By GENEVIEVE CUA

THE financial crisis is likely to lead private wealth clients to consolidate their accounts with fewer, rather than more, banks, says Deutsche Bank managing director Anurag Mahesh.

This is in contrast to what happened following the collapse of Lehman Brothers at the peak of the credit crisis last September. Following that shock, clients woke up to the reality of counter-party risk and began to spread their funds across a number of banks - in particular to those with stronger balance sheets.

But now, Mr Mahesh, who is also Deutsche Bank's head of global investment solutions (Asia Pacific), believes clients will begin to differentiate banks based on the quality of their portfolio and risk advisory services.

Increasingly, the conversation has to centre around risk and ways to dampen or hedge it.

'We tell clients to show us their portfolios, and they are doing that, even if the money is sitting in other banks,' he said.

'If a client thinks, here is a bank that can save me money when things are choppy, he is willing to listen. You change the paradigm of private banking. Our share of wallet has increased dramatically because of this.'

The re-pricing of risk has opened up opportunities for clients. 'If you're an investor and the return you can get per unit of risk is higher, that's a great thing,' said Mr Mahesh. 'We see that happening now. We think that's the single most significant positive development for buy-side investors.'

One silver lining of the financial crisis is that clients' return expectations have moderated, he said. 'The genesis of client return expectations is not in the bull market. It's the IRR (internal rate of return) of their own businesses. If I give my money to a private bank, that's an opportunity cost. Today clients are seeing that the returns on their businesses are not outsized.'

Lower expectations are also a result of the widespread repricing of risk, as equity and bond markets were sold off aggressively in the last few months. Interest rates have also declined sharply.

Mr Mahesh sees opportunities in segments of the credit markets where clients can eke out returns above deposit rates without taking on too much risk. One alternative, for example, is to buy the senior debt of an issuer, and buy credit default swaps on the junior debt to protect against the credit risk.

At the moment, thanks to 'negative basis', clients can reap a 2 to 4 per cent per annum return in excess of deposit rates. 'When you buy a bond, you get an incremental return above the deposit rate and that's the credit spread,' Mr Mahesh said. 'Then you buy protection and pay a premium for it. In a normal market, the credit spread you receive and the CDS you pay for cancel each other out and you're left with the deposit rate.'

Dislocations have resulted in a higher credit spread than the cost of the CDS. This excess return was as high as 7 per cent in October and November last year and has fallen back to 2 to 4 per cent, he said. 'It will not last forever.' These are some of the tailored solutions for portfolios of at least US$10 million.

On bond interest rate risks, Mr Mahesh says clients may worry about inflation. One way to hedge would be to use an interest rate derivative that turns a fixed-rate bond into a floating-rate bond.

Mr Mahesh remains confident of the growth of wealth management in Asia. 'The wealth owner typically owns an SME. We believe Asia will continue to be at the forefront of economic activity, driven not just by exports but by domestic consumption,' he said.

'That means SME owners will continue to generate wealth and a bigger pie of that incremental wealth will be in Asia. It's very important to be in this business.'

This article was first published in The Business Times.