www.asianprivatebanker.com
MARCH 2017
Issue 109
ASIAN PRIVATE BANKER Independent, Authoritative, Indispensable
Indonesian Ta x A m n e s t y Time’s up! Ins and outs of Indonesia’s tax amnesty
I NSI DE
Straight Talk: UBP’s Michel Longhini & Michael Blake
APB Mandate: UBS’ Vinay Pande on why P/E ratios tell the wrong story
Technology: AML officers weigh in on transaction monitoring automation
Industry: Indosuez WM aims for more visibilty
P8
P14
P6
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Join the largest and most powerful gathering of senior private bankers in Asia
Albert Chiu
Chief Executive, Asia Pacific Region, EFG Bank
Amy Lo
UBS Wealth Management Greater China, Country Head, UBS Hong Kong Branch, Group MD, UBS
Francesco de Ferrari Bahren Shaari
CEO, Bank of Singapore
François Monnet
MD, Head Greater China, Private Banking Asia Pacific, Chief Executive Hong Kong, Credit Suisse
Michael Blake
Ronald Lee
Tan Su Shan
Head of Private Wealth Management, Asia, Goldman Sachs
This event qualifies for CPT/CPD accreditation. Lead Partners
MD, Head of Private Banking Asia Pacific, CEO Southeast Asia and Frontier Markets, Credit Suisse
Conversation Partners
CEO Private Banking Asia, Union Bancaire Privée
Group Head, Consumer Banking and Wealth Management, DBS Bank
RSVP to Koye Sun koye.s@asianprivatebanker.com / +852 2529 0617
CONTENTS ISSUE 109
4
Letter from the Editor
5
Echo Chamber
March 2017
Industry Senior management changes add further uncertainty to StanChart’s WM tech project
6 Technology Transaction monitoring may be ripe for automation, but no machine will beat the client “smell test” 8 Industry Straight Talk: Michel Longhini, CEO Private Banking, UBP; Michael Blake, regional head and CEO, Asia, UBP 10 Regulation Time’s up! Ins and outs of Indonesia’s tax amnesty CEO Andrew Shale Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Charlene Cong Alice So Managing Director Paris Shepherd Business Development Madhuri Chatterjee Sonia Lam Sam Chan Joanne Tse Stacey Wong Kale Law Olaide Ogungbesan Eldar Gainutdinov
Digital Tristan Watkins Yiyang Zhou Cécile de Buor Wilfred Lam Evy Cheung Jacqueline Lau Gloria Fan Alice Wong Samuel Chen
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Emerging Markets: Key to unlocking global growth
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APB Mandate UBS’ Vinay Pande on why P/E ratios tell the wrong story
Finance & Operations Karman Wu Jessie Cheng Koye Sun
16 Industry Indosuez WM’s Masclet: “We don’t want to be more visible for the sake of it”
Production DG3
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Published by Key Positioning Limited 13B Greatmany Centre 111 Queen’s Road East Wanchai, Hong Kong Tel: +852 2529 1777 Fax: +852 3013 9984 Email: info@asianprivatebanker.com ISSN NO. 2076-5320
12 APB Mandate EM bond investors “more relaxed” about Fed rate hikes
People Moves Movers & Shakers
L E T T E R F R OM T H E ED I T O R
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few months into the year and the mood among private banks remains positive, even if clients are taking a cautious approach to markets. “Wait and see” is the name of the game, to quote a products head at an American wealth manager. By all accounts, this uncertainty is feeding a seemingly insatiable hunger for fixed maturity products, while thematics continue to garner interest. March is also the month when Indonesia winds up its tax amnesty programme. The government set itself three key targets, but current data suggests that it will only hit one. Likely the biggest ‘disappointment’ for authorities is the meagre amount of assets that have been repatriated. At last count, only 14.6% of the government’s Rp 1 quadrillion repatriation target has been achieved. Hestu Yoga Saksama, spokesperson for Indonesia’s Directorate General of Taxation, tells us that the amount of assets repatriated has “been much lower than we initially expected” and that, by this measure, “the amnesty has not performed as expected.” All eyes will now be on Indonesia’s follow-up, which could include the deployment of around 5,000 temporary inspectors to flush out dodgers for punishment. This month, we sit down with two private banking heads at UBP: Michel Longhini, CEO private banking, and Michael Blake, regional head and CEO for Asia. Longhini and Blake have a big task on their hands. UBP, which has around CHF 13 billion in private banking assets and liabilities in Asia is targeting CHF 15 billion in the short term. We also speak to Vinay Pande, UBS’ global head of trading strategies, on the shortcomings of the P/E ratio measure and his “asset swap” approach, and survey AML officers on process automation. I would be remiss not to mention the release of our annual AUM and RM League Tables benchmark next month - so stay tuned.
