Funds management remains a must-have accessory for any self-respecting bank despite the heightened regulatory and conduct risks involved, according to John Kensington, KPMG NZ head of banking and finance.
Kensington said the relatively recent entree of institutions outside the Australian-owned tight four into the funds management space – such as Kiwibank’s 2012 purchase of the-then Gareth Morgan Investments and TSB later taking an almost 50 per cent share in Fisher Funds – showed banks desired a presence in the sector.
“TSB is good example of a bank recognising a part of the customer experience it was not offering and needed to add [by taking a stake in Fisher],” he said. “If you want to be seen as a serious contender then you need to have a full-service model.”
And in its latest annual ‘Financial institutions performance survey’ (FIPS), released last week, KPMG found the country’s top five banks (the four Australian-owned entities plus Kiwibank) collectively increased funds under management (FUM) by more than $7 billion last year.
In total the five banks reported FUM of over $54.2 billion as at the end of 2016 with all firms – bar Kiwibank – seeing double-digit growth over the year, ranging from about 21 per cent for BNZ to a tad under 14 per cent at Westpac.
Kiwibank saw its FUM cut by 5.62 per cent during the annual period, bleeding $210 million “on top of a $150 million decrease from the previous year”, the KPMG report says. However, the Kiwibank figures relate solely to the group’s cash PIE funds with the group’s KiwiSaver and other investment products managed since July last year under the Kiwi Wealth subsidiary.
The Kiwi Wealth KiwiSaver scheme alone has racked up about $3 billion in FUM.
While ASB, ran second in growth-rates (up 18.53 per cent for the year), the Commonwealth Bank of Australia (CBA) NZ offshoot still lags Westpac in total FUM, reporting $8.9 billion under management compared to over $10.7 billion for the latter.
Westpac – the slowest-growing of the top four banks – still increased FUM by $1.32 billion during the 12-month period, of which almost $830 million was attributable to KiwiSaver, “along with moderate increase of $235 million and $148 million in PIE funds and retail unit trusts, respectively”.
“ANZ remains the biggest provider in the [funds management] sector, with a $3.75 billion (16.47%) growth in FUM to $26.49 billion,” the KPMG survey says.
In spite of ANZ’s reported exit from wealth management in Australasia (including a rumoured of a sale for the NZ unit), Kensington said all banks want to keep some exposure to funds management.
“Different banks have different strategies,” he said. “Some do everything themselves while others outsource some, or all, of the underlying funds management activities.”
Either way – but particularly for those banks owning all links in the chain – funds management “contributes nicely to profitability”. Although, the exact quantum of funds management profit is difficult to gauge from banks’ consolidated accounts.
“You’d have to be lucky enough to audit their accounts to really know,” Kensington said.
Regardless of profit margins, he said banks globally are more aware of the risks associated with operating wealth management divisions.
“For example, boards are concerned that their managed funds are invested in the right assets; that they understand the need of their customers, as well as wider conduct issues that might lead to mis-selling,” Kensington said.
Likewise, he said banks everywhere, including NZ, were taking the threat of digital disruption – now lumped under the ‘fintech’ moniker – very seriously.
“Banks will see their businesses nibbled at by a whole lot of different fintech firms,” Kensington said. “And they will be disrupted. But they will also disrupt themselves.
“These are smart businesses that realise they will either lose out or join in the fintech trend.”
As well as building innovations in-house, most banks were also likely to partner with external fintech firms, he said.
“Banks will see they could probably build fintech products, maybe in the right time-frame, and maybe at a price they could afford, but it might be better to partner with start-ups who have already developed a solution,” Kensington said. “Banks may lose some margin, but they’re more concerned about giving customers the best experience.”