Recent debacles gave a glimpse into the inherent risks of the popular «one bank» model but some industry players remain intent on leveraging the cross-divisional strategy. finews.asia reviews the high-risk, high-reward nature of the business.
While the promises of the «one bank» model are undoubtedly intriguing – optimization to act as a one-stop shop for clients' private and business needs – recent debacles unveiled another side to closer internal integration.
Despite the alluring rewards, there is also the prospect that the «one bank» pursuit could create the tendency to excessively insource risk.
Insourcing Risk
The collapse of supply chain funds tied to Greensill is one such poignant example where a crash in one area of the business can cause major internal ripples.
Overall, a diverse mix of business outcomes manifested from Greensill-linked activities including the issuance of a $160 million bridge loan, fund fees earned from 1,000 most ultra-wealthy clients and reportedly a private banking relationship with Lex Greensill himself.
But in the aftermath, other Credit Suisse clients – including Qatar's Sheikh Hamad bin Jassim Al Thani – may have to take a discount from fund wind-downs, legal claims for damages are being leveled, numerous senior executives were replaced and shareholders face losses potentially greater than last year’s total profits.
Asia: «One-Bank» Paradise
While many of the wealthiest individuals in more mature markets have liquidated their businesses and focused on non-business activities such as wealth preservation or philanthropy, Asia remains in high growth mode with bustling amounts of entrepreneurial activity that have yet to connect with global markets.
Yet although the region's pipeline spells promises, it is also renowned for transparency issues that even U.S. regulators struggle to address such as the inspection of audits at foreign firms. The high-risk, high-reward nature of Asia exacerbates the dangers of insourcing risk at an excessive scale.
Case in point, ex-Credit Suisse chief executive Tidjane Thiam famously called fallen Chinese billionaire and Luckin Coffee founder Lu Zhengyao a «poster child» for «one bank» ambitions. He lauded gains from the relationship such as private banking services or equity sales one year before Lu's firm was exposed for accounting fraud.
More Cross-Divisional Business
Despite the recent mishaps, Credit Suisse’s current CEO Thomas Gottstein expressed continued confidence in the «one bank» model.
«There are many examples where we know the client better because we serve them from two or three sides. As a bank we simply need to know the conflicts of interests and respect internal compliance,» he recently said. «When it's done right, we know more about the client's financial strength and actions.»
Others industry players are also betting on more internal collaboration such as Asia-focused lender HSBC which recently announced that it would open institutional-level access for global banking and markets services to its family office clients.
«One-Bank», One Crash?
Financial business based on internal referrals is nothing new.
If a private bank attempts to make a certain trade at a certain price and term, it is fairly standard in many cases for the broader financial group to give first considerations internally to execute before outsourcing to a brokerage house elsewhere. Similarly, a discretionary portfolio manager may find the terms and the services of the internal asset manager more favorable than the open market, especially for simpler products with lower performance differentials.
What makes the «one bank» model attractive is its promise to holistically build relationships and capture revenue opportunities – especially from entrepreneurial clients – to create near, if not fully, win-all scenarios. But an excessive tilt towards insourcing also has the potential to excessively concentrate risk within a single bank.
Core Asset: Reputation
But more than just soured loans and improper advice, global banks vying for Asian wealth with excessive insourcing are taking a major bet on their most valuable asset: reputation. This is especially important in Asia where a 2019 survey by marketing research firm Nielsen found the region to have the lowest brand loyalty worldwide.
A safe balance sheet and sound financial advice have helped many universal banks earn their reputation today as trusted wealth managers and more easily attract new clients. But this perception could very easily fade should client tolerance be tested, never mind the competition from the likes of established pure-play banks or emerging fintech firms.
Global banks that claim wealth management as their core competence should be wary of insourcing tendencies and learn to say «no» more often.