Cheers,
Sebastian Enberg Editor Asian Private Banker
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e ch o cham be r “We are also beginning to see that Asian families are allocating a percentage of their wealth to philanthropy (between 10-30%) as a new asset class within their financial portfolios.” Jean Sung, J.P. Morgan Private Bank’s head of The Philanthropy Centre, Asia “A lot of these [AI and big data] solutions greatly empower the private bankers themselves, who often complain that they spend more time on admin and compliance – basically being glorified secretaries - than actually servicing their clients.” Henri Arslanian, PwC’s fintech and regtech expert for China and Hong Kong “[T]oday, we clearly want to be more visible in the industry.” Pierre Masclet, Asia CEO for Indosuez Wealth Management “With the acquisition of BSI, EFG reached an important milestone in its history in 2016. While focusing on the completion of the transaction and on driving forward the integration process, we maintained our underlying profitability in a challenging market environment due, in particular, to the disciplined execution of our cost reduction programme.” Joachim Straehle, CEO, EFG International Proposed reforms to the UK’s nondomicile taxation rules are “making people think twice about going back to UK.” Carlo Gray, partner and head of Buzzacott Expatriate Tax Services in Hong Kong “We don’t observe any outflow or negative reaction from clients [regarding Fed rate hike]. Most USD EM bonds traded higher [the day after] following the rally in benchmark US Treasuries.” Prashant Bhayani, CIO, wealth management Asia, BNP Paribas
I ND U S T R Y
Senior management changes add further uncertainty to StanChart’s WM tech project
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tandard Chartered has made a series of changes to its senior management team tasked with overseeing the bank’s US$250 million tech revamp, further fuelling speculation that the project dubbed ‘enable’ has run into problems. According to an internal memo seen by, programme co-director and global head wealth transformation, Vincent Goh, has stepped down to “pursue other opportunities within the bank”, while Marcel Fuerst, also project co-director, has retired to “pursue his personal interests”. As a result, Jean Nabaa, Standard Chartered’s COO for private banking and wealth management, has been asked to take on additional ‘enable’-related responsibilities and Shang Thong Chie will step into Goh’s vacated role. Chie is currently StanChart’s head, client services, change delivery, private banking and wealth management. The memo states that Chie will retain his “responsibilities for the ‘BAU’ [business as usual] change agenda in wealth overall project governance for private banking and wealth management”. Heidi Yip, manager, client services and change delivery, will take on Chie’s former responsibilities as head, client services and change delivery for the private bank. Chie and Yip report to Nabaa. Meanwhile, Paul Macpherson, global head, technology for private banking and wealth management will take over the execution of all ‘enable’ workstreams. A spokesperson for the bank confirmed the changes when contacted by Asian Private Banker. Standard Chartered has said little publicly on ‘enable’ since it was first announced during the
bank’s November 2015 strategic review. At the time, StanChart said that it was investing US$250 million in cash from 2016 to 2018 to “upgrade capabilities and build a single global platform” for its private banking and wealth management units in Asia, Africa and the Middle East, with the aim of improving sales productivity, improving efficiency with increased automation of backoffice activities and lowering operational risk. Peter Kok, Standard Chartered’s ASEAN and South Asia regional head, last year told Asian Private Banker that the revamp includes an app for both relationship managers and clients, portfolio monitoring functions, and research-based advice. ‘Enable’ is part of a group-wide US$3 billion upgrade of the bank’s entire IT infrastructure. Since the initial announcement, new information on the project has been thin, notwithstanding a mid-2016 update that said the project was making “significant progress” and a brief mention in the bank’s year-end report that said that both its technology and hiring investments have been significant but in terms of delivering, these are still “early days”. The report added that its expenses rose by 36% YoY to US$463 million, largely due to investments in senior private banking talent and an upgrade to its core banking platform. Sources close to the project tell Asian Private Banker that the revamp has encountered headwinds and that the bank is looking to rein in the scope of the project. The same sources add that regarding which geographies (media reports last year stated that ‘enable’ is rolling out in six key markets) are on the receiving end, timelines remain up in the air. A spokesperson for the bank declined to add further clarity on the direction of the project.
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TECHNOLOGY
Transaction monitoring may be ripe for automation, but no machine will beat the client “smell test”
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nti-money laundering (AML) officers at Asia’s private banks are warming to prospects of greater automation in their daily workflow, but remain wary of widespread adoption, according to a survey of 24 AML and compliance officers in Hong Kong and Singapore by .
This perspective was echoed by a Hong Kong-based AML officer, who said that intense regulatory scrutiny on private banking risk practices has prompted the bank to search for AML technology vendors that provide a solution “properly tuned in accordance with the bank’s risk profile”.
Transaction monitoring, as the term implies, involves sifting through client transactions to detect abnormal activities, or activities that do not match the risk profile of a client.
Regulators in Hong Kong and Singapore have become more vocal about risk management over the past year. Ravi Menon, CEO for the Monetary Authority of Singapore (MAS), has advised senior managers at financial institutions to keep “risk and compliance people close to you”, underlining their importance amidst a six-fold increase in onsite AML and counter-terrorism financing inspections in recent years.
Respondents said that the process is a ‘top three’ AML/compliance cost at their institutions, accounting for approximately 20% of the total compliance spend. KYC/due diligence and compliance round out the top three. Moreover, 63% of respondents said that transaction monitoring is the process most ripe for automation, and over half (54%) said that one of the biggest challenges they face is maintaining an “effective” transaction monitoring system. “There is a case to be made that if transaction monitoring was fully automated, we would be able to identify and quickly fix more operational deficiencies and incur fewer transactional losses,” said one Singapore-based AML officer, pointing out that transaction monitoring systems that identify unusual activities and generate alerts have been in place at private banks for some time, but lack sophistication and tuning.
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Another compliance officer said that constant changes to regulation and a heightened focus on risk-based assessments increase the need to implement “successful suppression logic” into transaction monitoring systems. “Usually, alerts are closed as a ‘non-issue’ and do not get investigated and labelled suspicious if they fall outside fixed parameters,” he explained. “We are looking at a technology that has an agile rule engine that would be far better suited for the regulatory environment financial institutions operate in today.” Overall, survey respondents said that the appetite for AML technology is growing at private banks, with budget allocations towards AML set to grow in 2017. Tightening regulatory requirements, both in Hong
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Kong and Singapore, were cited as the primary driver behind banks’ focus on AML, with a number of those officers spoken to referencing the Common Reporting Standard regime, Indonesia’s tax amnesty and the 1MDB scandal as events that have had a marked impact on their jobs.
The bionic balance Still, most of those surveyed remain cautious about fully automating AML processes by introducing new technologies. Officers pointed out that machines fall short in terms of “smell testing” a client and detecting nuances that may only become apparent when interacting in person.
