in private banking without having your own investment banking products.”
At big U.S. banks such as Citigroup (C.N), the private banking operation can seem little more than a footnote because of its relatively small size against the remainder of the group.
But it’s the other way round at Swiss banks Credit Suisse CSGN.VX, which started trying to align investment banking with wealthy clients in 2005, and UBS, which began several years later. Both are among the world’s largest wealth managers and are seen by many as the litmus test for the wider industry.
For all the advantages, however, the one-bank approach does bring significant dangers.
The sharing of deal revenue is one tricky area, with the two sides left squabbling over who generated what.
But the biggest risk is that conflicts of interest may arise when acquiring new business. If not contained, these could easily threaten a private bank’s role as a trusted adviser.
“The one-bank model does need to build in Chinese walls that are not paper thin,” Dovey said. Follow Reuters Summits on Twitter @Reuters_Summits
Editing by David Goodman