Private Banks After the Global Financial Crisis

Though less culpable than big banks, private banks are working to mend their reputations Published in Bloomberg Businessweek, 3 June 2015

Since the 2008 Global Financial Crisis, the relationship between the global banking industry and the global banking public has been a mix of contrition and mistrust. Repeated revelations of pre- and post-crisis misbehaviour by many of the world’s largest financial institutions have seen the image of the entire sector sullied. Private banks—much less culpable than their “too-big-to-fail” counterparts for the destabilisation of the global economy brought on by the crisis—have been among the victims of the reputational damage.

“Every time there’s a financial crisis or a correction a lot of people are hurt, so it’s natural for them to have suspicions and trust issues with their financial intermediaries,” says David Pinkerton, chief investment officer of Falcon Private Bank. “The financial crisis has left long-lasting emotional scars on many investors.”

For private banks, the extent of the damage suffered to the client relationship in the aftermath of the crisis often depended on how the bank handled a customer’s concerns. Cedric Lizin, head of the Middle East and North Africa at Barclays Wealth & Investment Management, says such periods of adversity provide an opportunity for private banks to prove their worth to account holders. “The crisis was a good opportunity for clients to test the support they receive from their banks during tough times,” he says. Khaled Sifri, chief executive officer of Emirates Investment Bank, agrees. “If you provide clients with the kind of guidance and advice that they find useful during a period of crisis then you may benefit,” he says. “Private banking is like any other service: Either it steps up and plays a positive role that helps its clients or it ends up not providing the kind of support a client wants and it loses out.”

According to EIB’s GCC Wealth Insight Report, published in March, 29 per cent of customers think about the reputation of a bank when choosing a wealth manager. As an issue, it’s second only to the standard of service in importance, and far ahead of things like a bank’s geographic reach or the returns it delivers.

Sifri says that there’s still a lingering mistrust among customers towards some financial institutions. “My sense is that the crisis of trust is fading a little bit with time but it continues to exist,” he says. “But it is directed primarily towards the larger banks. We get the sense from our investor community that a lot of bad news one hears about—like the penalties imposed on larger institutions—are the things that impact people’s opinions.”

Azeemah Zaheer, vice-president of Gatehouse Bank, says that she has seen a recovery of trust in the more daring behaviour of her clients. In the aftermath of the Global Financial Crisis, clients wanted “stable income streams, safe haven investments, names they could understand and trust,” she says. “Since 2011, my clients have started to venture up the risk curve a bit. Today the conversation is less about risk and more about opportunities. Now that people have recapitalised, they’re starting to feel more comfortable.”

This confidence has been bolstered by increased regulation of the industry. “The private banking sector has changed shape considerably since the crisis,” says Anthony Habis, head of family offices coverage for the Middle East at Citi Private Bank. He cites, among other things, improved governance and controls, a heightened duty of care and “a much more intimate understanding and appreciation of the regulatory framework.”

Greater regulation hasn’t been entirely helpful in the battle for trust. Legal and compliance costs, and stricter rules around ‘know your customer,’ means that banks now have a higher cost base to cover. This has restricted some smaller banks’ plans to have an easily accessible local presence. “The period from 2008-12 made it quite clear for a number of international private banks that onshore private banking would be an expensive and relatively slow route to profitability that they didn’t feel was justified,” says Seb Devoy, managing partner of Scorpio Partnership. “The Middle East is clearly a market where there’s a high level of wealth, but it’s not necessarily a market where international private banks have enough reach to justify a full onshore presence.”

Others, however, say that having a local presence is still critical. “You can’t develop trust as a fly-in banker,” says Pinkerton. “You need to be on the ground, sit with your clients, have tea, get to know their family and understand their needs. The fly-in approach can be successful in the beginning when there’s no one else there, but we think we can develop a stronger relationship by having our relationship managers in the same place as our clients.”

  • Spotlight Q&A: Ayman Abdul-Hadi, Regional Head of MENAP-Private Banking Clients, Standard Chartered

To what extent were private banks affected by investor mistrust as a result of the Global Financial Crisis and what measures have they taken to restore this?

After the financial crisis a lot of things changed in the industry. While the other private banks suffered a lot, we actually strengthened our position and our AUM grew far above the industry average. We have maintained our strong growth momentum. Thanks to our conservative approach, we were not affected, we were still lending when other banks did not, and we successfully grew our client and asset base during the crisis.

How are private banks adapting their offering to cater to high-net worth female clients?

Arab businesswomen are at the forefront of global markets and their business networks will play an increasing role in promoting trade and creating jobs in MENA and elsewhere. We expect that the increase in women’s wealth will be driven mainly by salaries and bonuses, which will grow in line with women’s educational and professional development. Women often focus on long-term investment goals and seek holistic advice.

How has the increased role of technology affected private banks’ relationships with clients?

In terms of IT, wealth managers are still focused on regulatory compliance and protection of client data. To deliver these new client strategies and offerings, private banks will need a technology platform that enables their execution. Institutions (both traditional and new entrants) that are able to seamlessly integrate digital capabilities in their business models will be the winners.