Big data and AI In terms of implementing existing technology to bolster AML and compliance processes, big data analytics and artificial intelligence (AI)/machine learning were both viewed as the best options by respondents. More specifically, officers pointed to the possibility of using big data and analytics tools to sift through client data across multiple systems, from transaction monitoring to KYC client onboarding, thereby making it easier to continuously monitor activities. “Currently, data is scattered across technologies making it difficult to perform high level analyses, and pre-defined rules also make it difficult to predict new patterns and behaviour that may lead to violations of some sort,” a Singapore-based AML officer said.
“While cost escalation is certainly a reality in compliance and there is certainly room to compress the sizes of current teams at universal banks - where roughly 1,500 staff sit in front of computers and manually screen transactions - with the use of third party vendors, we still prefer to manage people,” said a Hong Kong-based regional head of AML at an American private bank. “That gut feeling or reading of someone that is behaving in a certain manner and dodging questions is something that a machine will never be able to pick up,” added another officer in Hong Kong.
Various studies have shown that AI can make fragmented processes more “intelligent” by using ontology-based information extraction a field of information extraction that drills down into the concepts and categories of a subject area or domain, revealing properties and interrelationships. AI also has the ability to learn and apply new rules.
ASIAN PRIVATE BANKER
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Straight Talk: Michel Longhini CEO private banking, UBPP Michael Blake regional head and CEO, Asia, UBP [APB] Michel, you recently penned a piece that listed challenges facing the private banking industry, including a drop in brokerage revenues, a “zero-sum” game for assets and heightened competition from direct investments. That was a grim - if refreshing - assessment from a CEO. [ML] Yes I received a lot of feedback on that. There has not been a lot of realistic commentary coming out of the industry. Everybody thought Asia would sit outside of these global trends because of its particular characteristics, but in the end, it is the same. Consolidation is happening far more than we expected, margin pressures persist, banks are playing with balance sheets more than ever. Some of these trends originated in Asia and spread globally while others spread to Asia. Do you think Asia is seeing a correction of sorts, in terms of industry optimism? [ML] There has certainly been over-optimism in Asia regarding growth prospects, revenue generation and hiring. This is always a problem where you need to be selective, provide high service and you run the risk of hiring bankers that, in the end, do not deliver. It’s a complex business. [MB] This more realistic phase of growth for the industry in Asia is a very good thing. If you go back over the last 10-15 years, you had a period up to 2007 that was, in a sense, the halcyon days, where everyone was attracted by and convinced of the growth and were willing to commit - or overcommit - to significant investment against the promise of future returns in this part of the world. You then had a period when the global financial crisis hit and attention was focused on issues in the US and Europe. This has given way to the current phase, where banks are looking far more closely at the returns on their investments in Asia. [ML] To be more blunt, there was a view ten years ago that you were building a private banking business with high growth potential, low risk, and huge value on the expectation that everybody would be looking to sell the business at 5% on the assets. If you look at the last two or three transactions in Asia, that is not the case. From memory, only the OCBC-ING deal came close to that rate and that ended up being a great purchase. [ML] It was a good purchase, and at that time it was a good way to grow. Today, rates have been higher than expected, profitability - if you are over-optimistic - is difficult to achieve, and valuations are unrealistic. You have said before that private banks today need to: (i) adjust costs in line with their growth potential and their ability to generate revenue and (ii) reinvent their offering and not engage in expensive hiring. How have you applied these solutions to UBP’s business in Asia? [ML] Asia [and the acquisition of Coutts] for us was a very significant 8
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step because we had a small set up prior. It was a good acquisition as we had an extremely limited amount of attrition, which proves that the book of clients brought across to UBP felt positive. We have since optimised the cost base and the run rate in terms of profitability went positive at the end of the year. What aspects of your cost base have you focused on? [ML] We optimised our general global cost base, for example fixed costs such as rent, and now that we have bought the set up, we can optimise some of the existing teams. Looking at the processes oneby-one, now that we have integrated, it becomes important to simplify and achieve cost reductions. [MB] It’s also the beauty of the organisation only being focused on wealth management and asset management. We don’t have the complexities of shadow allocated costs or areas of costs that aren’t controllable. Everything that we consume we can control and that, for all of us, is tremendously powerful. How diversified are your revenue streams in Asia - I ask this because last year was a difficult time for hedge funds and UBP has historically been associated with hedge funds and alternatives in general. [ML] Hedge funds do not contribute a major part of our revenues today. They used to, and they still are one of our strengths in terms of offering, but now they are a smaller portion of our activities. We saw success last year in fixed income solutions and in structured products globally. I’m surprised, if only because the industry saw a downturn in structured product volumes in Asia in 2016, at least over the first three quarters. [MB] We bucked the trend in that case. [ML] We also saw additional revenues from direct investments, which touches upon the point that we must look at solutions that are beyond the average scope. Last year one of the successes we had in Asia was to promote and develop direct investment solutions, such as real estate deals and funds that we structured, the sale of a plane that we then leased to an airline company. Also, by bringing the asset management capabilities of UBP to the Coutts business, we increased our capacity to generate additional revenues, which was a pleasant surprise. What has worked well for us is the optimisation of costs following the acquisition and the addition of capacity on the revenue side through new product and ideas. On the Asian side, it was not the same type of acquisition as Coutts Europe, which was an integration with an existing set up. Here it was the creation of a set up for UBP, but the fact that attrition was low has created a platform for us to start hiring new teams. We are now in the process growing assets. Last year, UBP set itself the target of doubling the size of its business in Asia over the medium-term and increasing the RM head-
