Millionaires' bankers may be next to feel pain
As the credit crisis drags on, not even the world's millionaire investors are immune from its effects, and the private banks which manage their money could be next to feel the pain.
Rich investors are reducing leverage on their portfolios, robbing wealth managers of a lucrative income stream just as difficult financial markets cast a shadow over their results.
As the credit crisis eats away the value of their assets, millionaires are paying back cash they borrowed for investment purposes to reduce risk, private bankers say.
"We've seen leverage vanish completely almost overnight from the beginning of November," said Nicolas Sarkis, a partner at wealth management boutique Alphaone Partners.
The credit crisis has so far had little impact on the wealth management industry, which manages an estimated $37.2 trillion in assets worldwide and which ranges from small boutiques to the private banking divisions of large wealth managers such as UBS, Credit Suisse and Citigroup.
UBS is among the most dependent of large banks on wealth management earnings, which accounted for roughly a third of its operating income in 2006.
But while clients at London-based Alphaone previously borrowed money worth about 25 percent of their portfolio - typically putting the money into illiquid assets such as hedge funds - that number had now gone down to zero, Sarkis said.
"I think this is due to risk aversion spiking up and people paying off debts," Sarkis said.
Speaking on condition of anonymity, a banker at a large wealth manager said he had seen loan books being reduced, in a sign that deleveraging may be widespread.
A loss of income from private banks' loan books would come just as stock markets enter a period of volatility, which could hurt their earnings, which depends largely on asset prices.
Leverage provides a double income stream for private banks: they charge a margin on the loan to clients, who typically reinvest the cash in products provided by the bank - again paying fees.
Wealth managers do not normally disclose clients' leverage and Julius Baer, Credit Suisse, UBS, HSBC and Deutsche Bank all declined to comment on where leverage was heading in choppy markets.
Analysts' estimates of client leverage rank from single-digit levels to 50 percent or more, with clients in Asia generally known to be keener on borrowing against their portfolio than those in Europe.
"There are private banks where collateralized loans are a standard product to boost performance," said Bernard Coucke, who heads ING's private bank in Europe.
"If a client is invested in leveraged products on top of that, he's seriously geared and I can well imagine that he will want to reduce leverage in turbulent times," he said.
Agencies
(China Daily 01/10/2008 page16)
