Private banking profitability
has undoubtedly been hit by the financial crisis, but less so than
other disciplines within the banking industry, according to recent
research. Banks in North America and Latin America fared best,
while steep declines in assets under management hit Asian wealth
managers
Private banking profitability declined from 36.4 percent to 30
percent in 2008, underlining the industry’s resilience in the face
of one of the most testing periods in financial history. North
American businesses performed the strongest, according to research
from Boston Consulting Group (BCG) which shows the region’s private
banking profit, measured by operating profit as a percentage of
revenue, rose from 34.7 percent in 2007 to 38.2 percent in
2008.
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“The wealth management industry has weathered the storm better than
most other financial services sectors, but it was hardly
unscathed,” the report said. “The industry’s profitability measured
by pretax profit margins declined in almost all regions and across
all business models.”
Asian private banks, which suffered the largest declines in assets
under management (AuM), were the worst performing on average, with
median profitability declining from 37.1 percent to 18.7
percent.
“A handful of participants in this region experienced significant
declines in revenues, causing median profitability to plunge,
ending the region’s strong run of increasing profitability,” the
report said.
European wealth managers’ profitability declined slightly from 39.9
percent in 2007 to 38.8 percent in 2008, though the decline was
steeper among offshore private banks where it declined from 43.8
percent to 33.1 percent.
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By GlobalDataIn Latin America, profitability was steady at 40 percent of
revenue.
“To some extent the wealth management industry defied the
downturn,” the report stated. “Although profitability was lower in
2008 – when the crisis began to intensify, assets declined and
clients shifted more of their wealth to conservative investments –
private banks were cushioned by a relatively good first
half.”
Declining profitability was driven by lower assets under
management, which fell 13 percent at wealth managers on a global
basis. The only region where the wealth management industry did not
suffer declines in AuM was Latin America, where there was no
change.
BCG said additional levers on private bank profitability were
revenue margins remaining resilient at an average 89.1 basis
points, an increase in the mobility of client assets, relationship
manager productivity and rising cost income ratios.
“In 2008, there was a clear division between the haves and the
have-nots, particularly in Europe,” the report said. “European
institutions that had a negative net new assets (NNA) suffered an
average net outflow of 5.2 percent. 
“Those with positive NNA achieved an average net inflow of 7.3
percent. The winners tended to have either a proven commitment to a
conservative, long-term investment strategy or the backing of a
government. Interviews with banking experts suggest that these
diverging NNA results stemmed from asset flows among wealth
managers.”
One of the key challenges facing wealth managers is clients’
preference for more risk-averse, and simple investments like cash,
bonds and basic stock holdings. Wealth management profitability in
the last decade has been driven in many cases by increases in
allocations to alteratives, particularly structured products, hedge
funds and private equity.
While sales of structured products have been picking up, there is
still evidence clients are wary of taking on too much risk or
complexity in their portfolios.
Walter Berchtold, Credit Suisse’s head of private banking, recently
said clients were still holding large allocations of cash.
Allocations were as high as 50 percent at the height of the
financial crisis, he said.
There remains limited appetite among clients to take on investments
that require a longer-term time horizon. BCG’s analysis showed the
proportion of assets held in cash and money market assets grew by
26 percent in 2008. This has undercut trading activity, reduced
fees and impacted margins.
“Even after clients regain their appetite for risk, most will
remain wary of opaque products,” the report said. “Wealth managers
cannot count on a resurgence of high margin products to pull them
out of the downturn.”
Global trends
BCG’s wealth report, which uses a looser definition of wealth than
Merrill Lynch/Capgemini (which estimates global investable assets
of $32.8 trillion), said there was an 11.8 percent decline in
wealth to $92.4 trillion.
Declining revenues and profitability across the industry meant
there was an imperative to cut costs, but at the same time offer
more intensive customer service. Pressure is also mounting on
offshore wealth, though it suffered only a modest decline compared
to the rest of the industry, falling 8.2 percent to $6.7 trillion,
from $7.3 trillion.
The report also found Europe had become the most significant region
in terms of its share of global wealth, with $32.7 trillion in
assets under management, overtaking the US, which had $29.3
trillion.
