Next Generation Private BankingRiding the Consolidation Wave in Asia

Introduction

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The private banking industry in Asia is undergoing times of in-creased M&A activity. This scenario follows international mar-ket dynamics, where a wave of consolidations is taking place in leading wealth management financial centers like Switzer-land and a competition upsurge is occurring in growing mar-kets like Latin America and Asia. For private banks operating in Asia, issues like China’s economic meltdown and, at a mar-ket level, cost pressures affecting banks’ operational models are challenges echoing on private banks’ annual growth rates in the last few years. In turn, industry players are pursuing ei-ther a merger or an acquisition as a way to achieve inorganic growth, resulting in a wave of consolidation in the regional market.

Therefore, the drive behind international and regional play-ers in pursuing consolidation is not incidental. It is a natural response to challenges arising from different fronts. Other than the factors mentioned above, recent deals in Asia have revealed more significant factors contributing to this trend. First of all, an increased customer mobility together with high-er expectations have changed client behavior, who now de-mands more focus. Secondly, banks need to conduct signifi-cant planning and invest large amounts to continuously adopt new regulations such as Foreign Account Tax Compliance Act (FATCA), Automatic Exchange of Information (AEI), Investment suitability rules and cross-border rules. Thirdly, more aggres-sive market expansion strategies have been deployed by local banks while many international onshore banks are struggling with reaching a size big enough to operate at the optimum cost/return profile. «You will need to have about USD 30 to 35 billion of AUM to run a viable private banking business in Asia» according to the regional head of a major wealth manager. These factors altogether not only induce a rise in operational costs, but also impose challenges in achieving organic growth. Eventually, banks in Asia are pushed to revise their operating models and consider M&A as a growth strategy.

Integration brings clear benefits for merged banks. This in-cludes the opportunity to develop new lines of business, achieving a stronger market position by client book acquisi-tions, and lowering operational costs through synergies, di-versification, and scalability. A successful consolidation pro-cess is fundamental for sustaining long-term benefits like economies of scale — including reorganisation and industrial-isation — lower cost to income ratios (CIR), and increase prof-itability margins. Consequently, we expect the ongoing wave of consolidation to intensify as banks in Asia will continue to pursue M&As in an attempt to increase profitability by achiev-ing economies of scale and service differentiation through un-conventional strategies. The above discussion brings up the following question: which path — either outsourcing or con-solidation — is the best option for banks operating model in APAC?

This study seeks to provide insights that support the deci-sion-making of banks that are either considering consolida-tion or those already going through a consolidation process. M&As are a long process where both the Pre-and Post-Merger Integration (PMI) phases are crucial: elements like defining the right objectives before signing the deal and establishing a suit-able operating model for the integration strategy can give a real competitive advantage.

Salomon WettsteinManaging DirectorSynpulse Hong Kong

Yves RoestiManaging Director & Partner Synpulse Singapore

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Contents

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1. Challenges in Asia’s Banking Industry ....................................... 6

1.1 Changing Client Behavior ............................................................. 6

1.2 Emergence of New Service Models ............................................. 6

1.3 Operational Inefficiencies ............................................................ 7

1.4 Increasing Regulations .................................................................. 7

2. Consolidation as a Way out of the Cost Trap ........................... 8

2.1 High Expectations on the M&A Deal .......................................... 10

2.2 Voices from the Market ................................................................. 10

3. Post-Merger Integration ............................................................... 12

3.1 Complexity of Integration ............................................................ 12

3.2 Target Operating Model Definition ............................................ 13

3.3 Implementing a 3rd Generation Operating Model ................. 14

4. Conclusion and Outlook ............................................................... 16

5. Authors ............................................................................................. 18

6. Synpulse ........................................................................................... 21

Table of Figures

1 Major M&A deals in APAC Private Banking

since 2009 ........................................................................................ 9

2 M&A Integration

— Areas to be considered for Prioritization ............................. 12

3 Target Operating Model (TOM) — Methodology ..................... 13

4 TOM Target State

— 3rd Generation Operating Model ........................................... 14

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Asia Pacific (APAC) has a high potential for private banking due to the region’s economic prosperity and subsequent wealth creation. In 2014 the region topped North America as the place with most wealthy individuals in the world with more than 4.69 million High Net Worth Individuals (HNWI)1. This trend was re-stated during 2015, when more than 440,000 HNWIs were add-ed into this rank to total 5.13 million HNWI. Moreover, the dif-ferent acquisitions of European private banks by top-tier local players in Singapore and Hong Kong (DBS/Société Générale Private Banking, Bank of Singapore/Barclays as two recent ex-amples) are a clear sign of the rapid changes the industry is facing in the region.