I ND U S T R Y count to around 100. What progress have you made? [ML] Short term, we set ourselves the target of reaching CHF 15 billion in assets and liabilities in Asia. Today we are around CHF 12 billion and CHF 17 billion including asset management. I think with the recent hiring we have done and with clients we have brought across from Coutts, growth will continue this year. Your latest earnings report noted strong inflows in Asia in 2016 from individual and institutional clients. With regards to the private banking business, did these new assets primarily come from existing or new clients? [ML] Primarily from new clients, but also from existing clients bringing in additional money, which is a very good sign. We are seeing a good balance between existing client growth because we have been able to offer them additional solutions and new assets driven by our hiring at the end of 2016 and the beginning of this year. On the asset management side, we have had very good success in the institutional business, in Japan in particular and had good inflows to our Chinese equity products. Is the Asia business now contributing meaningfully to revenues at the group level? [ML] For private banking, Asia is the second biggest contributor after Europe at around 10%. Our aim is for Asia to represent between 15% and 20%. Given these aims, do you think that you are doing enough to communicate to prospective clients and bankers that you are seriously committed to the Asia market? [ML] We are not loud in terms of advertising because the bank has never been very active in that area. But we like to be loud in our facts: there are not many banks that have, more or less, doubled their size in the last five years in this business, created two booking centres in Asia, and grown the institutional business significantly. Both in Asia and Europe, we are certainly seen as the player that is committed to private banking. You don’t buy four banks in five years just for kicks. Do you envisage another global or regional acquisition? [ML] You never know. [MB] The short-term priority is to make sure that those RMs who have joined us get up and running quickly. We’re already seeing this happen. How much patience will you show toward these RMs in terms of hitting profitability? [ML] Some may take longer depending on their client base, but generally, after a year you have a general sense if an RM will make it. Some may fit into the organisation and leverage the platform effectively, some may not, because they were wrong in assessing their capacity to bring clients in, or perhaps their clients are asking that our platform does not offer. How is UBP approaching CRS and the complexities it engenders? [ML] CRS is the end of a cycle. Getting to know the status of your clients is something that is relatively standard. The chain of information [engendered by CRS] is the last 10% of this global tax transparency exercise. It does bring an extra cost, because it is quite difficult to source the data, put it in the right format and send it to the appropriate jurisdiction. Do you have a clear sense as to what the cost burden of CRS will be on UBP?
[ML] The Swiss Banking Association estimates CHF 300-500 million to implement – there are project costs and there are also running costs. What is clear though, is that these costs will be recurrent and that there is no turning back. In terms of competitiveness, we have to take into account all tax-related impacts. Today, we must take into account that your competitor is, for example, a wealth manager from a bank somewhere in the world, for instance in Jakarta, which has solutions that are totally tax efficient for clients in that region. This dynamic will have a huge impact on our offering, particularly for an international private banking business, going forward. How are you addressing concerns from bankers and clients regarding CRS? [ML] We are spending a lot of time on training, we are adjusting our offering to make sure that we do not do anything that will penalise clients on the tax side. If you don’t do this, you cannot be part of the game - if you produce good investment returns, but didn’t realise that you onboarded incorrectly, sold too quickly or used the wrong instrument, at the end of the day you just cannot compete. What are your immediate priorities in Asia for 2017. [MB] From a geographic perspective, the focus is Indonesia, under Febby Avianto’s leadership, and Greater China. It’s a good time to be re-focusing on Indonesia, post-amnesty. Clients will have made their decisions and so there will be a greater willingness to engage. The amnesty also has a levelling effect. There is a real opportunity to look at clients that have interest in the Indonesia market. This is why we hired Febby, that’s what Febby will focus on, and this will be a key area of focus for us this year. With regards to Greater China, three quarters of the Hong Kong business is very much focused on the traditional Hong Kong families. The opportunity for us is in capturing international flows connected to the Mainland and in addressing entrepreneurs’ needs between Hong Kong, Taiwan and the Mainland. We’ve been hiring and will continue to hire to build out the Greater China team. What are Mainland clients banking offshore looking for from UBP? [MB] They are more open to the idea of an international wealth management relationship than perhaps they were ten years ago when they were focusing on growing their businesses. Back then, the best thing they could do was reinvest excess capital into those businesses. For a number of reasons, this has changed. The economy in China has matured, and Mainland Chinese have become more international in their outlooks. Also they are far more open to a conversation around diversification. What they are looking for is a classic wealth preservation solution, which UBP is very well placed to provide. But with many Asian HNWIs still in a wealth accumulation phase, are you hamstrung by the fact that you don’t have an investment banking platform to leverage upon? [ML] Helping the client find the solution is what we can do. Not having an investment banking arm is not a real problem. It’s very difficult to combine an investment and private bank into a single entity for many different reasons. We prefer to remain in our area.. [MB] It’s a huge market with huge potential and it’s important to be clear on what your value add to clients is.
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R E G U L A T I ON
Time’s up! Ins and outs of Indonesia’s tax amnesty Indonesia’s tax amnesty has been described as a resounding success and an abject failure in equal measure. Both views, while overcooked, hold truth.
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ith mere hours to go (at the time of publishing) before Indonesia’s tax amnesty window shuts tight, the government seems unlikely to meet two out of three key targets, and though authorities are holding on to their contention that the amnesty is, in relative terms, the most successful of its kind, their inability to stimulate substantial asset repatriation flows has removed some of its lustre. The amnesty was launched in July last year in a bid to claw back an estimated Rp 4 quadrillion in undeclared ‘Indonesian money’ parked in offshore jurisdictions, so as to shore up state coffers ahead an infrastructure development push. At the heart of the issue is Indonesia’s low rate of tax participation. In 2015, Indonesia had only 27 million registered taxpayers out of a population 256.7 billion, while the tax revenue/GDP ratio was around 11%. The average ratio for OECD countries in 2015 was 34.3%. Participants were presented with two options: declare and repatriate or simply declare. The first path incurs a substantially lower penalty rate than the second, although penalties increase in unison over the amnesty’s three phases, culminating in a 5% tariff on repatriated assets and a 10% tariff on assets that are declared but not moved onshore. By tiering the penalty rates, authorities had hoped to stimulate a thick and early flow of repatriated money. This has not borne out. To date, Rp 146.5 trillion has been repatriated, or just 14.7% of the government’s target of Rp 1 quadrillion.
