Market slump top risk for thriving private banks

By Douwe Miedema

GENEVA (Reuters) - A major downturn in equity markets would pose a serious risk for the booming private banking business, and those players with little exposure in Asia and other fast-growing markets would be the hardest hit.

Banks with most of their clients in Europe, where growth is slowest, have increased assets under management over the last few years mainly because asset prices have perked up. They may see a dramatic drop in income if markets slump.

"The biggest threat is that the industry has hinged itself on investment performance. A lot of managers we speak to are saying that if the market turns the way it did four to five years ago, they could seriously suffer," said Sebastian Dovey at consultancy firm Scorpio Partnership.

Global wealth -- from clients with free investable assets of $1 million or more -- stood at $33.3 trillion last year, according to a Cap Gemini study, and is expected to rise to $44.6 trillion by 2010.

But most of the growth will be in Asia and the Middle East, where banks have spent heavily to join the wealth bonanza to counter tepid growth in Europe.

"Private banks do not have the same cost flexibility as investment banks. When revenues drop, they're not as easily able to compensate. Things would definitely be hard for them in this scenario," one analyst said, asking not to be named.

Swiss bank UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) has rapidly become the largest wealth manager in Asia, with $124 billion of assets under management. Britain's HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) comes a close second because of its historic roots in China.

Others are catching up. Switzerland's Julius Baer (BAER.VX: Quote, Profile, Research, Stock Buzz) is pumping the increased cash flow from an acquisition into building an Asian business from scratch, chasing the continent's millionaires after years of anemic growth.  Continued...