Offshore private banking has long been a sweet spot in the financial services industry, combining high risk-adjusted margins and robust growth rates over the long term. But, increasing pressure on growth and margins could push private banks to specialize, acquire competitors, or consolidate, said Standard & Poor’s Rating Services in a report published today titled “Offshore Private Banks Sheltered From Liquidity Strain, But Face Intensifying Competition.”
“Generally low asset risk and structural excess liquidity positions shelter private banks from market turmoil,” said Standard & Poor’s credit analyst Taos Fudji.
Furthermore, in the short term, rising interest rates and growing assets under management and administration (AuMA) sustain income generation. As a result, the current trend toward financial services industry consolidation has largely bypassed the private banking sector, which comprises a large number of small to midsize players.
The 2007 financial results of European independent private banks–average cost-to-income ratio of 60% and ROE of 20%–demonstrate their robust profitability, albeit aided by buoyant capital markets that have performed strongly since their post-bubble lows of early 2003.
However, revenues tend to suffer in the case of prolonged drops in equity markets and investor sentiment. And structural changes in the competitive landscape are putting negative pressure on profit growth and margins:
–Clients’ performance expectations have significantly risen, requiring banks to offer a much wider product range.
–Increasingly extensive control and compliance structures require a heavier fixed-cost base.
–Intensifying competition for net new money and talent translates into rising staff turnover and costs.
–Global aging increases risk of client attrition in generational transitions.
–Reduction of offshore centers’ attractiveness and spread of wealth creation necessitates costly networks to capture client assets around the globe.
In the medium term, strong customer loyalty and banks’ generally low asset risk and strong liquidity profiles should ensure the generally good creditworthiness of private banks. Nevertheless, the increasing pressure on growth rates and margin levels is expected to push private banks to specialize, acquire competitors, or consolidate.
“Although banking secrecy, fear of client attrition, and staff departure risks have historically made private banks very wary of consolidation, margin pressures may dissuade banks from remaining stand-alone, especially offshore-based banks lacking global scale, a strong brand name, or recognized product expertise,” added Fudji.
