Private Banking Sector Rebounds
Monday, July 19, 2010

The wealth management industry is undergoing a rebound as private banking assets under management recovered strongly in 2009, although the industry is still walking something of a tightrope with wealthy clients reluctant to invest new money.

Scorpio Partnership’s 8th annual Global Private Banking KPI Benchmark shows that assets under management at private banks surged by a median of 17% in 2009 to recover lost ground from the previous year. The global wealth industry now manages USD16.5 trillion in high-new-worth (HNW) assets, compared to USD14.5 trillion last year.

However, Scorpio warns that the health of the industry is "far from good," citing efficiency and profitability concerns among many of the wealth management institutions tracked in this year’s assessment, which numbered almost 230. Should this trend continue, the report concludes that "the success of many players is in the balance."

Scorpio's Key Performance Indicator (KPI) of profitability has dropped by a median of -35% from the previous year’s level. Meanwhile, the cost to income ratios have risen to an average 78.2% continuing a worrying trend from the previous year where most banks faced a decline in efficiency. Crucially, net new money data this year highlights an median inflow across all institutions of USD900m for the financial year 2009. This represents a decline of -60% from last year’s data.

“The wealth management engine is still misfiring for many," said Sebastian Dovey, a managing partner at Scorpio Partnership. "While, for virtually all banks, in terms of attracting new business it has been a case of Net No Money. Significantly, our global HNW data shows there are strong signs of wealth creation even in these complex markets and yet new clients are still holding back from opening accounts with the industry."

The study shows that the top 10 private banking asset managers now collectively manage USD8.733 trillion in HNW assets, representing 64% of the total sector of fee-based managed assets today, while the top 20 manage USD10.451 trillion, representing 77% of the market, up from USD9.2 trillion in the previous year.

Within the top 10, Bank of America still leads the pack with USD1.74 trillion of assets under management. Scorpio notes that UBS has also managed to hold its own in spite of continuing well-publicised difficulties during 2009, taking second place with just under USD1.6 trillion of assets under management. Across the broader range of KPI measures, Scorpio says that the Swiss bank is performing relatively strongly compared to its peers and "appears relatively healthy". Morgan Stanley experienced a notable surge, up four places to third spot with just over 1.5 trillion of assets under management, following its deal with Citibank for the Smith Barney business.

A new entrant in this year's top ten is Royal Bank of Canada following an improved level of transparency in its financial reporting for global private banking. Swiss private bank Pictet & Cie returns to the top 10 after two years outside it. Notably, to be in the top 20 ranking by AUM a private bank must now have in excess of USD135bn of assets under fee-based management.

“The premier league of wealth managers have virtually all benefited from strong asset management performance during the past financial year with most in the top 20 posting double digit asset growth," remarked Stephen Wall, director at Scorpio Partnership. "Banks outside the top 100 are starting to show signs of prolonged suffering as NNM and real profits are in decline."

While the study says that the wealth industry sector has reason to feel somewhat positive, the industry has not performed well recently when set against the MSCI World Index benchmark. The MSCI World Index has risen from a year-to-year 2008 low of -42.1% to a year-to-year 2009 figure of 27.0%. This compares with the wealth management industry returns of -15.7% and 17.0% respectively in the same period.

The latest Scorpio findings also dispel the myth that the wealth management industry is a fragmented industry consisting of many boutique investment houses, when in fact it is highly concentrated, with the top five operators commanding 41.4% of the currently managed market.

“We feel it is time the fashion to retain the cottage industry perception is laid to rest," commented Catherine Tillotson, a Scorpio managing partner. "The benchmark data points clearly toward the fact that the industry can, and must, take on the mantle of being the market leader of industrially managing the assets of the world’s wealthiest. Those businesses and professionals that cling on to the past are likely to be marginalized rapidly and the current benchmark data suggests their days are numbered."