Private banks in the US and Canada enjoyed a “banner year” in 2012 terms of net inflows of client money, while cost reduction also helped drive profit growth upwards, according to an annual survey of the sector by McKinsey & Company.

Private banks in the US and Canada enjoyed a banner year
in 2012 terms of net inflows of client money, while cost reduction also helped
drive profit growth upwards by an average of 11 per cent from the previous
year, according to an annual survey of the sector by McKinsey & Company.

Globally, many wealth management firms have faced major
challenges to business models although improved capital market performance has
boosted AuM, the report said. Top-line revenue growth “remains subdued”. More
than 160 banks took part in the survey, from North America, Europe, the Middle East
and Asia.

In general, the report shows an American private banking
industry returning to health, while Asia is also relatively robust, if not
growing quite as fast as in recent years, and Europe’s
wealth sector is stable, but with a wider split between the successful and
weaker players.

In recent weeks, RBC Wealth Management/Capgemini and Boston
Consulting Group have issued data showing the number of high net worth
individuals, and their total wealth, expanded last year as markets recovered.
The RBC/Capgemini report showed North America has regained its top spot from Asia as home to the biggest number of wealthy individuals
and their assets.

Interestingly, in recent months two large US-headquartered
firms – Morgan Stanley and Bank of America – have exited some, or all, of their
non-US wealth management operations, focusing on specific foreign markets as
well as the domestic ones. This suggests there are limits to how global some of
these businesses can be against a background of rising regulatory costs and
other headwinds.

Profit growth

McKinsey said that two factors drove the increased
profitability in North America: more client
assets, and tighter cost controls. Client assets grew by 8 per cent over the
year, and participants improved their average profit margins on client assets
by 3 basis points to 32 basis points (as a percentage of assets). Market
appreciation of 5 per cent was powered by 16 per cent equity returns. The
sector logged an increase in organic net flows of 2.9 per cent following three
years of flat or negative flows.

“North American private banks cut costs dramatically in
2012, as cost margins fell 7 per cent to 63 basis points. The deepest
reductions were made in support and back office services, as reported expenses
in back/middle office and ‘other direct’ costs declined 7 per cent from 2011.
Total head count fell by almost 6 per cent, which more than offset a rise of 5
per cent per full-time equivalent employee compensation, resulting in a total
compensation expense around 1 per cent lower than in 2011,” the report said.

The number of $2.5-$10 million households served by private
banks increased by 12 per cent, one of the fastest growing wealth bands in
2012, reversing several years where many private banks were shedding such
clients.

“This [increase in clients being served] may indicate that
private banks are devoting more effort in attracting ‘core millionaire’ clients
– a group that we estimate will represent over 80 per cent of the profit growth
in the American market over the next five years,” the report said.

Asia

Among other regional findings, McKinsey’s report said that
private bank AuM – excluding Japan
– rose by 17 per cent year-on-year in 2012, driven principally by rising market
levels. Profit and revenue margins expanded by 6 bps and 4 bps, respectively,
reaching 17 bps and 82 bps. “These margins are slowly climbing back to the
pre-crisis levels,” the report said.  

The report underscored the industry understanding that most
Asian high net worth individuals are the first-generation to hold that status.
In China,
for example, entrepreneurs make up 40 per cent of all HNW individuals with 5
per cent of them falling into the ultra high net worth classification.

Europe

Within the western European region, AuM in private banks
expanded by 8 per cent last year, also largely an effect of rising capital
markets. Net inflows rose by 2 per cent, although the growth rate is still far
slower than before the 2008 financial crisis. Profit and revenue margins last
year fell, however, by 1 basis points for profit margins at 23 bps and 1 basis
point for revenue margins at 82 bps.

The report noted that an increased polarization between the
strongest and weakest firms in Western Europe.
Only 24 per cent of banks showed higher profitability than before the 208
financial crisis level of 35 bps.