“On this count, the amnesty has not performed as expected,” says Hetsu Saksama, responding to questions from Asian Private Banker, who points out that business considerations as well as social and political factors are likely the primary drivers of the low repatriation rate. The writing was on the wall at an early stage. Asset repatriation during 10
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the first phase was slow, prompting a terse warning from Indonesia’s The writing was on the wall at an early stage. Asset repatriation during the first phase was slow, prompting a terse warning from Indonesia’s finance minister last August that dodgers “face hell”. Meanwhile the Jakarta Composite Index reacted negatively to anaemic repatriation flows, dropping 4.4% in the space of 4 days in early September as confidence in financials and infrastructure evaporated, until a lastminute surge in participation in the dying moments of the first phase saw stocks rally (JKSE has since reached 5570.20 [30 March] or +8.3% since its 14 September trough of 5406.14.. Authorities remained buoyant: “Frankly, it has exceeded our expectation and this is only the first phase,” cabinet secretary Pramono Anung said at the time, adding that the surge before higher penalty rates kicked in caused computer servers to hang. Repatriation momentum has since been erratic, however. Still, Saksama points out that, on balance, the amnesty has not been a disappointment. “The amount of revenue collection in the amnesty programme as well as assets disclosed as percentage of GDP were among the highest in the world,” he says. As of last week, the government had brought in Rp 107 trillion [that total has since risen to Rp 112 trillion] from over 780,000 participants (including 73,000 HNWIs), over 178,000 of which had never before lodged tax returns. Revenues still lag the target set by the government, however, and with just a few hours left before the programme concludes, it is doubtful that the Rp 165 trillion objective will be met. Where the authorities will find solace is in the fact that total declared assets as a direct result of the amnesty have already exceeded the Rp 4 quadrillion target. By this measure (and by revenues collected), some
R e gul a ti o n
have labelled the tax amnesty as an outright success when held against similar programmes in Italy and Chile.
Indeed, the vast majority (73%) of respondents to an ongoing Asian Private Banker poll say that their private bank has seen “a trickle of outflows” as a direct result of the programme.
The Singapore factor Singapore, as one of Asia’s two offshore banking hubs, has cast a long shadow over the programme. Estimates prior to the amnesty placed the amount of ‘Indonesia money’ in Singapore at around US$200 billion and there were concerns that the amnesty would trigger outflows thick enough to ‘injure’ the city-state’s financial services industry. Indonesian authorities prickled at reports that Singapore’s banks were actively “hindering” the amnesty, whether by offering to pick up the two percentage point difference in first phase penalties or by ‘creatively’ structuring assets to keep money offshore and off-radar. There were also reports that private banks were sharing the names of amnesty participants with local police. Following a series of colourful exchanges between authorities from both jurisdictions that played out in mainstream and social media (Indonesia’s vice president Jusuf Kalla told reporters that Singapore’s alleged actions “[prove that] most of the money stashed in Singapore comes from Indonesia”), the Monetary Authority of Singapore (MAS) and Singapore’s Ministry of Finance issued a joint statement denying that authorities were attempting to “thwart” the programme. “Recent claims in the Indonesian media that Singapore is implementing policies to ‘thwart’ Indonesia’s tax amnesty programme are untrue,” read the statement posted on the MOF website. “Singapore has not cut tax rates or changed any of our policies in response to Indonesia’s Tax Amnesty Programme.” Indonesia’s finance minister Sri Mulyani Indrawati fired another salvo: “I have stressed to the Singapore government that the Tax Amnesty Law clearly mentions that Indonesian taxpayers have the right to join the amnesty programme and be pardoned for all their tax crimes and administrative sanctions,” she told media. “I will monitor this and all Indonesians that feel they have been hindered, we will follow up.”
Private banks impacted? The extent to which Singapore’s private banks have been impacted is not clear and outflows have likely been spread unevenly across players. Just this month, a managing director at a Singaporean institution told Asian Private Banker on the condition of anonymity that outflows had been insignificant at most. During the first phase of the amnesty when penalties were at their most attractive, there was a general consensus that private banks had navigated the worst. A report by RHB in October pointed out that the amount repatriated from Singapore during the first phase (around Rp 79 trillion, US$6.3 billion) is diminutive when held against the total amount of client assets with wealth managers in Singapore. At that point, DBS, OCBC, and UOB, the city-state’s three major lenders, had an estimated US$234 billion in wealth management AUM.
