How have banks’ wealth management pivots played out?

There’s up to $25b in fees to be made in Asia, but it’s a tough market, an analyst said.

For the last half decade — before the high interest rate environment propelled banks to record profits in 2023, at least — whenever it’s time for lenders to make the quarterly or mid-year update on their earnings, you can bet to hear one of three things: lower profits; another restructuring; and the potential of wealth management as the driving force for profitability.

Banks’ hopes in managing the money of the affluent are not without cause. A 2023 report by McKinsey & Co. posits that there is as much as $25b in fees to be made from Asia’s richest.

Success stories, like UBS’ Wealth Management Division generating around US$1.5b in wealth-related fees for the third quarter of 2021, for example, showed promise. From then, that division of UBS would report US$4.97b and US$3.58b in earnings for 2022 and 2023, respectively.

Oliver Wyman’s Jasper Yip told Asian Banking & Finance that there is $200b in global revenue pool for “wealth management (and) corporate and institutional banking” solutions, in particular.

Apart from fees and commissions, banks’ wealth management businesses have also presented themselves as an effective lever to attract stickier funding for their balance sheet, which is particularly beneficial to the higher interest rate environment, Yip said.
But not everyone is treading the same path.

“Under the current environment, banks need to develop a more resilient revenue portfolio where the longer-term nature of wealth management economics can serve to complement short-term natured businesses like investment banking and sales & trading,” noted Yip, who is a partner and the head of corporate and institutional banking for Asia Pacific at Oliver Wyman.

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China’s lustre fading?
China is often a key Asian market elevated by banks as a wealth mecca. There is a good reason for this: the Red Dragon is said to be creating millionaires at a rate three times faster than that of the US through 2025, at least according to estimates of the 2021 wealth report by Credit Suisse.

“In Asia, wealth creation is characterised by the rapid emergence of entrepreneurs. This was certainly the case for China with the tech sector over the last decade, while we are also observing the same for other emerging Asian markets,” Yip said.

The 2020s has not been the kindest to China, however. Apart from the global negative impact brought about by the COVID-19 pandemic, China has been hit with a whammy of economic-related issues. There is that still-ongoing property crisis, which notably claimed real estate giant Evergrande. Evergrande filed for bankruptcy in 2023, a slow decay that began after it defaulted on its $333-b debt in 2021.

Its banking industry is also experiencing weakness. One notable example of China’s banking woes is when three banks in its Henan province froze at least $178m of deposits in 2022. Strict lockdown rules in 2020-2022 further weighed down on an economy already grappling against a slowdown that began before the pandemic.

Tricky geopolitical issues with Taiwan and the US are another cause of concern.

“We certainly observe a more nuanced attitude towards building wealth management in China compared to 5 years ago,” Yip said.

For foreign banks, though, there is the fact that Chinese locals are more predisposed to working with local banks than trusting their money to international players. “Whilst geopolitical challenges were often cited as the reason, the initial exploration by foreign banks has also revealed that onshore China is still very much a local “captive” market, where wealthy local individuals would still prefer to go to local providers with a deeper local product shelf,” Yip said.

On a more positive note, Yip believes that these attitudes are “gradually turning a corner.”  The “reversal of interest rates” in late 2023 meant that Chinese individuals are increasingly open-minded about tapping into cross-border and global investment products that global banks are better able to provide.

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The asset management strategy
Foreign banks have also taken a different approach to penetrating the wealth management market in China: asset management firms.

“We observe that most wealth managers/private banks have now sharpened the focus to build asset management capabilities in China to tap into their global product strengths immediately and to gradually build the local brand affinity for future doubling-down opportunities, compared to very initial hypotheses to build a full private bank in China,” Yip noted.

Overall, despite challenges, China is still seen by banks as a significant portion of global wealth pools.

“[It] is still strategically important for global banks to explore onshore China cautiously to keep their brand relevant for the offshore capital of the Chinese,” Yip said.

Optimising for the future
Overall, Oliver Wyman remains optimistic for the future of the wealth management industry — at least for the foreseeable 12 to 24 months. Meanwhile, near term challenges are expected for the global investment environment.

“Banks that enjoy healthy net interest income associated with wealth management during this period need to look into optimising the infrastructure and management science to continue to grow more sustainably in the future,” Yip said.

He advises banks to adopt a tailored combination of human-led service and technology and digital interface, noting that this will become increasingly crucial for future winners.

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McKinsey & Co. echoed the same thing. “Banks and wealth managers can use digital products and services that are more personalised and tailored to the needs of specific customer segments, and which have a lower cost to serve than traditional client interactions,” it said in a report on digital and AI-enabled wealth management in Asia.

To achieve these advantages, banks and wealth managers will reportedly need a full-stack approach across four dimensions: segmented customer value propositions, reimagined digital engagement, AI-powered decision making and core technology, and the right operating model and talent, said McKinsey & Co.