Private banks are increasingly leveraging their balance sheets to lend to clients, releasing funds for portfolio investment as well as asset acquisition. Alongside generating additional revenue, this is also increasing customer loyalty. Paul Golden speaks to some of the leading players to find out more
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There are a number of reasons why private banks are keen on client lending. Not only does it generate additional revenue while reducing dependence on investment banking activities, it also leads to increased customer loyalty.
For those banks that offer asset management services there is the additional attraction of gaining business from clients looking to use the borrowed funds to diversify their portfolios. McKinsey’s 2014 Global Wealth Management Survey notes that private banks in North America with a lending-based offer generated significantly higher profit margins than competitors who didn’t offer client loans – an additional 20bps, an increase of 18% over the figure for 2013.
While cost margin gains from efficiency programmes have contributed to this improvement, the main driver has been growth in lending penetration.
In the Middle East, the McKinsey survey found that lending penetration grew to 20% of assets under management (AuM) in 2014, up from 18% in 2013 on the back of active promotion of the use of Lombard credit to enhance yields. Lombard loans enable the account holder to borrow funds to invest in assets that are either expected to perform well over time or that generate a dividend or coupon over and above the interest cost of the borrowed monies.
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By GlobalDataIn an environment of constrained balance sheets, private banks believe that enabling clients to access liquidity without having to liquidate their assets means the bank is seen as a partner rather than merely a provider of financial services, which helps to lift it to a higher level of engagement. This view is supported by the authors of the EY report Rethinking private banking in Asia-Pacific, who note that private banks that offer commercial lending benefit from increased client stickiness.
Banks remain largely reluctant to reveal specific details of their client lending programmes, citing confidentiality and commercial sensitivity. Of those contacted by PBI, only Societe Generale Private Banking (SGPB) disclosed lending volumes.
"At the end of 2015, the total amount of credit outstanding with clients was EUR18.3bn, which represents 16% of our AUM," says Jean-Francois Mazaud, head of Societe Generale Private Banking. "This sum has been rising over the last two years following the creation of our new private bank in France and a strong commercial momentum in the UK, Luxembourg and Belgium."
Clients require and expect solutions on both the credit and debit sides of the balance sheet, observes Nick Tucker, head of UK domestic wealth management business at UBS. "It is not always for leverage to amplify investment returns – it is more often about tiding over their business in terms of liquidity, enabling the client to maintain long term investment strategies."
Mazaud refers to lending as a source of multiple and recurrent revenue from the lending itself as well as the AuM with which it is correlated.
"We have established solutions to accompany increased demand from entrepreneurs and shareholders at different stages of a business, such as operations to reorganise capital holdings following changes in the family situation or a one-off need for liquidity by the shareholder family to finance a personal project or the purchase of shares. We also assist in the direct acquisition of property and can suggest financing through ‘club deals’."
HSBC Private Bank offers a range of facilities with amounts lent varying from hundreds of thousands to multi-million dollars, says Daniel Mentha, head of credit advisory HSBC Global Private Banking. "We see quite an even split between clients who use loans to diversify their portfolio and/or enhance yields and clients who borrow for other purposes."
The bank also provides structured loans for commercial or strategic investments to entrepreneurs and business owners who use its commercial banking services, he adds.
Cazenove Capital Management offers clients interest-only loans of up to five years duration, secured by UK residential property or investment assets managed by the firm, explains Alex Whitburn, head of banking and treasury.
"We do not have any targets for increasing the amount we lend to clients," he says. "The growth of our banking service is largely dependent on demand from our wealth management clients, who generally borrow for residential property purchase or refinance, or for short-term liquidity purposes."
Lending is a core element of the proposition Lloyds Private Banking offers to clients, enabling them to diversify their portfolios, fund property purchases or meet a range of short term funding needs observes Louise Santaana, head of UK lending.
"We provide both secured and unsecured loans. Generally speaking, the former are secured against residential property but we can also secure against different types of collateral, including investment portfolios. Many of our customers look for funding to allow them to diversify their portfolios – investment in the buy-to-let market is a clear example where many customers have employed this strategy," she says.
Ryan McGlynn, head of capital advisory services at EMEA JP Morgan private bank describes client lending as a core capability and says the bank sees an opportunity to grow its lending in the high single to low double digits in percentage terms.
"We provide a wide array of lending solutions, from facilities against marketable securities to unsecured loans to our largest clients. Additionally, we provide mortgages in the UK, loans against personal aircrafts and yachts for long standing clients, letters of credit and loans against single stock positions," says McGlynn.
The two most common loan types McGlynn’s clients request are for diversifying their portfolios or investing in their business, although he also refers to a trend for clients taking advantage of cheap sources of capital to acquire new businesses.
Tucker says UBS has not set any targets for the amount it lends to clients and that the provision of credit against investment portfolios remains relatively under-utilised in the UK compared to the Middle East and Asia. "However, the ability to borrow at such low rates is appealing to many entrepreneurial clients," he concludes.