Those institutions that disclose their financials with a relative degree of transparency hinted at some movements. Credit Suisse Private Banking APAC, while recording CHF 14.6 billion in net new assets in 2016 (“primarily from Greater China, Australia and Southeast Asia”), noted outflows “in connection with the regularisation of client assets of CHF 2.5 billion, mainly in Southeast Asia”. “Especially at the year-end, there was a lot of movement, especially in the ultra high net worth space,” Helman Sitohang CEO APAC for Credit Suisse told media when the bank released its 2016 results, noting that the amnesty had played a part. Rival UBS Wealth Management saw net new money outflows of CHF 4.1 billion in 4Q16, including “CHF 7.4 billion of cross-border outflows, mainly in emerging markets and APAC”. The bank did not say if Indonesia’s amnesty was a contributor. To be sure, regularisation, while ‘inconvenient’, is a positive development in the long term and many players are viewing the programme as an opportunity to be seized. “It’s a good time to be re-focusing on Indonesia, post-amnesty,” says Michael Blake, UBP’s regional head and CEO for Asia [see ‘Straight Talk’, p.8]. “Clients will have made their decisions and so there will be a greater willingness to engage. The amnesty also has a levelling effect.” The Swiss pure play recently hired Febby Avianto, formerly head private banking Asia for Falcon Private Bank, to build out its Indonesia offshore business. Elsewhere, HSBC Private Bank added a second team to cover the Indonesia market in January. The regional giant is currently pursuing a “pivot to Asia and ASEAN” strategy. OCBC, Bank of Singapore’s parent, is reportedly making a play for the Indonesia onshore market, with an application by PT Bank OCBC NISP to establish a private banking business under review by the Indonesian Financial Services Authority. DBS is also making a foray into Indonesia on the back of its purchase of ANZ’s retail and wealth management business in five Asia markets.
At the pointy end of transparency Of course, Indonesia’s amnesty should not be viewed in a vacuum. At the beginning of next year, OECD’s Common Reporting Standard (CRS) regime will come into force in most Asian jurisdictions, requiring them to obtain client information from financial institutions and, where necessary, to ‘automatically’ share it with other jurisdictions. While technically distinct, observers point to the fact that frontrunning CRS with the amnesty will have likely incentivised Indonesians to declare ahead of schedule. Indonesia is set to conduct its first information exchange in September 2018.
ASIAN PRIVATE BANKER
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A P B M A N DAT E
EM bond investors “more relaxed” about Fed rate hikes
Percent of GDP/Percent
6
4
2
0
-2 2001
2003
2005
2007
Net Private Flows to EMEs, Including china
A
lthough emerging market (EM) bonds, particularly those denominated in USD, are seen as vulnerable to the Fed’s rate hikes, Asian investors are more relaxed about the Fed’s influence on these assets than they were four years ago – when the socalled “taper tantrum” occurred. “We don’t observe any outflow or negative reaction from clients,” says Prashant Bhayani, CIO, wealth management Asia, BNP Paribas. “Most USD EM bonds traded higher [the day after the rate hike] following the rally in benchmark US Treasuries.”
2009
2011
Excluding China
2013
2015
Fed Funds Rate
Further, a strengthening US dollar makes it costlier to pay off USDdenominated bonds for corporates in emerging markets. During the taper tantrum period of mid-2013, when the Fed introduced a policy to taper its asset purchases and tighten its monetary policy, massive capital outflows were experienced in emerging markets. According to IMF data, net annual private flows fell from 2% of emerging market GDP in 2013 to -2% in 2015, driven by the market’s fears of further monetary policy tightening in the US.
Bhayani explains that Asian investors are looking for investment opportunities in fixed income, with the uncertainty surrounding rate hikes temporarily abated.
However, on the back of a generally strengthening emerging market economy and reduced dependency on the US, the market is better positioned to handle exogenous shocks.
Credit Suisse’s Asia CIO, John Woods, echoes this sentiment and says that since the rate hike in March, more Asian investors have been buyers of USD-denominated bonds than sellers.
In a recent media briefing, Chia-Liang Lian, head of emerging markets, Western Asset Management, Legg Mason, said emerging markets were ”highly dependent on oil and gas exports”. This highlighted that the recovery and the stability of oil prices boded well for emerging markets.
“As a matter of fact, the Credit Suisse investment committee remains positive on both emerging market hard currency and local currency bonds, as it remains to be a good source of yield,” says Woods.
2013 taper tantrum and EM capital outflows In the wake of the Fed’s rate hikes, emerging market companies with overseas borrowings tend to be more sensitive and susceptible to foreign exchange risks, leading to potential refinancing difficulties.
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APB MANDATE
Even so, according to the Institute of International Finance(IIF), foreigners pulled US$24.2 billion from emerging markets in November last year, the most since the taper tantrum in June 2013. This selloff included US$8.1 billion worth of equities and US$16.1 billion worth of debt. The IIF estimates that emerging market economies will see a total of US$490 billion worth of outflows in 2017, led by China.
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Emerging Markets: Key to Unlocking Global Growth Inefficiencies at the sovereign and corporate level have resulted in investors demanding a higher risk premium from Emerging Markets. Unearthing the potential of Emerging Markets
Jack Lin, Head of Asia Pacific, Middle East and Africa, Pioneer Investments
The potential of Emerging Markets (EM) has been somewhat reduced to a more volatile and less appealing field of choice for investors, mainly due to implementation shortfalls such as regulatory weakness, legacy capital structures and policy failures.
However in recent years, the asset management industry has begun to recognise weak governance as an opportunity, helped substantially by accommodative monetary policy. In fixed income, superior governance standards have generally correlated with smoother performance. We have seen less default risk in those issuers with higher quality governance, while in equities an active portfolio of well-governed companies have outperformed a portfolio of less well-run operations.
Factors driving Emerging Market returns We believe that three factors collectively drive EM returns – economic growth, market deepening and changes to governance. Growth and market deepening are straightforward and propelled by secular drivers, but governance is more complex. To commit capital, investors require legal protection of their interests; the concept of ownership needs to be consistent with the Western definition of the term. It is our view that the largest single contributor to investor dissatisfaction in EM stems from variable standards of corporate and sovereign governance. In fixed income, not every issuer who can pay chooses to do so, while in equities the issue of “transparency� in accounting is problematic in some markets.
