Private re­turns

Lo­cal bank­ing for the wealthy on the rise

Executive Magazine - - Front Page - By Thomas Schellen

In­ter­na­tional re­ports sug­gest that the Mid­dle East is cur­rently the world’s sec­ond fastest grow­ing re­gion in private wealth, trail­ing only Asia. Ac­cord­ing to a Global Wealth 2017 re­port pub­lished in June by Bos­ton Con­sult­ing Group (BCG), an in­ter­na­tional man­age­ment con­sult­ing firm, the private wealth seg­ment picked up mo­men­tum glob­ally in 2016, but with vis­i­ble re­gional vari­a­tions. This means that tail­winds are gather­ing for private bankers in Beirut. As Toufic Awad, gen­eral man­ager of Audi Private Bank, tells Ex­ec­u­tive, “This re­gion has a very ro­bust grow­ing pool that pro­motes the need for wealth man­age­ment and wealth man­age­ment ser­vices.”

In per­cent­age terms, the av­er­age an­nual rate of change in private wealth be­tween 2014 and 2015 was 4.4 per­cent, in­creas­ing to 5.3 in the fol­low­ing year. For the pe­riod be­tween 2016 and 2021, the rate is pro­jected, in BCG re­search, to reach 6 per­cent. In Asia Pa­cific, the re­spec­tive rates are 12.8, 9.5, and 9.9 per­cent, while in the Mid­dle East and Africa, change rates leapt from 1.2 per­cent in 2015 to 8.5 per­cent in 2016, and are pro­jected to stay, on av­er­age, above 8 per­cent through 2021.

That may not sound over­whelm­ing in a world prone to be­liev­ing that double-digit growth is the only truly im­pres­sive kind. How­ever, given the large vol­umes of wealth in­volved, these pro­jec­tions trans­late into size­able fig­ures and sub­stan­tial in­creases. Global private wealth in­creased from $151.4 tril­lion in 2014 to $166.5 tril­lion in 2016. From that im­mense base, the pro­jec­tion as­sumes that global private wealth, in 2021, will have grown by a nom­i­nal $56.6 tril­lion to $223.1 tril­lion. For the Mid­dle East and Africa, they project that private wealth will ex­pand by al­most half — from $8.1 tril­lion in 2016 to $12 tril­lion in 2021.

In other words, while some show op­ti­mism about the global econ­omy — last month, Euro­pean Cen­tral Bank (ECB) head Mario Draghi opened his Jack­son Hole speech to his cen­tral bank­ing peers by say­ing “the global re­cov­ery is firm­ing up” — the gains in global private wealth, by com­par­i­son, ap­pear to be in­or­di­nately healthy, and more so in the Mid­dle East and Africa than in other world re­gions.

While the ap­par­ent faster growth of private wealth, when com­pared to over­all im­prove­ments in the global econ­omy, might seem dis­turb­ing to

equal­ity ad­vo­cates in Le­banon, just as any­where, private bankers will not be com­plain­ing. Even if in­creased ac­cu­mu­la­tion of wealth from do­mes­tic busi­ness ac­tiv­i­ties in the past six or seven years is ques­tion­able (see in­ter­view with FFA Private Bank Chair­man Jean Ri­achi on page 34), and even if the econ­omy in Le­banon were to re­main locked in the state of “timid im­prove­ment” ob­served in the first half of 2017, these num­bers im­ply that private bankers in this coun­try could still book a grow­ing share of hand­outs from the god­dess For­tuna.

This is a ben­e­fit of the di­as­pora, says Charles Salem, global head of private bank­ing and wealth man­age­ment at Banque Libano-Fran­caise (BLF). Cit­ing re­gional de­vel­op­ments in 2009 and 2010 (the years directly af­ter the great re­ces­sion) and then in 2015, his view is that strong oil prices — as well as the is­suance of new eq­ui­ties and in­fra­struc­ture in­vest­ment projects in the Gulf and MENA mar­kets — all cre­ated new wealth there. This in turn, had an im­pact on wealth cre­ation in Le­banon.

“The di­as­pora is ac­tive in all these coun­tries and con­trib­uted to the global wealth cre­ation in the GCC, MENA, and some African coun­tries. Wealth thus also flowed to Le­banon, but the lo­cal in­fra­struc­ture was not there to man­age all this money. To­day, the bank­ing in­dus­try in Le­banon, and I think this is also due to in­ter­na­tional reg­u­la­tions, is putting in place all the teams and ex­per­tise to man­age this money. I think that we can have world class ser­vices here — as one can find tra­di­tion­ally in Switzer­land, Europe, and the US in private bank­ing — that can be de­liv­ered lo­cally to­day. This is what we are do­ing here in BLF [Banque LibanoFran­caise],” ex­plains Salem, who joined the Le­banese bank ear­lier this year in con­tin­u­a­tion of an in­ter­na­tional ca­reer in private bank­ing.

