Amid the losses suffered by individuals, corporations and institutions from the global financial crisis has emerged the opportunity for private banks to step into the spotlight and highlight their strengths. Private banks, after all, are associated with financial advisory services and what was sorely lacking during the buying frenzy in capital markets in the run-up to the financial crisis was precisely that: advice. Too many investors were chasing the momentum, and sales-driven money managers were all too happy to take in the excess liquidity. The rest, as they say, is history.

A report by Scorpio Partnership, a London-based strategist and high-net-worth consumer issues research firm, shows that the private banking industry managed to pull through in relative terms in 2008. However, the industry is facing a very difficult 12 months ahead if it fails to adjust business models, according to Scorpio Partnership's Global Private Banking KPI Benchmark 2009 report.

 "2009-2010 will be a moment of truth for the global private banking model," says Sebastian Dovey, managing partner of Scorpio Partnership. "Asset levels have declined by a median of -15.7% and cost-to-income ratios have risen by 13.7% which places a huge strain on the models of many competitors."

The way to survive post crisis is through an "intelligent focus on profitable segments and efficiency drives", Dovey says, adding that the traditional management tendency for "slash and burn" in such conditions will be much more damaging in the long-term.

"This is a time for vision and leadership," Dovey says. "Our view is firms must now use traditional consumer tools in branding and advertising to reclaim confidence and new business."

Global wealth managers now have around $14.5 trillion in assets under management (AUM), a decline of 16.7% from the previous year, according to the report.

Apart from slashing assets, the global financial crisis also affected the roster of the top private banking institutions in AUM. M&A activity, particularly in the US, influenced the top 10, with Bank of America (BoA) now becoming the world's largest wealth manager, according to the report. The core of BoA's asset base remains inside the US, however. UBS, meanwhile, remains in second spot and is effectively still the largest non-US international wealth manager.

AUM of the world's top 10 private banks, according to Scorpio Partnership:

  1. Bank of America - $1,501 billion
  2. UBS - $1,393 billion
  3. Citi - $1,320 billion
  4. Wells Fargo - $1,000 billion
  5. Credit Suisse - $611 billion
  6. JP Morgan - $552 billion
  7. Morgan Stanley - $522 billion
  8. HSBC - $352 billion
  9. Deutsche Bank - $231 billion
  10. Goldman Sachs - $215 billion

The top 20 global private banks manage nearly $9.2 trillion of private client assets. That's around 63% of the total global market and challenges the widely expressed view the global wealth industry is fragmented, according to the report.

The report shows that "market fragmentation as a characteristic of the industry is hugely overstated", Dovey says. "Our goal has always been to demonstrate that market share -- as measured by a percentage of assets managed relative to the total asset managed by all competition -- is much more concentrated. This has significant consequences for evaluating the industry and businesses within it."

Meanwhile, despite the fall in assets last year, the private banking industry as a whole added to its headcount. Overall, there was an uptick in new hires of 6% worldwide and the ratio of firms that were hiring in 2008 versus those that were shedding private banking staff was 4:1, the report says.

The report shows little evidence of a flight to quality through the worst of the crisis. Net new money results hint only that Swiss private banks may have seen a very marginal uptick in business, while some household names did not benefit at all.

It appears investors restructured portfolios among a number of different types of institutions when it was unclear which private banking institutions would emerge successfully from the banking crisis and which would fail.

The report points to five core strengths in the private banking model that enabled players of different types to perform well in difficult market conditions:

  • Ability to generate income from multiple sources rather than purely asset management
  • Wealth re-creation approach to business rather than exclusively wealth preservation
  • Ability to guide clients into high-quality specialist investments
  • Strength of brand and contemporary relevance to client requirements
  • Network leverage (either through branch systems or strong external partnerships) for new client access

"These five qualities are the future principles upon which the private banking industry can rebuild based on our analysis of business model performance," says Catherine Tillotson, head of research at Scorpio Partnership. "The market champions will be those that concentrate on modernising the proposition using contemporary positioning tools to re-engage with the client and developing products and services that are committed to wealth re-creation. Institutions that opt to sit tight in 2009 and ride out the storm will sink."

The Global Private Banking KPI Benchmark 2009 reviews the global wealth management industry. The annual report covers more than 248 private banking and wealth management firms.