Daniel Gresch, analyst with consultants Roland Berger, dismisses the consensus industry view that the lower funds under management will have some effect on mid-term private banking profitability, but earnings will revert back to normal sooner or later.
His research shows the last time assets under management (AuM) saw a correction – of around 10 percent – during the dotcom bust from 1999, a 15 percent reduction in the top-line margin and a 35 percent reduction in the pre-tax margin were experienced across the private banking industry.
This time around, things are significantly worse, with AuM deteriorating by around 20 percent within the space of a year – twice as much as during the last cycle and with consequent implications for industry profits.
Chris Wheeler, a highly-rated wealth analyst at MainFirst Bank, is even more pessimistic, estimating about 25 percent of the $40.7 trillion of global personal wealth calculated by the Merrill Lynch/Capgemini World Wealth Report in mid-2008 has been snuffed out by plunging markets.
Rebuilding this wealth will take a long time and some “major metrics” of the wealth management industry are already changing as a result of these market upheavals and the response of wealthy clients to the financial crisis, he says.
“The net result is that when the market recovers, the profitability of the wealth management industry will not return to the levels seen in 2007,” Wheeler declares.
The overall decline of the past year will undoubtedly result in lower levels of inflows into the industry in the next five years than were experienced between 2002 and 2007, Wheeler adds.
Crucially, de-risking and de-leveraging by clients, as they choose simple products and avoid highly-geared investment plays, will hit the wealth business’s gross margins. Gross margins earned on AuM have been strong in recent years, based on high levels of transactional activity, a move into higher margin alternative asset classes and leveraging up by clients.
All these factors are now reversing as wealthy clients seek refuge in lower risk and plain vanilla products, Wheeler believes. This will see gross margins decline in the short term and when they recover, they will probably not return to 2007 levels.