Abstract
The changing businesses in the financial services are gaining momentum mainly due to rapid developments of digital trends. For firms to prosper, they need a profound understanding of growth and profitability. We analysed the largest banks in the world and found that they are much less profitable as they appear to be. Growing profitable and faster than investors expect is vital for listed equity firms to get further investments and gain competitive edge. Our case studies corroborate the meaning of profitable growth and explain how wealth manager can become really big. We discuss acquisitions, global expansion strategies, but also the importance of a strong brand value. What history and reputation are for financial centres, the imperatives for asset managers are size and scope. Firms such as BlackRock and Vanguard but also the growing sovereign wealth funds dominate the industry. Firms must address growth and innovation at the highest possible level to gain competitive advantage. Thus, we suggest appointing chief officer roles to foster growth. Finally risks increase exponentially with every participant in the ecosystem. Incumbents that manage an innovation portfolio, including internal projects and external businesses, must apply risk management measures like the venture capital industry.
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Notes
- 1.
The value of financial assets expressed as a percentage of GDP can be used to explain macroeconomic interrelations. For example, advances in technology and the deregulation of financial markets around the world have made cross-border capital flows (foreign purchases of equity and debt securities as well as other transactions) possible and given rise to a growing class of global investors. 80% of global capital flows involve three regions, namely, the Central Europe, the United States, and the United Kingdom. The total value of the world’s financial stock, comprising equity market capitalization and outstanding bonds and loans, was at the end of 2010 US$212 trillion. The financial crisis and worldwide recession halted a three-decade expansion in global capital and banking markets. For more on the global capital markets, see McKinsey (2005) Mapping the global capital markets. McKinsey Quarterly, Special Edition: Value and performance; McKinsey (2011) Mapping Global Capital Markets 2011. McKinsey Global Institute, August 2011. There are other global wealth studies with similar findings. For consistency reasons, see Credit Suisse (2017) Global Wealth Report 2017. Research Institute, September 2017 and Capgemini (2017) World Wealth Report 2017.
- 2.
Deloitte (2017) Innovation in Private Banking and Wealth Management, Monitor Deloitte, United Kingdom
- 3.
US Debt Clock (5 December 2017) [Online] http://www.usdebtclock.org/; for the world debt, see http://www.usdebtclock.org/world-debt-clock.html
- 4.
There are different definitions of assets under management (AUM). Commonly, it is the total value of assets that a firm manages and administers for itself and its clients. Some financial institutions include bank deposits, mutual funds, mortgage loans, and institutional money in their calculations. Others limit it to funds under discretionary mandate where the client delegates responsibility to the company. The difference between two AuM balances consists mainly of market performance and net new assets (NNA) besides foreign exchanges movements and structural effects of the company. NNA indicate how much money from clients had been newly invested. NNA growth shows the NNA in relation to the previous AuM balance on an annualized basis. AuM and NNA growth are an important measure for banks of success and comparison against their competitors, particularly for wealth management businesses.
- 5.
Christensen, C.M. and Raynor, M.E. (2003) The innovator’s solution. Harvard Business School Press, Boston, MA
- 6.
See Boston Consulting Group (2005) Succeeding with growth: Creating value in banking. BCG Report.
- 7.
McKinsey (2017) European Private Banking Survey 2017. McKinsey Banking Practice, 2017. The formula to calculate the net profit margin is as follows: (total revenue − total expenses)/total revenue = net profit/total revenue = net profit margin. It is usually measured in basis points (BPS) where 100 basis points refer to 1%.
- 8.
McKinsey added to their conservative forecasts based on their Global Banking Annual Review 2015 the impact of digital entrants to banking return on equity; see McKinsey (2017) Remaking the bank for an ecosystem world. McKinsey, October 2017.
- 9.
Pavoni, S. (2017) Top 1,000 World Banks – China overcomes obstacles to lead efficiency rankings. The Banker [Online] http://www.thebanker.com/Top-1000-World-Banks/Top-1000-World-Banks-China-overcomes-obstacles-to-lead-efficiency-rankings
- 10.
