Global wealth management: banks’ panacea or failing dream?

It’s one of those divisive issues.
It’s one of those divisive issues.
Image: Reuters/Arnd Wiegmann
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If there’s one kind of banking that’s been repeatedly touted since the financial crisis, it has to be wealth management. Banking, we’re told, needs to become more boring. And in wealth management, the incentives of money managers are more directly aligned with those of their customers.

But the wealth-management love story may be hitting a rough patch. Today, Barclays announced that it’s cutting its wealth management practice in 130 countries. On September 24, Credit Suisse said it too was scaling back on its emerging markets business (paywall), pulling out of approximately 50 countries, because it doesn’t have the scale to profit from customers there who are just moderately wealthy. HSBC, traditionally an emerging markets powerhouse, has also dialed back from practices in Latin America and Asia, though presumably to prevent itself from getting caught up in yet another damning and expensive money-laundering scandal.

That said, not all players are moving out. The Financial Times reported that Société Générale has moved in on Eastern Europe. Standard Chartered has ramped up its businesses in Asia. Even Citigroup—despite leaving some territory in west Texas—has stood firm in its global presence, despite the earnings hit it’s taken from doing that.

Why these differing strategies? It’s not clear whether they’re based on differences in opinion about future growth in emerging markets, regulatory concerns, competition, or the continuing financial slump in Europe, but a mix of those factors is likely to be at play for each bank.

For instance, there are good reasons to move into wealth management in emerging markets. Most economists agree that growth, in the long term, is going to come from these markets, with their rising consumer classes, even if the biggest ones are right now slowing down relative to advanced economies. Under new regulations aimed at making the financial system safer, wealth management also requires less capital than other businesses (e.g. mortgage banking).

However, this also means that a lot of banks have flocked to wealth management, increasing competition. And those same new regulations are increasing the overall cost burdens on banks, forcing some of them to pull back operations. Even though private banking isn’t capital-intensive, it’s easy to cut costs by shutting down whole offices overseas. Last but not least: although the risk of calamity in Europe seems to have dissipated, investors continue to question the health of European banks.

Of course, we’re making some sweeping generalizations about global wealth management here. Nonetheless, as earnings season approaches, we should look out for any signs—either in the banks’ numbers, or in the things bank execs are saying on earnings calls—that their fascination with private banking is starting to fade.