Private banking: It’s time for action
The past few years have been challenging for private banking. But the bell for change is ringing due to market volatility, cost pressure and lower profit margins. According to an annual KPMG study named “Performance through focus” on seizing the global private banking opportunity, a clear vision of client and service development is a key to success. Cost control is an important factor too, but it is not enough for a private bank to outclass its competitors.
KPMG conducted in-depth interviews with more than 80 board-level executives at private banks from Europe (Austria, Switzerland and Luxembourg) and Asia (Hong Kong and Singapore). In Luxembourg, 26 CEOs have been interviewed. Stanislas Chambourdon is Partner at KPMG Luxembourg.
He says, “With pressure on interest margins and commission, is the only way to achieve better results to reduce costs? This was a main focus of the CEOs in the interviews we conducted. It is indeed a starting point, but not enough to increase your profit margin in the future and for the longer term”.
According to the KPMG survey, cost control is only half of the equation. The time has come for a greater emphasis on revenue enhancement. The financial crisis has clearly demonstrated one thing: banks that lack a clear vision of their existing and target clients are likely to suffer. 85% of bankers in Luxembourg see client segmentation change as necessary in light of the growing regulation.
Asian financial centres come out second with 64% of bankers making that statement. Figures from the Austrian and Swiss financial centres look very different (20% and 25%, respectively). Alain Piquet is Partner, Head of Advisory at KPMG Luxembourg. He underlines that in the local private banking arena, you find two sorts of players.
“You have the niche players, which are very profitable banks. They often want to serve clients in their country of origin via a local branch and have their hub in Luxembourg for all the centralised functions.
The other ones are called the integrated hybrids. These are the large banks that offer a wider range of activities, including private banking. They have the potential to link all their activities together and provide clients with a ‘one-stop shop’ solution. The question is how they can organise themselves in order to serve the different segments of their clientele.”
A change of mentality is needed
“Products and services” is another area of focus in the survey. It is a fact that clients have become more precise in the products and services they want. Asian clients demand a more integrated bank service offering than their European counterparts. Asian banks provide insurance, commodities and real estate offerings. Swiss interviewees focus on wealth management and asset management. 88% of Luxembourgish banks provide financial engineering. This is significantly higher than the European average of 67%.
Stanislas Chambourdon believes that, “Luxembourg is well ahead of other countries in financial engineering. To raise your market share, you need to tap into this knowledge and be ready to hire new skills. You need, for instance, tax specialists of certain key countries that have more than a general knowledge of this topic. You also need to train customer relationship managers. The more quickly you adapt your business model, the better. But these changes can be costly and may also imply a change in mentality.”
Switzerland is more international compared to Luxembourg and has a stronger footprint in private banking. While Swiss banks are focused on Latin America, the Middle East and Central and South Asia, Luxembourg private banks are primarily concerned with serving Western and Eastern Europe.
Despite this, the two KPMG partners agree that Luxembourg should try to pitch to markets further afield, for instance to wealthy people from the Middle East. In terms of structuring, Luxembourg has built up a strong know-how that is a clear differentiator vis-à-vis the Swiss private banking arena.
Nothing to declare
When speaking about future private banking strategies, regulatory impacts cannot be ignored. More than three out of four interviewees agreed that investor protection rules like MIFID, cross-border regulations and the Foreign Account Tax Compliance Act (Fatca) influence their business models. Luxembourg banks perceive a strong sense of urgency towards achieving tax transparency.
Alain Picquet speaks about a model that doesn’t work anymore: “The days when clients could open an account without being transparent to their local tax authority are over. The client is required to be fully tax transparent nowadays. Some bankers are even asking if we should continue to maintain the private banking secrecy. Luxembourg is a country where we respect the confidentiality of the private sphere. It is written in the law and we want to stick to that.”
Asked what the future of the Luxembourg private banking industry will look like, the KPMG partners answered that a certain level of stability in the number of banks should be reached. What’s more, both see new niches like Islamic finance, payment banks and other new business models coming to Luxembourg. They confirm that Luxembourg has always adapted rapidly to change. But there is one thing that erodes its competitiveness.
“If you need to explain to an American banker that even in a crisis we have to increase the salaries by 2.5% because of an automatic indexation law that forces you to do so, people in the US won’t understand. I am not saying that indexation is wrong, but from a psychological point of view it is a difficult message to transmit”, Alain Picquet concludes. CW