Despite the encouraging growth, the market is also facing dif-ferent challenges, including a changing client behavior, height-ened operational costs due to inefficiencies, and increasing regulations. The result of these interlinked events is causing players to face thin profit margins, increased competition and fee pressures. In an industry where costs are rising, the pres-sure on fees is becoming higher, and where capturing new as-sets is constantly a challenge, banks are facing a strong com-petition. Those are key elements driving the reshaping of the business in Asia, forcing some of the players either to have a market exit strategy, rationalise booking center, or force them to enter into a potential merger and acquisition process.

1.1 Changing Client Behavior

The last financial debacle reinforced the importance of trans-parency to build trust in financial markets. These difficult times not only brought more regulations to banks in terms of financial information disclosure and price structures but also created awareness among clients on the cost-benefit relation-ship between pricing and value add. Wealthy Individuals in Asia are engaging different private banks simultaneously to manage their assets and diversify their financial risk. These cli-

ents tend to expect pricing transparency to be able to com-pare them between private banks they are dealing with. In addition, these individuals tend to be more knowledgeable on financial topics and manage their money on their own. As a result, private banks in the region are having a tough time jus-tifying their pricing and dealing with client expectations at the same time.

Higher customer mobility adds another challenge. Many wealthy individuals have two or more banking relationships and it has become common to compare and keep only those services that are serving a true purpose. Against this back-drop, banks already started to offer innovative products, such as wealth inheritance and educational programs for the up-coming generations of wealthy individuals.

1.2 Emergence of New Service Models

Client behavior is changing along with the continuous devel-opment in technology, on one hand redefining banking busi-ness model, on the other hand modifying the way to commu-nicate with clients. Private banks have adopted digitization as part of their core strategic initiatives. This has translated into increased investments in developing digital capabilities to in-crease client experience.

In parallel, new service models and channel strategies appear-ing in the Asian private banking industry indicate a shift from the traditional channels which involves the client advisor. Cli-ents are willing to leverage the different channels to make their own decisions and share views. According to a 2015 survey2, 27.2% of APAC (excl. Japan) HNWIs prefer digital contact with their Relationship Manager, compared to 16.8% in the rest of the world. Using automated advisory services is expected to increase (76.3% APAC, excluding Japan versus 41.5% for the rest of the world), in line with the recent development of auto-

1. Challenges in Asia’s Banking Industry

1 Data drawn from Capgemini’s World Wealth Report 20162 Capgemini RBC Wealth Management Asia Pacific Wealth Report 2015

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mated advisory services by private banks such as robo-assist-ed advisory tools. New service models and channels are rede-fining private banking, and appear as one of the key challenges in the industry.

1.3 Operational Inefficiencies

Bankers in the region have been conservative historically and reluctant to embrace change. Innovative technologies in front office areas have not been implemented by banks yet and many processes still rely on old-time client identification methods (such as manual signature cross checking and ID val-idation) for transactions clearing and compliance. As a result, Relationship Managers (RM) spend considerable amounts of time in non-automated, semi-automated and non-industrial-ized tasks like document cross-checking and manual verifica-tion, and limited time is left to client facing activities where real value can be added.

The above facts result in high operating cost pressures and partly explain why Cost to Income Ratios (CIR) for private banks in Asia are substantially higher than their European peers. A recent market assessment found European private banks have on average lower total costs than the global players operating in Asia, 72% versus 86% CIR respectively3.

1.4 Increasing Regulations

Costs have also increased due to the wave of international and local regulatory compliance directives issued in the last years. Private banks have created new positions, procured new systems and documented additional work streams so as to guarantee timely implementation and fines avoidance. For example, the recent implementation of the Foreign Account Tax Compliance Act (FATCA) exchange of information and the requirement for banks to implement Common Reporting Standard (CRS), are driving a significant amount of resources that increases proportionally with the number of booking centres handled by each bank4. To be compliant with the dif-ferent local or global regulations, banks have invested in their operations and core banking systems to reach a certain level of standardization and automatization that inevitably lead to a re-definition of their entire operating model. In addition, new capital regulations have increased the buffer amounts required for banks to back certain transactions. This has con-sequently reduced the overall revenue of the banks. Finally, increased capital requirements have translated into higher return requirements for most private banks.

3 Running Faster to stand still – Deutsche Bank & Oliver Wyman (July 20, 2016)4 For example, recent research by Oliver Wyman and Deutsche Bank underscores the significant investments banks have to allocate to systems

standardization and automation in order to comply with cross-border reporting. (Source: Private Banking in Asia Pacific, Turning Regulatory Chal-

lenges into Opportunities – Accenture (2015)

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2. Consolidation as a Way out of the Cost Trap

The above challenges have raised the bar for banks in the re-gion, who are now asked to deliver a better customer experi-ence with limited resources allocated to front-line activities. On one hand, current operating models are assigning substan-tial resources to non-value creating activities like IT and back office processes and leaving aside improvement in value-cre-ating areas like digitization and client advisory. On the other hand, banks are seeing constrained budgets due to mounting cost pressures that have taken them to nearly unprofitable grounds. This situation is expected to trigger a wave of out-sourcing and consolidation in Asia in the next few years, as private banks are poised to increased profitability by achiev-ing economies of scale and service differentiation through unconventional strategies. To face increasing pressure, Asian private banks will have to review, and adopt the best banking operating model: either outsourcing or consolidation can be envisaged as the most adapted path in the region.