A critical question for the EM investor The question for investors is not whether EM sovereign management is generally improving but whether EM economies are getting sustainably better fast enough to compete successfully in the future. This means developing competitive advantages against both emerging and
mature countries alike. Bulls typically point to the recent record and argue that the last decade reflects a growing EM renaissance. The more bearish view is that there is still much to do and that the required resources, and time to deployment, are not generously distributed. More pernicious are those voices that point to the widening gap between rich and poor in the emerging world.
Looking towards progress While positive demographics and open economies have supported growth, the reality remains that EM countries are riskier than mature countries. EMs are engaged in a struggle to attract investment and generate prosperity. Competitive advantages can be narrow, policymaking can be surprising and thus outcomes unexpected. Negative investor experiences have accumulated over time and can reflect in a higher risk premium. To attract investment, countries need to offer investors stable economies, guided by predictable policymaking, while local laws need to offer a stable, consistent framework for competition. It is common to claim that many countries have made progress in these areas, but not all have.
The important role that EM plays The economic and social benefits of improved governance practices in the developing world could lead to a period of growth that pays a wide range of dividends. For mature market savers, an increase in economic activity by the 700 million people who live on a dollar a day in the developing world could create the demand that leads to a more balanced global economy. An improvement in governance could attract capital to corporates that are focusing on reducing inequality in the developing world, thus reducing western security costs. Above all, the investment returns could help chip away at the current pension deficit. In our view, EM could go much further on governance reform, but they will not achieve this alone. The pension fund industry needs to do more to address current shortfalls; encouraging shareholder activism may present a way forward. The benefits would be clear: a more prosperous stable emerging world would export fewer problems, while mature market pension funds would participate in a general increase in prosperity while meeting their return objectives.
Disclaimer: Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of March 2017. The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investment product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. ASIAN PRIVATE BANKER
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A P B MANDA T E
UBS’ Vinay Pande on why P/E ratios tell the wrong story
G
lobal investor appetite may have waned in recent years due to complex social, political and economic risks, but UBS Wealth Management believes that such factors do not warrant current levels of underinvestment, highlighting the industry’s misuse of priceto-earnings (P/E) ratios to determine stretched valuations.
on the gap between the equity risk premium (ERP or equity earnings yield less the risk-free rate) and a credit spread (Moody’s Baa spread average of 10-year and 30-year government rates). According to a February 2017 reading of this indicator, the ERPminus-credit spread rate was not far off its long-term average.
Are equities actually expensive? “Investors globally, including in Asia, appear to be underinvested in general and in equities specifically, and the issue of expensive valuations is commonly cited,” says Vinay Pande, head of trading strategies at UBS’ CIO office. “But are valuations expensive? On a price-to-earnings basis, yes, but extrapolating the value of stocks based on a single cash flow is unsound.”
“Many investors object to my argument on the grounds that monetary easing has driven bond yields too low, such that the equity risk premium is exaggerated,” Pande says. “But equities have been trading no richer than their historical low spreads of the 1990s. Even after subtracting the credit spread, the most recent S&P 500 ERP is still 87 bps higher than the long-term average.”
Currently, the S&P 500 is trading at a P/E ratio of 26.5 - well above its historical average of 15.65. But according to Pande, using P/E ratios to determine valuations is a flawed practice in the sense that one is determining the relative ‘cheapness’ or ‘expensiveness’ of equities based on a quarter of year’s worth of earnings.
The “asset swap approach” to determine uncertain cash flows may seem familiar to fixed income analysts but, interestingly, its origins trace back to the asset class Pande believes is well-suited to this method.
“If you make no earnings for a single quarter or year, is your price-toearnings (P/E) ratio infinite?” he asks rhetorically. “You may want to apply a P/E ratio that is based on long-term earnings like Shiller P/E to avoid this bias but in the end, this is not much of an improvement because the price is fast-moving whereas earnings move slowly.”
So, how should equities be valued? Instead UBS is taking what Pande refers to as an “asset swap” approach. Essentially, the bank determines the attractiveness of markets based
“[T]he true pioneers here, in handling uncertain cash flows, were academicians and equity analysts in the 50s and 60s,” he says.
Still, Asian HNWIs remain underinvested Still, clients globally, including Asian HNWIs, remain unconvinced on equities. “Even in Asia, where growth is strong, investors are seriously underinvested,” Pande points out. “The problem of being underinvested when developed market central banks are getting
S&P 500 Equity risk premium (ERP) vs. Baa Corp. Credit Spread Long-term average
Latest reading
S&P 500 ERP
3.50%
4.19%
Credit Spread
2.09%
1.91%
ERP minus Credit Spread
1.41%
2.28%
Source: Bloomberg Finance L.P., IBES, UBS, As of February 17, 2017 14
APB MANDATE
A P B MANDA T E
closer to achieving inflation targets is exposing yourself to negative real returns - a situation akin to termites eating your house.” Headline inflation from major economies like the US and Europe is already exceeding 2% and core inflation is also picking up, an issue that has already led ECB officials to signal additional tightening before the end of its asset purchase programme through deposit rate cuts and potential tapering by the BoJ.
The types of individual trades advised are similar to those made within hedge funds but still distinct from directly investing into these alternatives. STIO aims to enhance transparency and decision-making flexibility, allowing clients to pick and choose ideas they like instead of buying a full hedge fund portfolio. One other point of difference is the strict discipline applied to failing trades.
“When the burden of debt is very high among borrowers with limited capacity to repay, there are only two ways to address this: either you trigger a credit event or you ensure higher nominal growth rates than nominal interest rates,” Pande continues. “Who pays for this gap? The underinvested. Being invested is scary, but being uninvested is a lousy idea.”
“Our focus is not just on our hit rate; what matters to us is the average gains across all the trades,” he says, intimating that when peers merely stress hit rates, there is a risk of prolonging underperforming trades to reach positive grounds. “We are patient with our winners and brutal with our losers so if a downside scenario we anticipated plays out, we cut the trade without hesitation.”
