Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

What should be expected from a lender that just posted its worst return on equity in 22 quarters, experienced a sixfold jump in asset write-offs and has a thinning cushion to absorb losses from advances to oil-services clients, including one in judicial management and several others desperate to obtain easier debt terms? Any other bank would hunker down, but not Singapore's DBS Group Holdings Ltd.; it just bought another franchise.

Its acquisition of Australia & New Zealand Banking Group Ltd.’s wealth and retail units in five Asian markets, announced with quarterly results on Monday, would add S$6 billion ($4.3 billion) and 3,500 clients to DBS's private-banking business. Wealth-management revenue, which CEO Piyush Gupta forecasts rising to 20 percent of its total from 15 percent, is "very attractive" from an ROE standpoint, he says.

Vanishing Act
One measure of Singapore lender DBS's profitability skidded to its lowest in more than five years
Source: Bloomberg

That's either a heroic assumption or a large dose of UBS envy.  

UBS Group AG's 57.6 percent ROE in its wealth-management business acts like a neon sign for lenders looking for profit in a world buffeted by low interest rates and patchy corporate creditworthiness. But the Swiss bank's ROE in the unit was 73 percent a year ago, raising the question of whether private banking is already in a structural decline, especially in Asia where -- at 86 percent -- the cost-to-income ratio for global wealth managers is about 14 percentage points higher than in Europe, according to Oliver Wyman.   

UBS's gross margin on wealth assets slid to 76 basis points in the third quarter from 84 a year earlier. The bank attributes the decline to risk aversion among clients, in part because more new money is coming from ultra-high-net-worth individuals. For the longshot gambles, it needs the mass affluent. 

Poor Business of Serving the Rich
UBS's gross margin on wealth assets in Asia-Pacific is 73 basis points, lower than its global average
Source: UBS

These are the clients in the crosshairs of the Asian wealth managers. For a little extra yield, they piled into bonds of Swiber, the Singapore energy-services company that welshed on its debt in August -- and they can be persuaded to do so not just with their own money but with bank-provided leverage. But is this the El Dorado of high ROEs that bank shareholders crave? Outside of junk food and tobacco, what kind of a lasting franchise can be built by luring people to stuff that's so obviously bad for them?  

The glitter of private banking could be blinding. Bank analyst Daniel Tabbush says a reason DBS set aside a low loss provision -- and chose to write off more assets instead -- may be that it didn't want to show "despair or distress" ahead of the ANZ acquisition. Such a strategy, as Tabbush said in an article for website Smartkarma, has its own costs: "worse NPL cover, and pressure on margins and core net interest income."  

Tandem Cycle
DBS's share price over the past decade has moved in lockstep with its bad-loan allowance ratio
Source: Bloomberg

A second day of gains in DBS shares suggests shareholders are giving the deal a thumbs up. But investors' faith in bankers and their strategies can be fickle. In the long run, DBS might find its UBS envy to be a costly proposition.     

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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