M&A activities have scaled up from the first sizable consolida-tion case known — the snagging of ING PB activities by OCBC in 2009 (the deal had been concluded for a cost of USD 1,463 mil-lion for an additional of USD 15.8 billion of assets under man-agement creating a standalone private bank known as Bank of Singapore and by becoming a top-tier Asian private bank — to a ‘new normal’ characterized by an increasing number of deals in the region. Since then, numerous deals confirmed the trend for a regional consolidation in the industry: in 2011, Julius Baer Group Ltd. acquired Macquarie Private Wealth Asia to top-up their assets under management by USD 1 billion; followed by the completion of the acquisition of Merrill Lynch Non-United

States International Wealth Business in 2015 by the same bank globally — Julius Baer Group Ltd. (acquisition started in 2012 with an estimated approximatively at USD 907 million at USD 72 billion AUM transferred). In 2014, DBS Bank Ltd. acquired Société Générale Private Banking (including selected parts of trust business unit) in Singapore and Hong Kong to add USD 12.6 billion of assets under management at a cost of USD 220 million. More recently, the Barclays offloading of its Hong Kong and Singapore business to Bank of Singapore — subsidiary of OCBC Group, (in 2016, for an estimated cost of USD 320 million adding USD 18 billion of assets under management); the UBP acquisition of Coutts International, the Royal Bank of Scot-land’s private banking business in APAC and the acquisition of BSI by EFG International (in 2016, for a price of USD 1.33 bil-lion, adding a total of USD 84.2 billion in assets under manage-ment worldwide) are some of the most disruptive deals which changed the private banking industry globally and in APAC. In 2015, the global wealth management industry counted a to-tal of 124 deals for a total asset under management acquired of USD 408.5 billion: the number of deals was the highest observed since 20085. Major changes in the global and Asian private banking are ongoing; the above deals mentioned are only the main observed ones since 2009. Since the beginning of 2016, other consolidation has been observed such as Old Mutual Wealth acquiring AAM Advisory — a financial advisory firm in Singapore, or the Hong Kong Citychamp Watch & Jew-ellery Group Ltd. buying Valartis Bank (Liechtenstein) AG. In the meantime, through a press release on 30 June 2016, Bank of China (Hong Kong) has announced having entered into the acquisition agreements with Bank of China in relation to the

5 Scorpio Partnership — 2016 WEALTH MANAGEMENT DEAL TRACKER, Wealth Briefing Asia Article published on 3 March 2016 Wealth Management

M&A Volume Hit Record Last year, But Acquired AuM Dropped — Scorpio 6 OCBC Bank: Acquisition of ING’s Asia Private Banking Business (http://www. bit.ly/2dd7jTD)7 Macquarie: Julius Baer and Macquarie enter into strategic partnership (http://www.macquarie.com/mgl/com/news/2011/20111013)8 Julius Baer to acquire Merrill Lynch’s international wealth management business outside the united states from Bank of America, with strong

focus on growth markets (http://bit.ly/2cEJ6EU)

Acquisition of Merrill Lynch’s international wealth management business outside the us (http://bit.ly/2dlqTKz)9 DBS completes acquisition of Societe Generale's private banking business in Asia (https://go.dbs.com/2cxxy7K)

DBS to acquire Societe Generale's private banking business in Asia (https://go.dbs.com/2cxyQzB)10 Union Bancaire Privée completes its acquisition of Coutts activities in Asia (http://bit.ly/2cEJW4a)

Coutts International acquisition was to expand Asia footprint, says Swiss bank UBP (http://bit.ly/2cVXYyd)

Asian Private Banker Article “Straight Talk: Michael Blake, CEO, private banking Asia, Union Bancaire Privée” published on 21 September 2016

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1 Major M&A deals in APAC Private Banking since 2009 Source: Synpulse

YearStarted

20096 Asia private banking business of ING Group, represented by ING Asia Private Bank

Limited and its affiliated entities.

OCBC Bank USD 15.8 billion AUM (Scope: APAC)

USD 1,463 million 9.3%

20117 Strategic collaboration agreement Macquarie Group Ltd. (Investment

Banking) and Transfer of Macquarie’s Asian Private Wealth business (“Macquarie

Private Wealth Asia”).

