Sustainability
Singapore banks: Unlocking the hidden potential of wealth management
Why do we think the market is vastly underestimating the impact on Singapore banks earnings from wealth management?
Singapore banks have been outpacing global wealth trends
Global wealth grew at a 7% CAGR over the last 10 years (2012-2022) with APAC wealth outpacing the rest of the world. However, global wealth declined by 2% in 2022. The decline in wealth was similarly evidenced by the decline in assets under management (AUM) at global wealth management (WM) firms. Based on data we compiled from 14 of the largest WM firms globally, total AUM declined about 11% in 2022, mainly driven by a decline in market valuations. While net new money (NNM) generally remained positive, NNM as a percentage of AUM declined from c5% to c2% in 2021-2022. Singapore banks, on the other hand, recorded a 3% increase in AUM in 2022. While similarly impacted by the decline in market valuations, this was more than offset by strong NNM, which increased from c4% to c9% of total AUM in 2021-2022.
What has led to the strong net inflows for the Singapore banks?
As referenced in the above section, declines in market valuations for the Singapore banks were offset by strong net inflows into the region. There are a few likely reasons behind the strong net inflows, including:
- The growth of Asian wealth remains intact driven by resilient economic growth, relatively young population, and a growing middle class;
- It is often suggested that wealth flows were redirected to Singapore from Hong Kong and China given the geopolitical uncertainties and disappointing economic growth in these markets. However, clear evidence of this happening en masse is lacking;
- Concerns over the global banking sector in 1H23 and the flight to quality; and
- Singapore banks continue to expand their wealth management franchise from a relatively smaller base. Furthermore, the AUM numbers disclosed include wealth from the mass segment and not only from the HNWI segments which might not be an apples-to-apples comparison to the global peers.
Aside these factors, Singapore continues to establish itself as one of the leading wealth management centers globally and in Asia. Sound financial regulation, political and economic stability, and the breadth and depth of institutions are the main drivers behind this and helps to draw high-net-worth individuals (HNWI) to Singapore. Over the last five years, family offices in Singapore expanded 10 folds – growing from fewer than 100 family offices in 2017 to 1,100 family offices in 2020.
Are these net inflows sticky money?
Despite predictions around the NNM strength for the Singapore banks and what it could mean for their overall growth and profitability, the key concern among stakeholders (regulators, banks, investors) has been around whether this NNM is sticky and if this will translate to sustainably stronger WM business for the banks. This concern seems fair given that the strength in NNM over the last few years has been driven by:
- Flight to quality given geopolitical uncertainties;
- Concerns over the banking sector in 1H23; and
- Slower than expected economic growth in North Asia.
To address this, the Monetary Authority of Singapore (MAS) announced adjustments to its tax incentives for single family offices in July 2023, with these changes hopefully encouraging single family offices to deploy more capital in Singapore.