The Chinese financial industry is not well covered in the literature and sometimes not transparent. The section on Chinese bank’s profitability was mainly compiled from the work of Loechel, H. and Li, H.X. (2011) “Understanding the high profitability of Chinese banks”, Working paper series, Frankfurt School of Finance and Management, No. 177; Ding, N., Fung, H.G., Jia, J. (2017) “Comparison of Bank Profitability in China and the USA”, China & World Economy, No. 1, pp. 90–108. For more information about China, see Institute of World Economics and Politics, Chinese Academy of Social Sciences http://en.iwep.org.cn/ [online 10 December 2017].
- 11.
For the resource-based view on the firm, see the seminal work of Barney, J.B. (1991) “Firm resources and sustained competitive advantage”, Journal of Management, 17(1), 99–120 and Wernerfeld, B. (1984) “A resource-based view of the firm”, Strategic Management Journal, 5(2), 171–180.
- 12.
Julius Baer (2017) Julius Baer Wealth Report: Asia. Julius Baer, October 2017
- 13.
The capital requirement is a bank regulation, influenced by the Basel Committee on Banking Supervision. Within its actual Basel I and II capital accord, the framework of a country’s banking capital requirements is set and defines how banks and depository institutions must handle their capital. One important measure is Tier 1 capital that consists primarily of shareholders’ equity. It shows a bank’s financial strength from the regulator’s point of view. The third Basel III accord was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–2008. The intention is to further strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
- 14.
The Morgan Stanley Capital International (MSCI) Frontier Markets Index is reflecting expanded investment opportunities beyond traditional developed and emerging markets. By covering 29 countries, the MSCI Frontier Markets Indices are designed to track the performance of a range of equity markets that are now more accessible to global investors. For further information, see https://www.msci.com/index-review-frontier-markets [online 7 January 2018].
- 15.
HSBC (2016) What is the Belt and Road Initiative. For more information on how the initiative may reshape the twenty-first century economy, see http://www.business.hsbc.com.cn/en-gb/cn/campaign/thematic-stories. [online 7 January 2018].
- 16.
Sleire, S. and Holter, M. (2017) The World’s Biggest Wealth Fund Hits $ 1 Trillion. Bloomberg reporting. For the entire list of the largest asset holders as of 31 December 2016, see Kennedy, I. (2017) “The top 400 asset managers”, IPE Research Magazine, June 2017; Top Asset Management Firms, see https://www.relbanks.com/rankings/largest-asset-managers
- 17.
Sovereign Wealth Fund Institute (2017) Norway Government Pension Fund Global, https://www.swfinstitute.org/swfs/norway-government-pension-fund-global/; China Investment Corporation, https://www.swfinstitute.org/swfs/abu-dhabi-investment-authority/; Abu Dhabi Investment Authority, https://www.swfinstitute.org/swfs/abu-dhabi-investment-authority/ [online 12 December 2017]
- 18.
Swiss Bankers Association (2018) The Swiss Financial Centre – Key Figures. More material and info graphs to the Swiss Financial Centre, see https://www.swissbanking.org/en/financial-centre/key-figures [online 28 August 2018].
- 19.
Scorpio Partnership (2017) Global Private Banking Benchmark 2017. Scorpio Partnership, UK. The benchmarking methodology has been the same for the last 16 years. Assets under management (AUM) data aims to represent actively managed assets of private clients who hold more than US$1 million (or the local currency equivalent) with the firm. However, not all wealth manager conforms to this reporting methodology. Interestingly, Asia’s private banks gained momentum in 2016. But they are still mainly merchant’s bank that just started the process to enhance customer acquisition efforts and improving their private banking value proposition.
- 20.
Interbrand (2017) Best Global Brands 2017. [online 20 February 2018] http://interbrand.com/best-brands/best-global-brands/2017/ranking/
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Fasnacht, D. (2018). Strategic Choices for Growth. In: Open Innovation Ecosystems. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-76394-1_3
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