Julius Baer Group Ltd

USD 1 billion AUM (Scope: Hong Kong / Singapore)

(Macquarie Private Wealth Asia conducts its Singapore

activities through Macquarie Bank Limited, Singapore

Branch under the supervision of the Monetary Authority of Singapore and its Hong Kong activities through Macquarie

Funds Management Hong Kong Limited, an SFC

regulated entity)

Undisclosed Undisclosed

20128 Merrill Lynch’s International Wealth Manage-ment business (IWM)

Julius Baer Group Ltd

Estimated between USD 60 billion and USD 76

billion (Scope: Globally)(exchange rate used:

1USD=0.9483CHF as of 30 June 2012)

At USD 72 billion AUM transferred, Julius Baer would

pay approx. USD 907 million.

1.3%

20149 Private banking business of Société Générale in Singapore & Hong Kong, as well as selected parts of its trust business.

DBS Bank Ltd (DBS)

USD 12.6 billion (Scope: Hong Kong /

Singapore).

USD 220 million 1.7%

201510 Coutts International, the Royal Bank ofScotland private banking business inAPAC

Union Bancaire Privée (UBP)

UBP’s AUM (Scope: Hong Kong/

Singapore) now close to USD 11 billion (incl. Coutts

International’s activities in Singapore & Hong Kong)

Undisclosed Undisclosed

201611 Grupo BTG Pactual SA's Swiss pri-vate-banking unit BSI Ltd

EFG International USD 84.2 billion (Scope: Globally)

(exchange rate used: 1USD=1.0014CHF as of 31

December 2015)

USD 1.33 billion 1.6%

201612

201613

Barclays Bank PLC’s Wealth & Investment Management Business in Singapore &

Hong Kong

a-Bank of China (Thai) Public Company Limited (BOC Thailand)b-Bank of China (Malaysia) Berhad

(BOC Malaysia)

OCBC Bank’s Private Banking subsidiary Bank of Singapore

Bank of China (Hong Kong)

(BOCHK)

USD 18.3 billion(Scope: Hong Kong/

Singapore)

Undisclosed

Estimated cost USD 320 million

a-USD 424.5 million(exchange rate used:

1USD=35.0951THB as of 30 June 2016)

b-USD 506.5 million(exchange rate used:

1USD=3.9983MYR as of 30 June 2016)

1.7%

Undisclosed

Target AcquirerTransaction Multiple (AUM

Growth in USD)Transaction Price

(in USD)Price/AUM

Ratio (in %)

11 EFG to take over BSI’s business in Singapore in an accelerated asset deal (http://bit.ly/2cxzjBN)

EFG International announces future management structure after closing of acquisition of BSI (http://bit.ly/29jvMoM)

EFG agrees to buy BSI from Brazil's BTG Pactual for USD 1.3 billion (http://reut.rs/2dls2C3)12 OCBC Bank’s private banking subsidiary Bank of Singapore to acquire Barclays Bank PLC’s Wealth and Investment Management Business In

Singapore And Hong Kong (http://bit.ly/2cxy99F)13 BOCHK has entered into the Acquisition Agreements with BOC in relation to the acquisitions of the entire issued share capital of BOC Thailand

and BOC Malaysia (http://bit.ly/2cW0og6)

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acquisitions of the entire issued share capital of Bank of China (Thai) Public Company Limited and Bank of China (Malaysia) Berhad as part of the restructuring exercise of the Group in the ASEAN region14, showing the importance of the South East Asia region in the bank’s actual strategy.

2.1 High Expectations on the M&A Deal

The immediate answer to the above question is rather unclear and will depend on different factors, including the bank’s size, corporate strategy and types of banking services offered. For smaller players, a merger or an acquisition seems to be the best alternative for long-term survival as recent assessments suggest the minimum amount for banks to remain profitable is USD 30 billion in Assets under Management (AUM)15. In addition, growing capital requirements and related regula-tory costs constitute an operational barrier that will not be soothed by merely reducing operational costs. Thus, gaining scale is a priority for most minor banks operating in the region right now.

Alternatively, the best strategy for bigger banks consists of leaning down operations and creating a competitive edge through achieving lower average costs and delivering im-proved services. However, given the difficulty in achieving organic growth, big players in the region are opting for consol-idation in order to increase Assets under Management (AUM). Sizable banks can also adopt a mixed strategy (by both acquir-ing smaller banks and outsourcing processes) as a way to cir-cumvent stagnant growth while increasing margins.

Consequently, given the importance of consolidation as a solution that simultaneously addresses various market chal-lenges, we decided to interview bankers who have recently participated in consolidations. The aim was to understand what were the reasons behind an M&A decision and learn about the important aspects that were considered during the post-M&A phase.

