August 14, 2014 12:00 am JST

Swiss bank sees record year as Hong Kong tycoons pass the baton

KENJI KAWASE, Nikkei deputy editor

HONG KONG -- For a Geneva-based private bank established well over 200 years ago, the timing seems just right to expand in Hong Kong. Vincent Duhamel, a capital partner and the head of Asia for Lombard Odier, revealed in an interview with the Nikkei Asian Review that his bank is enjoying a "record year" in terms of new clients and assets in the territory.

     Duhamel, a 25-year veteran of the financial industry, attributes this mainly to a shift from first-generation entrepreneurs to their second-generation heirs.

     Unlike large full-service banks, such as Citibank and HSBC, Lombard Odier neither lends money nor underwrites initial public offerings. It only accepts clients' wealth and tries to increase it as much as possible through prudent investment. For some clients, this pure focus on private banking is seen as an advantage over larger banks because "there is no potential conflict of interest."

     Duhamel knows who his clients are -- and aren't. "For the first generation of entrepreneurs, we are not suited," he said, as Lombard Odier is not involved in providing new funding. Another reason Duhamel's bank is not an attractive option for many self-made, risk-taking entrepreneurs? "We are too boring for them, and we are too stable."

Changing of the guards

On the other hand, the sons and daughters of these founders, having been born into wealth, seem to have a different mindset. "Second-generation successors normally do not want to take risks," according to Duhamel.

     As first-generation Hong Kong tycoons, such as Li Ka-shing and Lee Shau-kee, are now in their 80s, transitions in corporate management and personal wealth are gradually getting underway. Unlike the first generation, who started from scratch and had nothing to lose, their children are "risk adverse," Duhamel said. "They are afraid of losing their wealth. They want to do better. And that suits us much better. They are like us, more wealth-preservation oriented. We don't take unnecessary risks."

     As a privately owned partnership, the bank generally refrains from providing concrete figures on its performance. But Duhamel offered a glimpse of the kind of new clients he is getting in Hong Kong.

     "Client A," for example, is a typical entrepreneurial family in Hong Kong that made its fortune in textiles and real estate -- and it is in the midst of passing the baton from one generation to the next. The family previously entrusted around $500 million in liquid assets to various major international banks, such as Goldman Sachs and UBS, but it recently diverted $30 million of that amount to Lombard Odier. Although this is a tiny fraction of the family's wealth, Duhamel said he is quite positive about gaining a larger share, as "so far we are doing better than the other (banks)."

Value of prudence

Mainland China, another crucial market in the region, is a different story. Even though most of the entrepreneurs there are first-generation, "because of a lack of alternatives, there is more interest in what we are doing." China's strict capital controls severely limit citizens' investment options. The decision by China's National Social Security Fund in 2012 to choose Lombard Odier as one of the 12 global financial institutions, along with JP Morgan and Schroders, to help manage the multibillion-dollar social security fund also helped boost the private bank's credibility among Chinese investors.

     But in dealing with mainland China, Duhamel uses the word "carefully." Not only does China "still have foreign exchange control, so you cannot deal with the fund inside China," but there is a much larger issue of knowing your clients. Since the wealthy are often either corrupt officials using their political clout or businesspeople who are close to those officials, it is important "to be able to identify and be comfortable with the source of funds that you are dealing with," he said.

     "You have to be very careful with politically exposed people, or the PEPs," he added. Duhamel, who has experience working at American banks, recalled how major financial institutions went on a hiring spree of sons and daughters of the Chinese Communist Party leaders 10 years ago. It was "the thing to do," he said, as it was a guaranteed way to "get mandates and work done there." This race to snap up cadres' offspring -- which Lombard Odier was not a part of -- has now come back to haunt those financial institutions, highlighting the risks involved in trying to grow too quickly in mainland China. "Organizations like ours have no benefit in getting involved in a scandal with the PEPs," Duhamel said. "The reputation that we built for 200 years could be destroyed in a day or two."