Audi Private Bank’s Awad has a sim­i­lar per­spec­tive. He says, “The Le­banese di­as­pora is very ac­tive in re­gions like Africa and South Amer­ica and are still look­ing to di­ver­sify their wealth away from their do­mes­tic mar­kets. We have ac­tive desks for those mar­kets, for Latin Amer­ica, Africa, and also the Gulf and the GCC. Most of our Le­banese ex­pat clients are try­ing to repa­tri­ate money from their coun­try of busi­ness to Le­banon, be­cause they are not very se­cured by their po­lit­i­cal and se­cu­rity en­vi­ron­ment [in their coun­tries of res­i­dence]. There­fore, we are still see­ing flows to Le­banese private banks and to Audi Private Bank.”

As Awad ac­knowl­edges, the sit­u­a­tion, from the private bank­ing per­spec­tive, is nonethe­less not en­tirely a bed of roses. “The wealth man­age­ment in­dus­try, as we all know, is in a tran­si­tion mode in or­der to ac­com­mo­date all the in­creas­ing reg­u­la­tory re­quire­ments and re­lated costs,” he tells Ex­ec­u­tive, ex­plain­ing that private banks have to un­der­take heavy in­vest­ments into com­pli­ance, man­age­ment in­for­ma­tion sys­tems, and other in­for­ma­tion tech­nol­ogy up­grades. “This is why we be­lieve mar­ket share is im­por­tant. Small play­ers in this mar­ket will have a dif­fi­cult time cop­ing with in­creased re­quire­ments,” he adds.

Private bank­ing may be sit­u­ated in a sweet spot, when seen from the cur­rent macro en­vi­ron­ment and out­look for wealth, but when seen from a client re­la­tions, reg­u­la­tory, com­pet­i­tive, and tech­ni­cal per­spec­tive, play­ers in this in­dus­try have no lau­rels to rest on. In the years of and af­ter the great re­ces­sion, from 2007 to about 2012, client con­fi­dence did not look good. In Europe and the United States, the re­cent past was filled with an en­forced de­par­ture from bankers’ no­to­ri­ous se­crecy and will­ful as­sis­tance in hid­ing client as­sets from tax col­lec­tors.

Fur­ther, while to­day’s global eco­nomic con­di­tions are re­garded as calm and up­beat in com­par­i­son to 2016, as il­lus­trated by the Draghi speech, no cen­tral bankers’ sym­po­sium to­day is com­plete with­out an omi­nous warn­ing that mem­o­ries of the 2007 re­ces­sion are fad­ing. “We can never be sure that new crises will not oc­cur,” Fed Chair Janet Yellen cau­tioned in her — po­lit­i­cally loaded — Jack­son Hole re­marks. Un­said note to private bankers and wealth man­agers: never ex­pect an easy time. Ad­di­tion­ally, new tech­nol­ogy — specif­i­cally ar­ti­fi­cial in­tel­li­gence — is a fourth el­e­ment that is emerg­ing as both ca­pa­ble and likely to dis­turb the peace of private bank­ing in the near fu­ture.

DIG­I­TAL AD­VI­SORS?

The pri­mary threat from cy­berspace, in the case of private bank­ing, are not viruses but AI-driven robo-ad­vi­sors, ca­pa­ble not only of stor­ing a client’s risk pro­file and all rel­e­vant mar­ket data — and an­a­lyz­ing a client’s whole his­tory of in­vest­ment choices, but also of giv­ing in­vest­ment ad­vice that is more ob­jec­tive and im­mune to hu­man bi­ases, as well as more cog­nizant of the in­vestor’s pref­er­ences. In its re­port, BCG warns wealth man­agers about this new dig­i­ti­za­tion, with the po­si­tion that wealth man­agers

“Most of our Le­banese ex­pat clients are try­ing to repa­tri­ate money from their coun­try of busi­ness to Le­banon”

who wait out such de­vel­op­ments and con­tinue with busi­ness as usual “are un­likely to pros­per as trans­for­ma­tion of the in­dus­try gains mo­men­tum.”

For sev­eral years, bankers have been in­un­dated with prophe­cies about busi­ness dis­rup­tions from Fin­tech star­tups who might hit large banks, like Uber and Airbnb hit the trans­port and ac­com­mo­da­tion sec­tors. Con­trary to such hype, re­search to­day speaks more of banks which as­sim­i­late or out­right ab­sorb Fin­techs.

THE HU­MAN FAC­TOR

Asked if he con­sid­ers state­ments such as BCG’s to be per­ti­nent analysis or more of a con­sul­tancy sales pitch, Awad says he ex­pects the re­al­ity to be a bit of both, with changes that might hap­pen faster than many would think pos­si­ble. “If one reads into what is hap­pen­ing in the area of ar­ti­fi­cial in­tel­li­gence and re­lated tech­nol­ogy, one can pre­dict that the con­cept of private bank­ing will be to­tally dif­fer­ent in 10 or per­haps 15 years,” he says, be­fore adding that per­sonal re­la­tion­ships, trust, and friend­ship play im­por­tant roles in private bank­ing, and that banks in the Mid­dle East are un­likely to lead the global shift to robo-ad­vi­sors, if one takes into ac­count the re­gion’s pre­dom­i­nantly con­ser­va­tive client men­tal­ity. “It’s a ma­jor men­tal­ity shift and also a gen­er­a­tional is­sue. Per­haps the next gen­er­a­tion, with the evo­lu­tion of what is hap­pen­ing in the world, will be more prone to go for this new sort of private bank,” he says.