2.2 Voices from the Market

Synpulse has spoken to key stakeholders of integration proj-ect at recent deals in order to understand their reasons of consolidation. Just to name a few, the most common answers revolved around:

Accessing new markets Strengthening their presence in an existing market Creating cross-selling opportunities with new clients Growing their AUM / profitability ratios; Adopting the counterparty’s IT systems / expertise in

a certain product.

These objectives are aligned to the common causes frequent-ly mentioned as reasons behind any consolidation deal.

«The biggest challenges leading to an M&A decision were the difficulty to achieve economies of scale

and strengthening market position.»

Whether pursuing a merger or an acquisition, for the banks interviewed, the greatest concern behind a consolidation pro-cess remains in the fact that the M&A will not result in what they expected at the date of deal announcement. This belief is rightly grounded on a number of M&A deals that have failed in the past, frequently resulting in over budgets (due to the complexity of the integration) and thus delivering a lower than expected return on investment. One of our respondents point-ed out to this aspect in particular, by arguing the bank’s M&A budget had to be stretched due to a higher than expected use of consultants and legal advisors. In addition, unsuccessful deals in the past (Bank of America and Merrill Lynch in 2009 or Deutsche Bank and Dresdner Bank in 2000) have also shown important increases in operational risk and errors that result-ed in poor service delivery and reputational risk.

«One of the biggest challenges during the M&A phase was two align the two banks’ operational

cultures. In particular when the most critical team is the Front Office staff.»

Many banks also fear of high fines resulting from legal viola-tions (mostly stemming from the regulatory differences in the regions where banks operate) and recognize that M&A deals are a big source of risk. Another risk that is particularly difficult to avoid is the client risk, resulting from the acquirer’s inability to identify the counterparty’s clients only until they have been moved to the acquirer’s books: the key risk to underline is that the acquiring bank cannot conduct their own due diligence upfront, unless a repapering exercise is performed. A typical repapering exercise requires the modification of the clients'

14 BOCHK has entered into the Acquisition Agreements with BOC in relation to the acquisitions of the entire issued share capital of BOC Thailand

and BOC Malaysia (http://bit.ly/2cW0og6)15 Asian Private Banker — Desperately Seeking Scale: USD30bn AUM threshold may be key to survival in Asia, May 13th 2016

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documentation into the buyer's bank documentation — such as a completely new on-boarding of the client which includes full due dilgence, KYC approval, etc. In this aspect, one of the surveyed bankers’ emphasized success in the deal implemen-tation came from a strict control on the accounts transferred and client identification through a structured client repaper-ing process.

«A more structured approach and better methodology could have been used for the M&A

Target Operating Model.»

Attention to operational risk is increasing, with 'asset deal' gain-ing popularity during the last years. Banks are in consequence more focused in acquiring client relationships and their assets (the traditional 'asset deal'), rather than transferring contracts, infrastructure, and commitments which might include enquity ('business deal'). The transfer of clients in this type of transac-tion might be drawn out – but the risks can be better controlled.

«The key differentiators for a private bank to survive today are automation, economies of scale, broad

product offering and brand image.»

Furthermore, most of the experts interviewed say banks should implement an external growth strategy as a way to differentiate themselves in the industry. Having exposure to Asian markets has been underlined as a key differentiator. From a business perspective, consolidation of niche players with established players is seen as an opportunity for private banks to acquire the Asian expertise needed for development.

«For the integration, a BPO model was chosen to run with an extremely lean operating model. The

focus was always for staff to adopt a standardized procedure.»

Our interviews also shed light on some of the key factors that will take an M&A deal to success. Early planning on the Tar-get Operating Model, a proper prioritization in the integration strategy, and ensuring high business engagement are just some of these key factors. Additionally, some interviewees highlighted that extensive due diligence in the process, recog-nition of each partner in the deal as well as an entire commit-ment to change from teams are also factors that contribute to success. Synergies as a way to evaluate the success of a deal discussed by industry professionals shows the importance given to the development and enhancement of product of-fering, as well as the utilization of platform capacity: business and technology are often the main focus.

«Right after the merger was finalized metrics like the CIR were reduced due to the improved Back

Office / Front Office ratio.»

Regarding the first and second aspects, one of the respon-dents underscored that both the post-M&A Target Operating Model (TOM) and the integration strategy were defined after the deal signature. This created uncertainty amongst staff and made it difficult for the acquiring entity to implement the proper rehearsals. A lesson learnt from this example is that inadequate planning can impact staff expectations and engagement, which in turn can severely impact the deal ex-pected outcome. Industry experts also underlined that one of the main issues was to be able to manage the unexpected: the differentiation of standards, the clash between legacy system and new technologies, or the migration processes are often quoted.

«Outcomes achieved from the M&A deal included; increasing and strengthening market share and

assets under management, lowering cost to reach economies of scale, developing a new branding, marketing strategy, and enhancing the product

offering.»

