Published July 14, 2009

The lesson that cost US$3t

Deutsche Bank official reflects on the crisis that shook the financial world

By VEN SREENIVASAN

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(SINGAPORE) The firestorm which hit the global financial industry, wiping out some US$3 trillion in market value and blowing away established players such as Lehman Brothers, has led to a period of introspection on the global financial business model.

Mr Raju: Says this is a US-led crisis, and Asia remains largely intact

And one segment particularly badly hit was wealth management, where huge asset values - especially in structured products - were wiped out overnight.

'All this hit suddenly after a good run for over a decade,' noted Ravi Raju, head of Deutsche Bank Private Wealth Management Asia Pacific. 'No one expected a huge chunk of the market to be wiped out overnight.'

Private banking clients saw their net wealth shrink substantially.

According to a recent Merrill Lynch-Cap Gemini report, the combined wealth of the world's high net worth individuals (HNWIs) - defined as those with investible assets of US$1 million - fell 19.5 per cent to US$32.8 trillion in 2008, but should recover to US$48.5 trillion in five years. The ultra-HNWIs - those with investible assets of more than US$30 million - suffered an even sharper drop of 24.6 per cent in combined fortunes.

Meanwhile, the banks themselves - having built up huge fixed costs in investments in facilities, people and technology - were suddenly faced with shrinking margins.

According to Mr Raju, the root cause of the problem was insufficient regulation of exotic products, lack of training of the people who sold them, and poor product knowledge by the people who bought them.

'Over the past two decades there has been such explosive growth that the industry over-expanded. There was also too much fixed investment and hiring of too many client advisers without the requisite training. Banks created and sold structured products without adequate control or oversight.'

The situation was particularly bad for the mass affluent market, or those with some US$500,000 in investible funds.

But the worst may be over, at least for Asia, said Mr Raju: 'This is a US-led crisis, and Asia remains largely intact. In five years, when we look back, this will seem like a blip in Asia's growth supercycle. The Asia-Pacific remains the manufacturing and entrepreneurial centre of the world.'

And Deutsche Bank's (DB) private banking franchise is focused on this niche.

'Entrepreneurs spend 95 per cent of their time on their business. So we offer solutions in investment banking and advisory work, then bring in our wealth management capabilities,' Mr Ravi explained.

'We do not compete directly with the Swiss boutique banks in Europe, which deal largely with the old money establishment. In Asia, much of the wealth is one or two-generational, and largely in the hands of entrepreneurs.'

He said the value proposition of DB's private banking franchise was its capability to offer an array of banking services onshore: 'DB is very much embedded in Asia Pacific. We have an onshore presence in virtually every market. So our strategy is somewhat different from the others. It enables us to forge closer partnerships with the growing numbers of entrepreneurial wealthy across Asia.'

Though smaller than the Swiss banking giants, DB's private banking franchise is far from small.

'We have almost 20 billion euros (S$40.8 billion) under management in the Asia-Pacific,' he said.

This is about 11.6 per cent of DB's global portfolio of 165.1 billion euro, and has grown from Dec 31, 2008's 18.4 billion euros.

With demand for wealth management still growing in the region, Mr Raju sees Singapore and Hong Kong remaining the two biggest Asia-Pacific booking centres for private wealth.

'Singapore in particular has all the right ingredients - regulatory structure, talent, institutional framework - to emerge as a global leader in wealth management.'

But retaining this lead will require more emphasis on the quality of its wealth managers, he added.