A continuous explosion of new wealth in both emerging economies and the West has helped to create an exceptional demand for private banking services. The sector is seen as increasingly dynamic and mainstream, and is being coveted by larger international banks that are eager to gain a share of this vibrant market.

As this year’s survey reveals, the urge to merge remains strong in the private banking sector, with the vast majority of respondents questioned indicating that they are actively seeking acquisition targets. Acquisition rationale varies, but one of the key aims is the drive to penetrate new geographic markets and increase market share.

While the fragmented nature of the private banking sector should be conducive to consolidation, the volume of transactions continues to be constrained. The strong overall performance of the industry is an important factor in this, as it means that smaller banks feel little compulsion to succumb to suitors and that price expectations can be high. If market conditions deteriorate, however, the situation could look very different.

The current benign economic climate masks a number of potentially serious undercurrents. Smaller institutions in particular struggle with endemically high costs. Severe shortages of qualified private wealth managers, especially in Europe, has driven up compensation levels and led to high employee turnover rates. In addition, the cost of information technology infrastructure can prove to be a burden, especially for smaller banks. A major downturn could therefore saddle these banks with onerous fixed overheads and potentially force downsizing measures. Consolidation might help address such concerns, but it would take a very sharp dose of austerity for many banks to start to seriously address structural concerns.

Hungry for more? Global update 2007 is a study by KPMG International of senior executives in the private banking and wealth management industry. The results reveal some of:

• the pressures that are fuelling appetites for consolidation
• the regional differences in acquisition strategy
• the many obstacles to the acquisition process.

Acquisition appetite

• More than 90 percent of respondents expect an improvement in the prospects for growth over the next three years – a broadly similar percentage to last year’s survey (please note that this survey was conducted in May 2007, prior to the recent market turmoil).
• There is more proactive searching for potential acquisition targets, with 48 percent of respondents saying they are actively seeking targets, compared with 18 percent last year.
• The main forces driving M&A in the private banking and wealth management industries are cited as being increased competition, both generally and from larger, consolidated competitors, and the drive to capture a new client base
• Respondents point to the need to penetrate new geographic markets and increase market share as being the main objectives for seeking acquisitions over the next three years.
• Levels of confidence are highest in Asia-Pacific, where respondents are most likely to be actively planning large investments in acquisitions and where expectations of a significant increase in assets under management are highest
• Changing patterns of wealth distribution are driving demand for private banking services, especially in Asia and the Middle East.
• More than 50 percent of the private banks surveyed say that they have made acquisitions in the past three years, with those in Europe most likely to have completed such transactions.
• Access to talent is a growing concern, with almost half of respondents citing shortages of client relationship managers as an important reason for making acquisitions. This problem is especially acute among European respondent banks and seems to worsen with size – the larger the bank, the more focus given to the objective of gaining client relationship managers.

 Possible obstacles to acquisition

• There are few ‘for sale’ signs in an industry where the overwhelming majority of those surveyed has no plans to sell or shut down operations. This is in contrast to previous years, when as many as one in seven respondents said that they were planning to sell or close some private banking or wealth management operations.
• Regulation has risen in significance compared with last year’s survey and is now cited as being the biggest single barrier to acquisitions. Respondents from smaller banks and those from Asia were most likely to see regulation as a factor hindering their M&A strategy.
• Respondents highlighted that deals, particularly those in North America, continue to be frustrated by unrealistic price expectations from vendors.
• Smaller banks appear to be under less competitive pressure compared with previous surveys. Only 43 percent cite pressure from larger competitors as the main driver for consolidation, compared with 55 percent last year. This does mean, however, that there is a dearth of attractive targets with smaller banks less keen to merge than in the past.

Growth strategies

• One-third of respondents say that they plan to invest more than US$500 million in acquisitions over the next three years; Asian respondents expect to invest the most, with almost half planning investments of more than US$500 million.
• Around 20 percent of respondents expect to invest more than US$1 billion in acquisitions over the next three years – a similar proportion to last year.
• China, Russia, Eastern Europe, the Gulf, India and the U.S.A. offer the strongest growth potential according to our survey, though areas where respondents have made most recent acquisitions are the U.S.A., U.K., the Middle East and Japan.
• A much higher proportion of respondents expect to derive the majority of their growth from organic expansion, rather than through acquisitions.
• Despite the above, more than one-quarter of respondents expect to derive 50 percent or more of their growth from acquisitions over the next few years.

 Following the acquisition

• The average amount added to assets under management by respondents’ largest acquisition in the last three years was 6-8 percent, implying that smaller bolt-on acquisitions have been more popular.
• More than 20 percent of respondents said they expected acquisitions over the next three years to add 21 percent or more to their assets under management.
• More than half of respondents (57 percent) say that they lost some proportion of the acquired company’s client base within one year of completing their largest acquisition from the past three years. This is an improvement over last year’s survey, when this figure was 67 percent. The average loss was around 4 percent, a much lower percentage than in previous years, when it was typically around 10 percent.
• The vast majority of respondents indicate that acquisitions have increased shareholder value, but only 22 percent say they have contributed to a substantial increase. This is significantly lower than last year, when 42 percent reported a substantial increase.
• Three in five bankers surveyed said that they had a formal plan in place to track benefits and synergies derived from post-acquisition integration, suggesting that post-deal implementation procedures are becoming the norm.