Financial crisis slams private bank sales, margins

By Jeffrey Hodgson - Analysis

SINGAPORE (Reuters) - Profits at the world's private banks, whose fortunes soared this decade in tandem with their rich clients, will tumble this year as the global financial crisis slashes revenues from fees and sales.

The stunning plunge of financial markets has prompted wealthy clients to sell equity holdings and shun higher-fee products for the comfort and safety of cash, private bankers and industry experts told the Reuters Wealth Management Summit this week.

"This business is tied to the ebbs and flows of the market. When capital markets are performing strongly, private banking does well. When asset markets fall off a cliff, the correlation will hold," said Roman Scott, managing director of Calamander Group and an expert on Asia's private banking industry.

"If you look at private bank asset-under-management growth, a lot of it was fueled by the sale of structured products. You cannot go to a situation like now, where structured products is a dirty word, and not have private banking affected."

Wealth management had been one of the most profitable bank segments prior to the crisis, prompting non-traditional players to expand rapidly into the sector over the past few years.

Assets held by the world's richest people rose by 9.4 percent to $40.7 trillion in 2007, according to the Merrill Lynch and Capgemini Annual World Wealth Report released in June.

But trillions in wealth has been wiped out globally since the credit crisis began over a year ago, and it's not clear when the carnage will end.

The private banking industry, whose largest players include UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co Inc MER.N, typically earn fees of 1 percent or more per year on assets under management.

Analysts note that a disproportionate amount of that fee income is generated from riskier asset classes like equities. Structured products, which often use complicated financial instruments such as derivatives, are seen as particularly big fee generators for the banks.

But private bankers serving U.S., European and Asian investors said many of their clients had been dumping assets with the slightest hint of risk and hoarding cash to avoid further losses as the global credit crisis continues to bite.

This means even if overall assets hold steady or shrink only slightly, profits for the private banks could quickly evaporate.

"The values you can generate on cash management is clearly not as high as on some alternative investments. These are 30 to 40 basis points. So, gross margin is clearly going down," said Sebastian Dovey, managing partner at wealth management consultancy Scorpio Partnership.

Dovey and private banking executives, who are notorious for their secrecy, declined to speculate on how badly fees and margins could be hit. Calamander's Scott said in a worst case scenario the blended fee income collected by private banks could fall below 100 basis points.

Rahul Malhotra, Merrill's head of Asia Pacific Advisory, told the Reuters Wealth Management Summit in Singapore that overall revenue of Asia's wealth management industry could fall 10-15 percent, and sales drops in other regions would be even worse.

"The industry needs to get used to lower return on assets in 2009. Clients will go for lower-yielding products," said Boris Collardi, Chief Operating Officer at Bank Julius Baer (BAER.VX: Quote, Profile, Research, Stock Buzz).  Continued...