In the meantime, other participants explained that no change was done in the operating model as the integration of bank ac-quire followed seamless the operating model of the Acquirer. Transaction rationales were driven mainly by the complemen-tarity of the business and operating models with small client overlap, exposure to new markets enabling gaining market share, growing the asset base by the enhancement in product offering.

«One of the key factors leading to a successful deal was to put a big emphasis on governance when

defining the merged entity TOM.»

Finally, respondents added up a few more factors considered crucial for a positive consolidation deal. These are:

To clearly specify a governance structure for the merged entity right after the deal has been signed.

In terms of the integration strategy prioritization, areas like ‘Staff & Organization’, ‘Customer & Sales’, and ‘Culture and Position’ should always be put first in order to guaran-tee staff retention and client engagement.

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3. Post-Merger Integration

3.1 Complexity of Integration

M&A integrations are highly complex. Issues such as the align-ment of different governance structures, divergent corporate cultures, overlapping functions and simultaneous presence across markets are common in consolidations and a threat for achieving expected goals if not handled well. This is why many acquisitions have not brought the desired return on investment in the past. Lack of quality in project execution, underutilized potential synergies and the changing market landscape are often cited as the three main reasons behind the lack of success. Today, a bank thinks a lot harder about whether it is capable of mastering the challenges of integra-tion. One major issue here is that the integrators do not attach the necessary importance to post-merger integration (PMI), or accept key management support from start to finish.

In a competitive market environment, banks need to ensure these issues are overcome by following a structured integra-tion strategy that guarantees a better market position for the

consolidated entity after the deal is finalized. As a particular example, some banks use compatibility frameworks that sup-port them in taking a Merger or Acquisition decision by identi-fying matching critical areas like market segments, corporate culture, and financial fit. In the past, not abiding by a well-de-signed approach during the deal execution phase resulted in unpleasant results for merged parties, including for example, consolidation costs overrun, overstated synergies/value-cre-ating opportunities and in some cases even deal failure.

An effective consolidation strategy varies according to the deal characteristics and comprises both hard (e.g. processes, IT architecture, infrastructure) and soft factors (e.g. culture, positioning, human resources). A successful M&A integration requires the addressing of all factors in the integration strat-egy. The integration team is well advised to first focus on critical areas of integration ( 2). Their prioritization depends on various factors (e.g. time horizon, system compatibility). A well-designed integration strategy should therefore be both comprehensive and adapted to every deal’s particular needs.

2 M&A Integration — Areas to be considered for Prioritization Source: Synpulse

IT Compatibility

Transactional Goal

Time Horizon

RegulatoryConditions

Business Strategy

IntegrationExperience

Transaction Size

Acquisition Type

Number of Locations

Culture and Positioning

People and Organization

Customer and Sales

IT Architecture andInfrastructure

Product and Services

Process and Know-how

Soft

Fact

ors

Har

d

ExternalInternalRange

Integration Areas

Influencing Factors

12 | synpulse

This includes taking into account synergies and targets identi-fied during the pre-merger phase and internalizing them into each of the M&A activities. A recent example on prioritization during a PMI phase comes from EFG-BSI acquisition, where both banks decided to focus on three areas: legal aspects (e.g. required approvals, tax and corporate structure, alignment of contracts, forms, etc.), strategy and operations (client reten-tion and service standardization), and a clear definition of IT and organization (e.g. platform selection, migration, and price alignment).

The soft factors such as corporate identity and organizational culture should never be relegated as their effective handling results in higher staff retention and higher employee commit-ment during the PMI phase. Taking care of the hard factors such as redefining or adapting the operating model requires a structured approach connected with a clearly defined inte-gration approach. 3.2 Target Operating Model Definition

Defining the right TOM is key for a successful PMI. The TOM defines the future optimal business architecture after the inte-gration of the two parties to enable the expected M&A targets. This includes looking at the changes in the product offering, the organizational transition under the new merged entity and

the IT migration. Besides its operational scope, a post-merger operational architecture should always strive for an industri-alized business model, one that not only deals with new busi-ness segments but also states what to do with the residual business that takes care of clients that are not transferring (by choice or rejected by the buyer). Experience shows that a TOM should include the following dimensions in order to achieve cost and time efficiencies ( 3).

Organization & Processes: Focus on the review of the current processes of both sides and measures them against quanti-tative and qualitative M&A targets to identify bottlenecks and redundant activities. It suggests optimization options, and highlights necessary organizational changes.

Products & Services: Explores opportunities to extend prod-uct and service offerings post-merger. It exposes function-al gaps of the current IT system landscape and advises on high-level business requirements to support new products and services. Key focus is thereby on the client to ensure an optimal experience for transferring clients and no impact on the existing client base.

