Ten years ago, HSBC was nowhere in global private banking. Now, it's solidly entrenched as a top five global player. HSBC Private Bank chief executive Clive Bannister talks to PBI about his strategy, including some pungent comments about the competition - and where the wealth markets are heading.

It's been a rollercoaster ride for private banking at HSBC in the last few years. First the acquisition of the Republic Group from the late Edmond Safra, then the HSBC Group's acquisition of CCF, giving the private bank the French bank's wealth management operation, followed by the cleverly-opportunistic acquisition of the tax team of accountants Arthur Andersen in the US.

Then came the takeover of the Bank of Bermuda at the beginning of this year. This marked one of the largest wealth management acquisitions ever, underlining how serious HSBC is about growing its HNW business to beat the best in the industry.

That wasn't always the case. HSBC really only started to take private banking seriously about ten years ago. Bannister, a partner with Booz Allen & Hamilton, had joined the bank one year earlier in the investment banking area. He was then given the mandate to establish group private banking, and give it international scope and stature. Since then, the private banking business has gone from a base five years ago of 1,000 employees in ten locations, making about US$85 million, to earning US$560 million pre-tax last year. Nowadays, the employee base totals 5,100 staff in 41 locations.

"The vision is not difficult, to look after wealth complex clients, on and offshore," said Bannister, his disarming simplicity belying the intricate machinery for wealth management which he has constructed. "Our DNA at HSBC is first and foremost that we are an international firm, not a bolt-on collection of various foreign businesses."

At Citigroup, by comparison, 64 percent of its total income comes from North America, making it less "global" than HSBC, he asserts. After such torrid organic growth and acquisitions, HSBC believes that its position as a top five wealth player nowadays is firmly established. On one broad measure of capability, Merrill Lynch global private clients has a huge US$1.1 trillion of assets under management, followed by UBS with US$993 billion and Credit Suisse (US$380 billion).

HSBC ranks alongside Citicorp, JP Morgan and Deutsche Bank, but after that bank size drops away dramatically to the smaller Swiss private banking players like Baer and Vontobel.

But even that "premier" league of dominating private banks may see future relegations. Current industry talk is that JP Morgan Chase will find it hard to stay up with leaders in global banking and it is becoming less of a competitor in Europe and Asia. The contention is that its merger with Bank One, to form a massive top three US domestic player, will reorientate it away from the global market.

Bannister is loath to talk about his rivals, ranging from Merrill Lynch through to the big Swiss banks but acknowledges that "staying the course in private banking now matters more than ever before."

He continued: "Compare that with some of our competitors in the US, particularly the brokerage business. They invested in private client management and when things didn't work out, they just reversed out." Others have described this acidly as the "parking lot" concept of business management.

So, what is going to separate HSBC from the rest of the pack in future?

Bannister doesn't have a minimum or maximum wealth threshold for clients. Instead, "our vision is to look after wealthy and what we call complex clients," those with a variety of wealth preservation, tax, family, trust and related corporate needs.
That is why the acquisition of Bank of Bermuda fits so well within the gameplan, he says.

"What we are building with the Bank of Bermuda is the world's largest trust business, with 250 employees working out of 23 locations. It's a view of managing wealth in a modern, high-IQ way."

Emphasising this point, Bannister notes: "Very few private bankers have successfully adapted in order to provide a coherent overview of a client's need, and produce solutions ranging from tax and estate planning through to sophisticated asset classes like hedge funds.

"The Swiss banks have never really tried. They've always said to the client, 'You bring in your lawyer, describe what you require and we will see if we can manufacture a solution.'"

So, for today's marketplace, "you need a wider approach and more subtle concepts of wealth."

In essence, HSBC Private Banking wants a blended mix of off- and onshore banking, and combining the private bank with the HSBC parent's broad geographical reach.
Its target clients are those complex wealthy, both international and domestic.

The private bank is also working for what is termed smooth, reciprocal cross-referrals with the parent bank's personal financial services operations, upgrading clients to private banking and their wealth grows.

For the future, the private bank is also focusing on higher-value products and services.

And it is particularly keen on what it terms "product enrichment" and is looking for opportunities to build family office advisory, trustee and treasury services, tax advisory and industry practices.

In fact, HSBC-watchers believe that the private bank, to gain unbeatable scale, should do a massive and transforming US acquisition, setting its sights on a Merrill Lynch, Charles Schwab and the like and cementing its total onshore wealth position. That is a course that UBS is setting, with a major new push in the US centred on its PaineWebber operations and a team of new personnel from Merrill Lynch.

Bannister is sure the timing is not right for a big US private banking-related deal. "We've completed our major acquisitions and are now focused on organic growth. If things turn up that are interesting, we will of course look at them."

And he does not underestimate the challenge of the US.

Bannister argues that offshore private banking used to be suitcase banking - where money was buried in Switzerland. Now, Switzerland "has to compete on quality and tariffs."

The client is grateful for service, not primarily the offshore domicile. He adds: "The legacy business, one which in many ways is a good one but alone will not be one which will sustain us in future - we need to go onshore."

But Bannister certainly doesn't underestimate the importance of Switzerland, where HSBC Private Bank ranks as the largest foreign bank. The Swiss private banking industry is in the process of consolidation and thus is "extremely interesting" for HSBC, he has noted.

Indeed, HSBC is understood to have looked, among other firms, at the acquisition of Bank von Ernst, a company which was subsequently acquired by Coutts.

Nonetheless, the strategic future of private banking "is onshore. But the moment you go onshore, say in the US, you come against very formidable entrenched competitors."

The private banking operations of HSBC and Citigroup make no more than between 3 percent and 4 percent of the parents' earnings.

Considering both banks have customer bases of more than 100 million individuals, shouldn't the sky be the limit for upscale wealth management?

Bannister agrees: "Why should there be a limit?" He stresses however that the whole HSBC group is such an awesome cash-generating machine that the private bank has to run very hard just to keep up with that 3 percent to 4 percent ratio.

Meantime, there has been some criticism that HSBC has taken a longish, four years fully to integrate the Republic private banking empire, opening the way this year for the combined operations to be completely re-branded as "HSBC Private Banking." But Bannister doesn't accept this. "We took our time and got it right. No [Republic] staff nor customer left in this time."

What other targets are the HSBC banker's sights? "We consistently want to make a margin of 100 basis points on clients' assets," he says. UBS, CS and Citigroup currently are just above the 100 bp mark while HSBC is understood currently to generate a margin of around 85 bp.

Another aim to target a return on equity in excess of the parent's RoE, currently 24.7 percent. At the same time, the current cost:income ratio at the private bank, at 70 percent "is not acceptable," says Bannister, although restraining costs at a people-intensive business like private banking is notoriously difficult. And HSBC reports in dollar terms, meaning that the US currency's weakness has tended to bloat the nominal costs of the group's non-dollar expense base.

Nonetheless, the target for the efficiency ratio is to "get it down to 65 percent" and ultimately around the range of between 60 percent and 62 percent currently being achieved by UBS and CS, says Bannister.

HSBC is to sell a private banking unit, operating as CCF in Greece to Marfin Financial Group. CCF provides private banking services to domestic clients and HSBC said the sale is in line with its intention to concentrate on its corporate banking business in Greece. The deal is expected to be completed by 28 June 2004.

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