Spear’s Wealth Management Awards: Private Banking’s Troubles

The judging made clear that the industry is still in the midst of prolonged teething

On Tuesday evening, 600 of the great and good will descend on Phillips de Pury. The subject dominating many of their minds will be the main prize — UK Private Bank of the Year – for which judging took place a fortnight ago in a Mayfair boardroom.

The judges — James Anderson at PAM, Ronnie Armist at Stonehage, Seb Dovey at Scorpio, Ian Marsh at FF&P, Rupert Phelps at BNY Mellon, David Scott at Vestra and Oliver Stanley at Oliver Stanley Partners — all signed NDAs, so I’m not giving any hints. But one theme warrants echoing.

See the nominees for the Spear’s Wealth Management Awards

While private banking has always been one of the favoured sons of financial services, with pre-tax profit margins of 35 basis points on AUM, limited capital requirements and large pools of liquidity, the judging made clear that the industry is still in the midst of prolonged teething.

McKinsey’s Private Banking Survey 2012 illustrates the trend well, observing that the financial crisis triggered a 30 per cent drop in profits (see graph below) and while there was something of a recovery in 2010, a combination of poor market performance, shifting customer preferences and increasing regulatory demands has made life difficult ever since, exemplified by measly net inflows and flat profits.

Delving deeper, revenue margins at UK private banks are down on investment activities due to customer risk-aversion leading to 59% of assets being invested in low-margin cash and fixed-income products, HNW reluctance to trade and the rise of low-cost ETFs (see graph below). But the rise in banking revenue margins, due to deposits not lending, has offset some of this, meaning that profit margins are currently hovering around 24 bp for the second year running.

This is not positive as they’re still 12 bp beneath the heydays of 2005–2007. And the pressures of the RDR and increased boutique competition suggest that depressed profitability will be the norm going forward unless private banks can control costs.

These metrics haven’t been heading in the right direction of late, as proven by McKinsey’s stat that back office, IT and overhead costs are up 7%, which means that either large structural change lies ahead for onshore private banking or else the trend towards emerging markets will accelerate yet further.

It’ll be interesting therefore to judge the atmosphere at the Spear’s Awards on the 30th. My bet is that triumph amid adversity will be the overriding emotion.