BLF’s Salem like­wise does not fully buy into pre­dic­tions of a com­plete shift to dig­i­tal in private bank­ing. “What­ever will de­velop in the wealth man­age­ment in­dus­try, the hu­man fac­tor will stay — dis­cus­sions, eye con­tact, per­sonal in­ter­ac­tions, etc. But dig­i­tal is very im­por­tant be­cause you have to dif­fer­en­ti­ate your­self, meet client ex­pec­ta­tions, and en­hance client ex­pe­ri­ence, but you also have to en­hance your value propo­si­tion, your ad­vi­sory propo­si­tion, and staff skills,” he says, fur­ther not­ing that dig­i­tal trans­for­ma­tion is also made in­evitable by com­pli­ance-re­lated prac­ti­cal­i­ties and for the align­ment of in­ter­nal pro­cesses.

Com­ing back to more im­me­di­ate is­sues, some par­a­digms of the wealth man­age­ment in­dus­try in 2017 do not sound dif­fer­ent from the recipes of ear­lier years. Port­fo­lio diver­si­fi­ca­tion is ad­vice that has been re­cited by private bankers in ev­ery in­ter­view over the last ten or fif­teen years; an­other mantra is to tai­lor in­vest­ment of­fer­ings ac­cord­ing to client needs and risk ap­petite. In such ba­sics, the in­dus­try ap­pears to have its iden­tity and con­ti­nu­ity, whether the times and global mar­ket con­di­tions are smooth or rough.

LE­BANESE HOPES

As to cur­rent hopes for private bank­ing in Le­banon, there is pal­pa­bly greater en­thu­si­asm in the cor­ner of­fices of private banks around the city of Beirut. In com­par­i­son, a few years ago de­vel­op­ment of the do­mes­tic mar­ket in­vest­ment op­por­tu­ni­ties fit for private bank­ing was, at best, talked about in ten­ta­tive terms, as some­thing that would be nice to have.

Now BLF’s Salem is en­thu­si­as­tic in de­liv­er­ing his view that for­eign op­er­a­tors of private banks will tend to move out of the Le­banese mar­ket more than come into it, with lo­cal private banks be­ing on the rise. “I think the Le­banese mar­ket in [the] fu­ture will be more for lo­cal play­ers who have ev­ery­thing needed to de­liver the ser­vice lo­cally,” he says. Al­beit re­fus­ing to dis­close the ra­tios for as­sets un­der man­age­ment (AUM) in the bank’s two private bank­ing op­er­a­tions

in Beirut and Geneva, he con­tin­ues, “We are de­vel­op­ing the private bank­ing ac­tiv­ity at BLF and to­day we are fo­cus­ing on Beirut and Geneva in de­vel­op­ing our ad­vi­sory skills and all our prod­uct ca­pa­bil­i­ties with as­set man­age­ment, con­tin­u­ing along the trend es­tab­lished in re­cent years to de­velop solutions and cre­ate new prod­ucts for clients, stream­lin­ing their jour­ney.”

Awad is, in part, more forth­com­ing, as he states the re­spec­tive AUM sizes of Audi Private Bank in Beirut and Geneva, when he an­nounces that the bank some­what ex­traor­di­nar­ily saw more AUM growth in Beirut than Geneva last year, reach­ing AUM di­men­sions of about $4 bil­lion in the for­mer and $6 bil­lion in the lat­ter city. He con­cedes that this trend of faster AUM growth in Beirut ver­sus Geneva was not re­peated in the year to date — with­out re­fer­ring to the rea­sons for the atyp­i­cal de­vel­op­ment in 2016, how­ever, which of course gives room for the as­sump­tion that this in­flow was re­lated to the cen­tral bank’s “fi­nan­cial engi­neer­ing.”

Over­all, Awad is also up­beat about Beirut, say­ing, “As far as re­struc­tur­ing of private banks here in Le­banon, we have been work­ing in the past few years at Bank Audi to set up private bank­ing as a busi­ness line. To­day we have the oper­a­tion in Switzer­land, the oper­a­tion here, in Saudi Arabia, and in Qatar. Those are the four main book­ing cen­ters. One way to go is to cre­ate of­fer­ings where clients can bank with one bank, Audi Private, and you [as a client] can go into dif­fer­ent ge­ogra­phies and ac­cord­ing to the risk pro­file, chose dif­fer­ent book­ing cen­ters. The in­vest­ment propo­si­tion needs to be uni­fied and it is; we have a cen­tral in­vest­ment team. At the same time we cater to clients in dif­fer­ent mar­kets and of­fer them dif­fer­ent book­ing cen­ters. This is the model that we have put in place, and it’s work­ing very nicely for us.”

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