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Singapore. Rich individuals in Asia are shunning “exotic” investments such as derivatives and hedge funds in favor of stocks and bonds, challenging efforts to boost private-banking revenue, according to DBS Group.

“This scares me,” said Kwong Kin Mun, the Singapore head of private banking at Southeast Asia’s biggest lender. “Their investment activities are very basic ones, like what we used to see in the late ’80s and ’90s, but the only difference is they carry much thinner profit margins today.”

Derivatives were tarnished after they helped hasten the collapse of Lehman Brothers a year ago and as private-bank clients in Singapore and Hong Kong sued Citigroup and Goldman Sachs over investment losses. The shift among wealthy Asians toward stocks and bonds has crimped industry profit margins, analysts said.

“Everyone in the industry has felt the impact of clients looking for simple, transparent products,” said Beat Lenherr, who helps oversee about $16 billion as the Singapore-based chief global strategist at LGT Capital Management. “For an individual private banker, you might have to have a bigger book to get the same profitability.”

Net fee income at DBS’s wealth management unit, which includes private banking, fell 53 percent in the second quarter from a year earlier to 21 million Singapore dollars ($14.7 million), even as the bank grew assets by 3 billion Singapore dollars in the first six months of 2009.

DBS fared better than some rivals, Kwong said. The bank has taken clients from overseas rivals who were bailed out by their governments or encumbered by credit-market losses, he said, without naming any companies.

The bank has more than 100 relationship managers serving about 15,000 private clients in Asia. DBS ranked sixth by assets managed from Singapore and Hong Kong with a 5 percent market share, said the Calamander Group Report 2008.

Before the collapse of Lehman Brothers a year ago sent asset prices tumbling, “a lot” of private-banking industry revenue came from selling clients so called alternative investments including hedge funds, private equity and structured products, Kwong said, without specifying.

The MSCI Asia ex-Japan Index has gained 52 percent this year, led by technology and consumer companies. The extra yield investors demand to hold Asian corporate bonds denominated in US dollars rather than government securities has more than halved since Jan. 1, JPMorgan Chase’s Asia Corporate Bond Index showed.

“In the past six months, clients were making money buying stocks, bonds, plain-vanilla investments,” Kwong said. “Clients are saying, ‘I don’t need the exotic complex stuff since the basic products achieved the same objective.’ For them, cutting edge means it cuts.”

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies, commodities or linked to events such as changes in interest rates.

Oei Hong Leong, one of Singapore’s richest men, in May sued Citigroup’s private banking arm over 1 billion Singapore dollars in losses on foreign exchange and bond options.

A former Goldman Sachs client adviser was banned by Hong Kong’s securities regulator in July from re-entering the industry for two years for making unauthorized trades for a client who later sued the company. Both banks are contesting the suits.

Global private-bank assets fell 16 percent last year to $14.5 trillion, according to Scorpio Partnership, a London-based consultant.

About 60 percent of private banks in Asia saw their assets under management fall by more than a fifth in the 12 months ending between December and March, according to a recent survey by PricewaterhouseCoopers.

Industry profit margins are now “negligible,” compared with about 30 percent to 40 percent during the years that preceded the financial crisis, said Justin Ong, PwC’s head of Asia-Pacific private-banking practice.

“Most of the structured products have either blown up or gone out of money,” Ong said.

Even so, structured products may be gaining favor with some investors, Ong said. “Since one month ago, banks are telling me that clients are again talking about it, which I think is frightening,” he said. “That’s the investor mind-set for you.”



Bloomberg