The logo of Societe Generale is seen on a building in the financial district of La Defense near Paris. The planned sale of Societe Generale’s Asian private bank, for which final bids are due next week, underscores how high costs are pushing smaller players in the region to make hard decisions on whether to bulk up and or get out of the business.

Reuters/Singapore

The planned sale of Societe Generale’s Asian private bank, for which final bids are due next week, underscores how high costs are pushing smaller players in the region to make hard decisions on whether to bulk up and or get out of the business.

Economic growth has led to a surge in Asian millionaires and billionaires. Their combined wealth, at $6.6tn this year, is expected to overtake that of their European counterparts in 2017 and US peers in 2024, according to a Wealth-X and UBS World Ultra Wealth Report.

But profit margins are thin for the industry’s minnows, especially those managing less than $20bn - asset bases that don’t generate enough revenue to support expensive bankers and cope with rising regulatory costs and technology spending.

SocGen is the third major global financial institution selling its Asian wealth arm in the last five years, and more deals are likely to follow, industry experts say.

“There will be continued consolidation over the next three to four years. Unfortunately some players will exit with virtually no returns,” said Mark Jansen, a partner at PricewaterhouseCoopers.

He added that some banks could miss the boat completely if they price too high or their assets don’t match buyers’ interests - lost opportunities that may harm their operations.

“Without prospective buyers there becomes a real risk of flight of staff and clients. It would be value-eroding for those organisations but will drive other prospective sellers to be more realistic around the pricing,” he said.

The cost-to-income ratio for some small private banks in Asia has exceeded 90%, industry sources say, with nearly half of those costs for relationship bankers and front office staff.

That compares with a ratio for private banks operating in Singapore and Hong Kong of 83% in 2012 and 69% on a global basis, according to PricewaterhouseCoopers.

Private bankers in the region also often remark that as the money they receive is usually first or second generation wealth, they act more like brokers than private bankers - an arrangement that can be costly as brokers are more hands-on.

Additionally, the fastest growth is in the lower to middle end of the Asia wealth management market. That trend serves bigger banks that have the scale to cater to the mass affluent rather than niche firms targetting the ultra-rich.

Banks like UBS and Citigroup, which manage over $200bn each in Asia, as well as large Asian banks have the infrastructure, talent pool and network to execute bigger trades and investments for prospective clients, areas that require big capital expenditure.

“These economics are pretty unsustainable for smaller players,” said Federico Burgoni, partner and managing director at Boston Consulting Group.

“The survivors will be the big commercial groups or some differentiated players with a specific value proposition like retirement.”

SocGen’s Asian wealth unit manages just $13bn in assets - below the $20bn mark that the industry has come to see as necessary for critical mass in the region.

France’s No 2 listed bank has declined to comment on the auction, which follows the sale of its Japan private bank to Sumitomo Mitsui Banking Corp for an undisclosed sum this year.

The Asian wealth unit is valued between $300mn and $600mn and has drawn big suitors such as Singapore’s DBS Group Holdings Ltd and Credit Suisse, according to sources.

But it also represents an opportunity for smaller players to gain scale.

ABN AMRO, which manages less than $20bn, is among the bidders for the SocGen arm, people familiar with the deal have previously told Reuters. ABN AMRO declined to comment.

There are some smaller players that make no bones about their keenness to grow.

RBS private wealth unit Coutts manages less than $20 billion, according to an annual survey conducted by Private Banker International. It sees great opportunities in a region that is home to eight of the world’s ten fastest growing high-net-worth populations but only has a small portion handled by wealth management professionals.

“This presents a clear opportunity for Coutts to capture a greater market share - and to that end, we are planning to double the number of senior bankers in the region in the medium term,” Coutts CEO Rory Tapner told Reuters.

Other banks that make it onto the top 20 of the Private Banker International list and which manage less than $20bn include Swiss firms EFG and Sarasin.

Sarasin, which has merged to become Safra Sarasin, declined to comment. In October it shut its India wealth joint venture. EFG said its Asia business is growing and highly profitable.