UBS WM’s “Short-term investment opportunities” (STIO) advisory offering
In Asia, inadequate investor education remains a hurdle for private banks that are attempting to introduce new asset classes or investment products into portfolios. Exposure to relative value trades is uncommon within Asian HNW portfolios. Although UBS’ offering is garnering some interest in Asia - especially from Hong Kong UHNW clients - Pande notes that the offering is better suited to more sophisticated investors and underlines the importance intense handholding.
Pande’s equity view are implemented into a broader offering called “Short-term investment opportunities” (STIO), which UBS Wealth Management launched in October last year. STIO’s investment process rests on the two pillars of valuation and macro scenario analysis, producing advice for clients on relative value multi-asset trades with shorter horizons of up to six months.
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I ND U S T R Y
Indosuez WM’s Masclet: “We don’t want to be more visible for the sake of it” associated with public hoardings and high profile sponsorships. But for Masclet, this approach is insufficient. “It’s more than just branding, it’s about client events and communication with clients,” he says. “But we don’t want to be more visible for the sake of it. We want to grow our client base as I strongly believe that Indosuez Wealth Management has a unique positioning and offering in Asia.”
Hiring and redeployment This includes increasing the number of front office staff in Asia by 20% over the next couple of years, adds Masclet, whose short time as Asia head has already been punctuated by the key hire of Arjan de Boer, formerly head of North Asia ANZ Private Banking and, before that, ABN AMRO Private Banking, as head of market solutions and investments (filling a vacancy left by Norbert Joué in June last year), as well as the addition of a handful of relationship managers (Indosuez Wealth Management has just over 70 RMs in Asia, split evenly between Hong Kong and Singapore).
P
ierre Masclet’s appointment as head of Credit Agricole’s private banking business in Asia in January fell just shy of a year after the division was rebranded as Indosuez Wealth Management, amidst a global restructuring exercise. The impetus behind the rebranding, according to the bank, was to align “subsidiaries in different geographies to offer a streamlined and cross-border service to families and entrepreneurs across the globe” and to address brand dilution outside of France. And Masclet, an industry veteran who has spent the bulk of his career with Banque Indosuez and the Credit Agricole group, is keen to build brand awareness in Asia, where the bank has maintained a presence since 1894 when it opened a Hong Kong office under the banner of Banque de l’Indochine.
Masclet’s appointment also coincided with a change in role for Sen Sui, who was named as commercial head for Asia, having previously served as CEO Singapore and, before that, head of markets and investment solutions. Sui’s redeployment raised a few eyebrows, if only because commercial development roles typically do not represent a step up the career ladder. “Not at all” says Masclet. “I have been appointed CEO for Asia and Sen has been appointed head of all commercial development in the region. His previous role was local, but now he’s covering all regions, and in charge of all team heads and relationship managers. Therefore, he has a global and very important role to drive our commercial effort in line with our ambitions.”
A matter of scale When the rebranding was announced in January last year, Indosuez Wealth Management’s head for Switzerland, Middle East and Asia, Patrick Ramsey, told Asian Private Banker that the private bank had €10 billion in AUM, accounting for around 10% of its global total.
Visibility “We intend to be more visible,” says Masclet. “Part of the culture of Crédit Agricole is that, even though we are one of the top 15 banks worldwide, we are a group that remains quite discrete in terms of communication. However, today, we clearly want to be more visible in the industry.” Visibility, especially in Hong Kong and Singapore, is typically 16
ASIAN PRIVATE BANKER
“We have seen growth in all regions since then,” says Masclet, declines to disclose current figures or if growth in Asia has been on par with – or even exceeded – the regional average for the bank. A back of the envelope calculation of reveals an average 6.9% YoY increase in AUM for four of the region’s top 5 private banks by client assets (UBS, Credit Suisse, HSBC, Julius Baer) in 2016. If Indosuez
I n d u s tr y
Wealth Management grew at a similar rate in Asia last year, it would still have less than €11 billion in Asia AUM – not enough to place it among the region’s 20 largest private banks booking out of Hong Kong and Singapore. “Some competitors have divested, some have exited the market due to cost cutting and geographical repositioning,” says Masclet, undoubtedly referring to the exit of French compatriot, Societe Generale Private which sold to DBS in and, more recently, ABN AMRO, which offloaded its Hong Kong, Singa pore and Middle East business to LGT. “Ultimately each player tries to find a strategy. Our own strategy has always been to rely on three pillars: we are an international bank with financing capacities, personalised investment advice capacities, and wealth structuring capabilities. Step by step we are developing these pillars.” The CEO says that, on the advisory side, the bank is increasing its product offering range, having added private equity services, for example, and efforts are being made to bolster recurrent revenue, especially in the context of last year’s industry-wide slump in transactional volumes (structured products volumes fell by a bankweighted average of 13.8% for the first three quarters of 2016, according to Asian Private Banker data).
“The group is more willing to consider organic growth by attracting and retaining clients, and by enlarging their wallet share with us,” he adds. Of course, this doesn’t mean that deals are anathema to Indosuez Wealth Management: in October last year, it struck a client referral deal with HSBC Private Bank in Monaco, which decided to wind down its business in the European principality. Still, one wonders if the group has the stomach to continuing investing in the region if the results do not justify this expenditure. “First, we have maintained a long-term presence here and will remain committed for years to come,” Masclet says. “Second, we hold medium and long-term views on our business here. We want to grow with Asia. We want to grow within Asia. We want to grow with local expansion, and we are committed.”
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Co-Head of Hedge Funds APAC Investment Products and Services UBS Wealth Management
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