Competition is pressuring private banks to seek economies of scale. Silvia Pavoni looks at the latest research on consolidation and expansion opportunities around the world, and at what bigger banks can offer their wealthy clients.

With its booming economy, Asia-Pacific is the place to be for all banking players, including private bankers. This at least is the result of a KPMG survey on the global private banking market, investigating what drives acquisitions.

Figures from the survey show that acquisitions were up 26% in 2005 compared with the previous year. Planned acquisition activity over the next three years also looks promising.

Is it not news that the sector is consistently consolidating, but it is less obvious which banks will expand or how they will do it.

The survey highlights that, despite 37% of respondents indicating that Asia-Pacific was the region with the most growth potential, only 14% expressed a desire to undertake an acquisition in the area. Similarly, in eastern Europe, an area that 14% of respondents highlighted as attractive, only 5% said they want to take over a local firm.

“Everybody wants to expand in Asia, the Middle East and eastern Europe, but there aren’t necessarily banks to buy and it’s very difficult to find experienced client relationship managers,” says Anton Simonet, head of the private banking group at Dresdner Bank. “Banks need to have a good reputation in markets they want to expand to. They need to follow their unique selling points and the market has to be a natural fit. They also have to be able to attract the best client relationship managers.”

Foreign ownership in many Asian countries has traditionally not been welcomed, and this has restrained potential foreign buyers. But attitudes are starting to change and they could lead to an increased mergers and acquisitions (M&A) activity.

For their part, clients welcome consolidation. An IBM Business Consulting Services European survey shows that most clients would choose private banks with their own brand but part of a larger group. The second choice is the private banking division of a universal bank, followed by independent private banks.

Client and employee benefits

What bigger private banks can offer is undoubtedly valuable. Clients of bigger private banking groups can benefit from a wider range of solutions and expertise, across geographies and products. Bigger organisations can also offer advantages to wealth managers, both in terms of career advancement and training; they therefore attract and retain the best professionals.

Consolidation is needed to help banks face the costs of regulation, particularly in Europe where the number of small private banks is higher. Larger banks are more competitive in a market where clients are more inclined than they have ever been to switch between private banks, particularly between smaller banks.

The increased importance of scale has put pressure on small and mid-sized players whose strategic options are becoming more limited. Their ability to transform their business model and focus on clear niches will play an important role in determining the pace of future consolidation.

Competition results

Responding to rising competition and the cost of running a private bank, in April this year even Credit Suisse, one of the largest players in this area, merged its five independent private banks, forming a new entity called Clariden Leu. And looking for scale, Julius Baer last year acquired UBS’s SBC Wealth Management, comprising of Ehinger & Armand von Ernst, Ferrier Lullin and Banco di Lugano, making the private bank the third largest Swiss player after UBS and Credit Suisse.

Lehman Brothers, which acquired US fund manager Neuberger Berman in 2003, claims the acquisition helped the firm to double its assets under management to $116bn.

It is not all about size or client numbers, though. There is also a more interesting and powerful consolidation going on, making a wider array of products and solutions available to clients under one roof. UBS is a good example. Its acquisition of Goodman & Harris, a UK independent financial adviser specialising in life and pension advice, and Laing & Cruickshank, which brought in its unique expertise in equities, allowed the Swiss wealth management giant to offer additional solutions to its clients.

Consolidation and expansion will continue in the private banking sector. Clients around the world will be the prime beneficiaries.

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