Technologies & Architecture: The current application land-scape and IT infrastructure has to be analysed. The acquiring bank may have to invest into their IT platform to be able to

3 Target Operating Model (TOM) — Methodology Source: Synpulse

Organization & Processes

Technologies & Architecture

Partnership & Sourcing

Vision

Target Operating Model (TOM)

Products & Services

Transformation Planning and Implementation

Business Case

BANKINABOX®

| 13synpulse

cater for the organization & process changes, as well as the in-creased product & services scope. A strategic decision on the optimal IT platform has to be taken in case of a merger, i.e. which of the existing platform should be taken as a baseline and can it cater for the new increased business volume.

Partnership & Sourcing: Choosing the right sourcing strategy and partnership model is key for the optimal TOM. Recent in-tegrations have shown that there are options to avoid heavy investments into a new IT platform or the setup of a big Oper-ations that takes care of the new organisation (post-merger/after acquisition). Business process outsourcing (BPO) is espe-cially attractive, if the M&A deal involves entering of new mar-kets and jurisdictions.

A best-practice approach is used to define the TOM blue-print across all four dimensions considering both industry best-practices and inputs from the two banks that are part of the M&A deal. This blueprint will provide the guiding prin-ciples in arriving at location-agnostic harmonized processes, products / service offerings supported by globally-aligned or-

ganization structure and homogenous systems architecture. Having a well-defined TOM with clear, senior management ap-proved guiding principles is the project’s keystone. It impacts almost all aspects of the project from process definition and handshake points to SLAs through to end-user training.

3.3 Implementing a 3rd Generation Operating Model

Bringing an additional partner into an M&A integration (i.e. in-house or external BPO provider) may add complexity to the integration, but also industry best-practise in terms of oper-ational excellence. Our last year’s study has shown that big advantages can be thrown through the implementation of a 3rd generation operating model with a global BPO network connecting centers of operational excellence. Each center is thereby fully scalable leveraging high-level of automation16. Such a model presents itself as a great solution for merged banks to achieve the projected benefits of the deal by sub-stantially reducing operational costs and by increasing service differentiation through unlocking resources to focus on value

4 TOM Target State – 3rd Generation Operating Model

16 Next Generation Private Banking — 3rd Generation Operating Models, Synpulse, 2015

Markets Segments Products Channels Org structure Processes IT Infrastructure Applications

As-Is

Econ

omie

s of s

cale

Industrialization degree

TOM options Recommended path

Guiding Principles

Value Proposition Customer segments Product & Offerings Channels Countries Jurisdictions Market Trends/Opportunities

StrategicLevers

1 Partnership & Sourcing

Organization & Processes

Products & Services

Technologies & Architecture

2

3

4

TOM

Strategy enabler Business case benefits Customer experience Economies of scale Harmonized processes Productivity increase Wider Product offering RTB & CTB reduction Predictable IT costs

Local Integration

Regional Integration

Global Integration

3rd Gen OM(BPO)

As-Is

Industrialized Integration

TOM Dimensions

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creating activities. By making use of connected BPO centers operating through a global processing network, banks are able to offer a complete product suite at any location and at fully predictable costs (no upfront investment requirement, on demand scalability, and pay-as-you-go facility/costs on trans-action level), this is especially relevant for banks with a global presence ( 4).

If well implemented, a 3rd generation operating model prom-ises to reduce up to 30% of operating costs17. A very enticing alternative for those banks already assigning sizable resources to operations and whom cannot afford upfront investments to enter new markets or want to avoid high M&A integration costs. These banks benefit further from maximized front of-fice effectiveness at day one after the M&A integration. This due to the fact that for many banks an existing state-of-the-art IT platform can be leveraged and that the front office staff is supported by a highly professional back office service centers (BPO centers) ensuring efficient error-free processes, granular monitoring capabilities, and extended product offering across locations.

17 Next Generation Private Banking — 3rd Generation Operating Models, Synpulse, 2015

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4. Conclusion and Outlook

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Asia’s banking industry is continuously facing transformation. Due to the fast economic growth of the region and the creation of wealth the private banking industry has been transformed and needs currently to deal with ongoing challenges. Facing a change in client behaviour from a business perspective, or in-efficiencies from an operational view, the private banks in the region needs to find way to grow and to develop themselves. Facing strong competition in more stringent regulatory en-vironment where pressure on margins and difficulties to tap new clients, assets, markets are present, private banks need to rethink about their strategy by either focusing on key mar-kets, rationalizing booking centers, exiting markets or entering into a potential merger and acquisition process leading to the observed wave of consolidation.

