Strategic challenge facing banks in asset management

THE recent news that United Overseas Bank (UOB) plans to hive off its asset management business highlights the strategic challenges that banks face with regard to their asset management divisions.

If indeed these banks are having an existential crisis with regard to this segment of their business, it should come as no surprise.

The competitive pressure from global players is immense.

In Malaysia, asset management firms compete among themselves, against global fund management companies, as well as against state-owned Permodalan Nasional Bhd, which has a massive asset under management (AUM) figure of RM364bil.

One could argue they also compete against the Employees Provident Fund (EPF) but the latter works on a different model due to its statutory-backed forced savings mechanism, which naturally puts it in a class on its own and giving it that outlier level of AUM of some RM1.4 trillion.

The largest privately run asset managers in Malaysia are Public Mutual, AHAM Asset Management and Principal Asset Management, with AUMs around RM100bil.

Two of these had originally belonged to banking groups, which eventually hived them off to global players for tidy profits.

CIMB Bank Bhd first inked a joint venture with US giant Principal Financial Group some 20 years ago. By 2023, CIMB whittled down its ownership and today retains a minority stake in the since renamed Principal Asset Management Berhad.

AHAM Asset Management was once majority owned by Affin Bank, which in July 2022, sold its controlling stake to private equity group CVC Capital Partners for a massive RM1.42bil.

Today AHAM is in the news as it is about to be taken over by Japan’s Amova Asset Management Co Ltd (formerly known as Nikko Asset Management Co Ltd), which will be buying CVC’s stake in AHAM.

A related development is the increasing focus on wealth management among local banks.

On the face of it, having one’s own asset management division would tie in nicely with the wealth business.

Proprietary products from the bank’s asset management team would carry higher profit margins if pushed to its wealth management clients.

However, this model could be in threat. The reason: Clients are increasingly becoming more sophisticated and demanding.

All clients want the best of breed of products and some could be particularly sceptical about in-house products being proffered by a relationship manager from a bank.

The question is, can our local fund management companies offer products which are better than what the global players have?

Is this why increasingly we see announcements of tie-ups between our local banks and international fund managers, co-branding some products or merely selling the foreign fund managers’ products?

Some would argue that local asset managers still have room to play as there is sufficient demand for their products, not only their own bank’s clientele but also through cross-selling with other local banks or fund managers.

A local fund manager would also be able to tailor solutions for domestic clients in a way that the global funds aren’t able to do. But global funds are also creating products that meet local needs, such as Islamic-based ones.

This is why, increasingly, banks here are likely to merge their asset managers with big foreign players or sell these businesses outright and focus on growing their wealth clientele with the best of breed of investment products procured from third parties.

But if that is the case, how do you explain what Affin Bank just did – after selling its asset management arm in 2022, late last year it bought a smallish asset manager, Pheim Asset Management Sdn Bhd, for RM50mil.

The answer could be that Affin Bank sees a low-hanging fruit for this business, namely the monies in the coffers of the Sarawak state. Recall that in 2024, Sarawak emerged as the single largest shareholder of Affin Bank with a 31.25% stake. And, as we all know, that state is sitting on a cash pile estimated at around RM26bil now – and growing.

Not to mention the wealth management possibilities of the many billionaires in Sarawak who made their vast fortunes from mining, timber and plantations over the years.

So if we exclude the Affin Bank case, the attention would now be with the banks that still wholly own their asset management divisions. These include Maybank, Public Bank, RHB and Hong Leong Bank.

Are these banks likely to be having an existential crisis with regards to their asset management arms?

Remember, these firms face a stiff competitive landscape both locally and globally, plus have to contend with their wealth management colleagues wishing to give the best of breed of products to their clients, which may not include their own asset management products.

Should banks then seek to sell them to the highest bidder, likely in the form of global asset managers wanting access to local markets or even private equity firms like CVC Capital Partners?

It will be interesting to see how the UOB saga unfolds as that would give more insights into how banks are looking at their asset management divisions.