Private bank profits hinge on operational efficiency

Whether it’s a huge European business expanding in Asia or locally based wealth managers ramping up, the entire industry is embroiled in a high-profile talent war and chase after the region’s budding multi-millionaires.

Behind announcements about plans to double or triple teams of relationship managers, however, private banks are quietly suffering. The global financial crisis has put a temporary end to the level of trading flows and booked deals, with revenues still well below the 2007 peak.

In the gold rush up to 2007, private banks operating out of Singapore and Hong Kong scrambled to grow as quickly as possible. They raced to launch products, but delayed infrastructure projects in favour of front-office hiring.

This pattern has continued as more banks seek to launch or expand their wealth management businesses, and this raises serious questions about the viability of many private banks’ business models.

These aren’t just issues for recent entrants and local mid-sized players. They apply to industry leaders such as Credit Suisse Private Banking.

“We weathered the Lehman storm and that helped us attract new clients, but we also face similar operational constraints,” says Thomas Heeb, director of operations at CSPB in Singapore. “Straight-through processing levels are not very high in Asia.”

Omgeo, provider of middle- and back-office technology solutions such as pre-trade confirmation-matching, organised a seminar in Singapore recently among global and local private-banking COOs to discuss challenges facing the industry.

James Drumm, regional managing director at Omgeo, says: “Everyone knows that private banks require the technology to build a sustainable business model, one that allows them to make sense of their costs.

“But it’s difficult for senior management to forecast their operational budgets when you have volatile markets and fluctuating trading volumes. They need processes that can effectively manage rising or falling trading volumes.”

Leadership the missing ingredient
One of the most important means of success is getting private bank CEOs to pay more attention to operations and technology. For Western institutions, an additional challenge is for headquarters to have a better appreciation of the differences in doing business in Asia, and having a system and process that is adaptable. Easier said than done.

Within regional offices, salespeople and relationship managers have always driven business. “Hiring RMs has been the proven strategy for growth in Asia,” says Shiu Kai-wing, senior manager at PricewaterhouseCoopers Private Banking. “There is a growing recognition that banks need the right technology to support this growth, and that this is something that’s been overlooked over the past five-to-10 years.”

Because private banking in Asia is more transactional than advisory, RMs often demand support for churning out hot products – which often abruptly stop selling later. The ‘accumulator’ structured products craze of the mid-2000s is a good example.

Too often, however, this leads to a patchwork of quick-fix processes, often manual, at the expense of future efficiency.

“It’s not just finding efficiency, but getting quality processing that is straight-through,” says Matthias Schütz, regional managing director at Avaloq Group, a provider of integrated banking software that, in Asia-Pacific, is predominantly used by private banks.

Having an integrated system is of particular help in Asia where turnover, even among CEOs, is high, and new hires don’t understand how or why a jerry-rigged jumble of systems came to be.

“The better the efficiency, the higher your quality of service, and the easier it is to retain your people,” says Schütz. “These issues are just as important as bringing down costs.”

Although more banks are keen to build or buy some form of integrated system, implementing such ambitious projects can’t be left on autopilot by senior management.

“CEOs are busy looking after big clients, but they need to understand that platform change is like life insurance,” says Mario Bassi, managing director at Solution Providers, a consulting firm.

Adapting to Asian markets
But there is no one-size-fits-all platform. Moreover, integrated systems such as Avaloq’s were developed for the European market, where time-to-market for new products is less important.

The trading-oriented nature of Asian clients, and their preference for building rather than preserving wealth, creates a different dynamic.

Yes, private banks need the efficiency of an automated, front-to-back platform. But RMs will continue to demand the flexibility to allow for changing gears to meet market trends and to deliver best-of-breed products.

Vendors have become more attuned to this, yet there is a limit to how quickly a system provider, whether outsourced or internal, can make the necessary tweaks.

This may explain why, according to a recent PwC survey of Asia-based COOs at private banks, only 44% rated their systems as adequate for doing business.

The biggest banks, such as Credit Suisse, are able to maintain a mix of both a core, integrated platform, but with sufficient flexibility to add tailored additions.

“Operations is about standardisation and efficiency, while the front-office is about helping the client, no matter how,” says CSPB’s Heeb. “We’re between those extremes. The front office is happy if it has someone in the back who will listen to their problems and come up with solutions.

“If you just come out and say ‘no’, because the solution goes against standardisation, you create a disconnect that will be very hard to repair. Relationships are very important between the front and the back office.”

This may seem like common sense, but the reality at many private banks is different, says PwC’s Shiu. “People in the back are terrified of the front office,” he says, noting that few of these staff have the training or experience to approach the big-wigs in the corner office confidently.

And if RMs think of ops folk as mere compliance-obsessed kill-joys, the internal relationship really breaks down.

This impoverished state of affairs emerges at banks where there hasn’t been sufficient attention or budget given to the bank-office. But it no longer works, not just because banks are more ambitious, but because of the new wave of regulatory change.

Meeting the regulatory challenge
Regulation around the sale of investment products is a huge issue for operations chiefs. Those banks with a centralised platform will find it easier to address these changes, but everyone faces a period of more work and discipline. Hopefully the present regulatory tsunami will, once waters recede, leave the industry with better defined standards for best practices.

It’s a tumultuous but also exciting time for private banks in Asia. Although it’s easy to bemoan the transactional nature of the business compared with Europe, that’s the flip-side is the dynamism that infuses the region and its entrepreneurs.

But it requires private banks to gear their systems to be able to meet sudden changes in the business or regulatory climate. An integrated, STP base is more likely to be adaptable in a sustained way than the quilt of quick-fixes that define many banks today.

As private banks in Asia look to establish the right platform and connectivity, they need to do so while being led from the top. To establish the platform that is both integrated and flexible, one that maximises the gains from the current hiring expansion, requires CEOs to take the lead.

This article is sponsored by Omgeo and appeared in the November edition of AsianInvestor magazine.