Following the different interviews conducted throughout the industry in Hong Kong and Singapore, an M&A process in the private banking is always unpredictable in different aspects, either from a business perspective or from an operational view. Having a structured approach, and a defined method-ology is key to succeed in the process, pre-and post-merg-er. Aligning the banks’ model, and managing the shift from a human resources, company culture, and governance are key

aspects not to neglect. Defining the right operating model by considering the different available options (core system to adopt, model to run the bank) are key aspects that may take M&A deal to success. In the meantime, such processes enables banks to differentiate themselves in a highly competitive mar-ket by increasing their level of automation, develop economy of scale, and potentially increase visibility worldwide by devel-oping a strong branding. Post-merger integration is critical in the process, and has been underlined by industry experts as one of the main steps in any M&A process.

Differences in the business models and the maturity of the operating models are circumventing the realization of the anticipated synergies and the projected economies of scale. This is why it is crucial to assure business model alignment and to define a suitable TOM during the M&A integration. This is essential for an efficient, cost-effective integration. Different sourcing options can be considered to get even further advan-tages out of the deal in terms of scalability, cost efficiencies, and front office effectiveness.

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5. Authors

Yves RoestiManaging Director & Partner, Singapore

Yves Roesti joined Synpulse in 2006 and relocated to Singa-pore in 2008 to support the build-up of the local office. As Head Banking Consultancy Services, his primary focus is on key trends in the wealth management market and business process outsourcing initiatives. He holds a Master in Econom-ics and Information Systems from the University of Zurich, Switzerland.

yves.roesti@synpulse.com

Salomon WettsteinManaging Director, Hong Kong

Salomon Wettstein joined Synpulse in 2011, supported the Singapore office from 2013-2016 before he relocated to Hong Kong in 2016 to support the build-up of the Hong Kong office. His experience in the banking industry encompasses strategic business and technology transformations, target operating model design and post-merger integration. His focus is on key trends in the wealth management market and business pro-cess outsourcing initiatives. He holds a Master in Computa-tional Science and Engineering from ETH Zurich, Switzerland.

salomon.wettstein@synpulse.com

Andreas WengerAssociate Partner, Singapore

Andreas Wenger joined Synpulse in 2010 in Switzerland. He re-located to Singapore in 2011 to support the local office. His experience in the banking industry is in the area of post-merg-er integration, front office strategies and processes, business and technology transformations. He holds a PhD in Physics form University of Zurich and a Master in Physics from ETH Zu-rich, Switzerland.

andreas.wenger@synpulse.com

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Gregory AchacheSenior Consultant, Singapore

Gregory Achache joined Synpulse in 2015, supporting the Sin-gapore office. His international experience in the banking in-dustry enables him to focus on Operational Excellence topics. He holds a Master in Management from Skema Business School Nice — Sophia-Antipolis, France.

gregory.achache@synpulse.com

Carlos DominguezConsultant, Hong Kong

Carlos Dominguez joined Synpulse in 2016 and currently sup-ports the build-up of the Hong Kong office. His experience in the banking industry includes business technology transfor-mation, project management, and operational leaning for both retail and private banks across Asia and Latin America. He holds a Master in Banking and Finance from Lingnan Uni-versity, Hong Kong.

carlos.dominguez@synpulse.com

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Data Collection

In order to supplement publicly available information, inter-views were held with a range of senior individuals from orga-nizations operating in Singapore’s and Hong Kong’s banking industry. A diverse mix of banks involved in recent M&A deals were chosen in order to ensure a fair representation of the industry. The surveys and interviews were conducted using a structured approach to ensure that consistent information was obtained and collated. Each interview lasted approx-imately one hour and was mostly face-to-face. This paper contains data self-reported by the participants and Synpulse does not take any responsibility regarding the accuracy of the data. These findings have been supplemented by Synpulse’s internal research, project experience and expertise to provide a holistic analysis.

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6. Synpulse

Synpulse is an established, globally active management consulting company and a valued partner to renowned in-ternational financial services companies. Since its formation in 1996, Synpulse has offered its clients excellent solutions, enabling them to generate high added value. We support our clients in the whole process from working out strategies and realizing them operationally through to technical implemen-tation.

Synpulse’s clients deserve the best. Since the quality of con-sultancy is closely related to the level of education, it invests approximately 10% of its financial and human resources in comprehensive further education and development as part of its «Academy Program®». On the principle of «Life-Long- Learning» the program supports its ambitious consultants on their path to senior consultant, manager and partner at the company.

The trust that leading banks and insurance companies have in Synpulse is based on experience and a conviction that its consultants are always able to form teams that are capable of and willing to achieve ambitious goals with expertise and pas-sion.

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Publishing details

Published bySynpulse Singapore Pte. Ltd.Management Consulting Singaporewww.synpulse.com

© CopyrightSynpulse Singapore Pte. Ltd., Singapore 2016The reproduction is permitted with the agreement of the publisher if the source is acknowledged.

Edition2016 - 1st edition

Important noteThe authors assume no liability for decisions taken on the basis of this paper and for any consequences thereof.

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