Private Banking Special 2014: Cost, Consolidation And Complexity

Earlier this year, J.P. Morgan celebrated 80 years of serving clients in the GCC region. This occasion gave cause for celebration and also afforded us the opportunity to reflect upon the changing nature of private banking in the region.

Through these past eight decades, the region has evolved into a globally significant economic region, with energy- driven GCC economies growing twice as fast as developed economies, creating enormous wealth.

Many of the world’s private banks and more and more regional banks are today operating in this highly competitive market – perhaps one of the most densely banked regions in the world. We have recently seen further gradual opening of local markets to international investors and a resurgence of local equity and sukuk issuance. The GCC wealth management market continues to grow in international importance. But this competitive landscape is changing just as quickly.

Developments in the banking industry since 2008 have unfolded at rapid speed. As a consequence of the 2008 financial crisis, legislators and regulators have worked with banks to make the financial system more stable and better insulated against future shocks.

These developments have improved stability and liquidity, but have also driven changes in the industry. The industry has seen a number of regulatory changes that have a lasting impact on banks’ balance sheets, cost structures and business models.

Regulators in the GCC adopted several similar changes with the same drive and along the same thematic lines as their counterparties world-wide. An example of the impact of these changes are soaring internal costs of additional technology, new controls and most importantly, of adding human capital. Only well-capitalised firms that have the commitment, culture, capital and capacity to evolve with these changes will be positioned for the future.

Only firms with the required capital, platform, profitability and a clear strategic focus will be able to continue providing wealth management services to ever more globally-minded and sophisticated clients while fully engaging the regulatory agenda.

Consolidation is sweeping across the private banking industry as a consequence of these dynamics: well- known firms have merged, retrenched from the region or exited altogether.

Such consolidation comes at a time when clients once again look to their private bank for stability, commitment and thought leadership as recent geopolitical events and markets have made partnering with the strongest global firms more important than ever.

This year has seen major geopolitical upheavals in eastern Europe and the Middle East while the aftershocks of the Arab Spring still resonate.

Markets, too, are likely set for a period of higher volatility as the era of large- scale central bank intervention and zero interest policies will gradually come to an end. Such times remind us why we are here: to empower clients to plan and secure their financial future and family legacies and to help families preserve wealth over generations.

WHERE WILL THE MONEY GO?

Greater geopolitical uncertainty will mean investors will demand safety, stability and continuity.

The end of both quantitative easing and zero interest policies will change the way clients will invest: normalised rates and greater volatility will require a thoughtful, sophisticated and responsive investment approach. Only the largest firms will have the full suite of solutions across asset classes needed to navigate this environment.

Enhanced regulations and higher cost of capital will continue to increase the cost of doing business for financial firms and drive further consolidation.