PERSPECTIVE: Private banking's squeezed middle

By bne IntelliNews July 18, 2012

Tim Gosling in Prague -

Echoing their colleagues in investment banking, private bankers in Emerging Europe see the middle segment of their market being squeezed, with only the biggest and the boutiques surviving. That has some casting around for new strategies in the region.

In a climate in which bankers' credibility could hardly sink lower, those working in private wealth management enjoy perhaps the meanest of reputations, with hubris potentially seen as their greatest sin. However, with the odd exception at EBCG's "Private Banking in CEE, SEE & CIS" conference in Prague in June - the compere gamely tried to rally the troops against tightened regulation that would "stop us doing business if we followed it" - most delegates and speakers appear ready to respond positively to the challenges facing the industry.

Stephen Jennings, owner of Russian investment bank Renaissance Capital, remarked in June that his business will increasingly resemble a barbell over the coming years, with the mid-sized players falling by the wayside. Leaders in private banking in the region foresee a similar fate. Michael Wodzicki, head of private banking at Kathrein Privatbank, even put a definitive figure on a place at the larger end of the barbell. "You need €10bn in assets under management (AUM) per banking license to survive over the next few years," he stated frankly. "There are minimum requirements to play: you need huge investment in technology, your network and training; and the regulators will suffocate you."

At the other end, smaller Western European outfits are targeting Central and Eastern European (CEE) economies to help them survive that coming retrenchment, albeit using widely differing tactics.

Schoellerbank is, in the words of its CEE head Stephen Maxonus, "an old-fashioned and conservative bank," used to looking after generations of old money in Austria. However, just over a decade after being bought out by UniCredit Group, in 2011 it was designated to act as the Italian group's hub for international private banking, especially for clients from CEE. It is now rolling out a fresh strategy to find new business, leveraging the largest banking network in the region to fish for established private banking clients. "We're not really looking for CEE clients new to private banking, but instead plan to take market share from the Swiss banks that dominate many of the markets," he explained.

Reflecting Schoellerbank's conservative background, as well as the reality of the region's markets, potential clients need to already have an account with UniCredit, he pointed out. "Provenance of funds in CEE is key. We will not make any compromise on transparency, and by working with clients we already know through the network, we can keep compliance costs to a minimum."

The effort will be worth it, Maxonus reckons, especially today now the region's entrepreneurs that started businesses in the early 1990s are coming to an age when they want to sell up. It's a trend that private equity investors in the region are also watching closely.

Due to the relatively limited distribution of wealth in the CEE region, clients there tend to have an overall asset base larger than that in Austria and Germany, while privacy and political risk are compelling reasons to look for an asset manager in Western Europe. Hungary under Prime Minister Viktor Orban is a prime example of the latter. "Austrian banks on the border have seen a huge rise in clients coming across the border to deposit assets," Maxonus said. That makes Hungary one of Schoellerbank's top targets in the region, alongside Russia, Kazakhstan, the Czech Republic, Bulgaria and Romania, though he added that, "going further southeast into the Balkans is difficult because the money is not clean and the number of potential clients is low."

That final point is one that Hypo-Alpe-Adria, the struggling Austrian outfit that was nationalized in 2009, has made central to its own low-cost strategy in the region. "We don't have the resources to roll out a full private banking operation," admitted group head of affluent banking, Jochen Maurer.

Instead, the bank is leveraging an established network in Southeast Europe to attract "relatively high earners" in countries such as Slovenia, Croatia and Serbia, signing them up for enhanced retail banking services, and hoping they grow into "affluent clients" as regional incomes swell. "It's not possible currently to do full private banking in the Balkans," Maurer claimed. "It would cost too much to build the capacity and then spend time persuading clients of the benefits."

Therefore, faced with a young potential clientele - "80% of them are below 40, unlike the far older private banking clients in the West" - who need to have €5,000 on deposit (20% of all clients), Hypo-Alpe hopes to slowly "grow" its own batch of Balkan private banking clients, offering products such as gold cards along the way. "That's a stable business when dealing with clients that are wary of investment markets, as they are especially right now," Maurer pointed out. "We decided not to try to teach a fish to ride a bicycle."

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