While bank analysts fixated on signs of an end to the secular decline in FICC revenues and profits as US banks kicked off the third quarter reporting season last month, the real action was in wealth management. It seems that the US authorities’ clampdown on private banks aiding US citizens evade tax has made foreign banks less keen to manage the money of wealthy Americans offshore and provided a boon to domestic banks.
|Clients look at pockets of money in different ways and some of those pockets they just want to leave alone to be managed for the longer term|
Peter Charrington, Citi Private Bank
Wells Fargo’s net income from its wealth management unit rose 22% year-on-year in the third quarter, up from a 25% increase in the second quarter. At Bank of America Merrill Lynch, while total revenue fell for the entire group, wealth management profits were up 13% year-on-year. Its global wealth and investment management (GWIM) division, which includes Merrill Lynch and US Trust, saw an increase in net income to $813 million for the third quarter, up from $720 million a year ago. Total revenue hit a record high of $4.7 billion, up from $4.4 billion for the same period last year. Its wealth management division is now contributing a much larger share of BAML’s overall group revenues. GWIM’s share of total revenue rose from 13.5% in the third quarter of 2009 to 22% of total revenue for the most recent quarter.
Chief financial officer Bruce Thompson said in a call with analysts: “The retention of [the bank’s] more experienced advisers remains at record levels.” It now has 15,868 advisers.
Even as Citi announced plans to quit retail banking in a number of countries, Citi Private Bank’s revenues increased by 8% year-on-year to $663 million. The private bank performed better than investment banking and corporate lending within the firm’s institutional clients group.
At JPMorgan, which includes its private banking results within its asset management division, the third quarter report stated an increase in assets under management for the private bank of 22% year-on-year to $429 billion.
At Goldman Sachs, revenues in investment management, which includes the private bank, were $1.46 billion for the third quarter of 2014. That is 20% higher than the third quarter of 2013. In an earnings call, CFO Harvey Schwartz highlighted the success of the firm in two key areas: technology and asset management.
“Back in 1999, we had approximately 3,000 people in our technology division. Now we have nearly 8,000. They represent close to a quarter of the firm. We also built an asset management business, largely organically, from a few hundred million assets under supervision to 1.15 trillion today,” he said.
Morgan Stanley had a great quarter in wealth management. Net income was up 25% on the third quarter last year and it produced record revenues per adviser. Revenues for the division grew 9% versus a year ago “driven by the continued execution of our bank strategy as well as revenue tailwinds from high markets. Notably our margin improved to 22%,” said chairman and CEO, James Gorman.
Even at the regional banks, wealth management was an earnings booster. At Pittsburgh-based PNC Bank, the asset management group, which includes personal wealth management for high-net-worth and ultra-high-net-worth clients, generated $411 million in third-quarter revenue, outpacing all other contributors of fee income to the bank.
Growth of the world’s wealthy is accelerating, making banks eager to focus on the business line. There has also been a move among international players to exit some regional businesses, amounting to a boost for some banks. For example, many US wealthy clients have been turned down or let go of by non-US banks because regulation is simply too onerous now. US private banks and wealth managers have been direct beneficiaries. At the same time, global private banks have been streamlining their businesses and withdrawing from some regions. That has meant that client money is moving around and those banks that can prove they are committed can pick up new business.
Appetite for borrowing, discretionary portfolios and alternative investments have also helped boost wealth management revenues, as did the strong markets in the third quarter before October’s sell off.
Peter Charrington took over as global head of Citi Private Bank in September. He says appetite for discretionary managed portfolios is growing. That has been surprising for the wealth management industry, which expected to lose some of this traditional high-fee business. Post-crisis, there had been expectations that clients would trust their managers less and would prefer more involvement than leaving their money to be managed. Greater availability of information and ability to trade more easily thanks to technology were also expected to hit discretionary mandates. But Charrington says he has not seen evidence of this.
He tells Euromoney: “Clients look at pockets of money in different ways, and some of those pockets they just want to leave alone to be managed for the longer term.” Discretionary management is growing in Asia he says, but the bulk of Citi Private Bank’s growth in discretionary portfolios is in north America and Europe.
Charrington says unique investment ideas and lending are two key elements for serving this segment. “Use of the balance sheet to lend to clients who are chiefly entrepreneurs or for co-investments in private equity deals is something we are focused on.”
Lending has become a key differentiator for clients in general. Citigroup’s loan-to-deposit ratio is 67%. Wells Fargo’s is 76%, while BAML’s is 80%. JPMorgan has come under criticism for its lack of lending. Its loan-to-deposit ratio for the third quarter was just 56%. One private banker says she is seeing more interest for loans from high-net-worth clients that have been turned down by JPMorgan.