Looking at the Future of World Wealth McKinsey-style

06-03-12 © VizArchMcKinsey has published a Private Banking Survey, part of a series it initiated in 2002. The gist of this one is that growing pressure on private banks in the years to come “will continue to fuel industry consolidation,” as manifest in rising mergers and acquisition activity. On that thesis hangs a tour of the major private-banking world regions.

McKinsey begins, then, with the following observations:

  • The number of millionaires, McKinsey expects, will rise 30% by 2016, putting it at 16 million;
  • 0ver the next four years Asia e-Japan will surpass other regions in this growth, creating about $7 trillion (USD) in new millionaire wealth;
  • China, India, Brazil will continue to move up the league table in HNW;
  • Emerging HNW markets are skewed more than the older markets toward the Ultra High Net Worth segment, have higher asset growth, and a larger offshore share;
  • Private bank profits will grow to $70 billion, again led by Asia ex-Japan.

On to the Tour

In Europe, the two great offshore-banking centers have taken different approaches to the challenges of the present moment. Switzerland appeals to wealth from the emerging markets, while Luxembourg retains its appeal for UHNW individuals within Europe.

Meanwhile onshore and offshore private banks are converging, in part because “the traditional tax rationale for offshore markets” has become “less compelling.”

In North America, 2012 was a banner year, with an 11% increase in profits. This is because client assets grew by 8%, and because the average profit margin on those assets also grew, 2 basis points, to 32 bps. This was something of a relief, since throughout the whole period 2007-2011 private banking asset growth in North America had been “anemic.” Traditional private banks have felt a squeeze from each of three directions: the success of small independent boutiques; increased competition from full-service brokerages, independent BDs, and analogous institutions; and “self-inflicted outflow.”

McKinsey proposes that North American private banks devote their energies to the following four opportunities:

  • Delivering world-class expertise;
  • Sharpening of the “core millionaire” proposition;
  • Capturing intergenerational wealth transfer;
  • Responding to regulatory challenges.

A focus on expertise would imply a shift away from older focuses on either wealth management or lending.

The “core millionaire” issue suggests that private banks must resist the encroachment of other players for the loyalty of their core clientele.

Intergenerational transfer refers to the fact that the average age of a private banker’s client is 60. Regional private banks, in particular, have a high concentration of older clients.

Finally, the looming regulatory challenges include the Foreign Account Tax Compliance Act.

Asia and Latin America

Then we come to Asia, where the high net worth population still consists largely of the first generation wealthy. In China in particular, entrepreneurs represent over 40% of total HNW, and 5% of them are UHNW.

So: for what are UHNW individuals looking in their investment banking services? They’re looking for in-houses services on co-investment/direct deals, alignment of family and business portfolios, and in general a one-stop-shop approach for their business needs.

What about India? Here we get another list of bullet points:

  • Private banks in India are growing rapidly – assets under management in 2012 increased in 17% in 2011 and by 32% in 2012;
  • Profit margins have also increased;
  • The nation’s banking industry is dominated by the cities of Mumbai and Delhi, and by the UHNW segment;
  • Economics varies depending on both scale and business model.

On that last point, smaller scale firms show both a smaller rate of AUM growth and less profitability than their larger brethren. The difference in profitability is due to the lower costs that large scales can achieve.

As we noted at the start of this summary, McKinsey contends that one Latin American country, Brazil, will continue to move up the league tables. As it happens, the Brazil real and the local stock market have both fallen on hard times, so that Brazil’s HNW individuals are looking abroad. “We believe that offshore investments have the potential to grow further as clients adopt a more fluid approach to allocating to local and international investments.”

The survey draws upon the McKinsey Wealth Sizing database and detailed analysis of more than 160 participating private banks around the world, defining a private bank as an institution offering banking, investment, lending and related services, whose main source of business comes from high net worth individuals.

 

 

 

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