The tectonic plates are shifting
in wealth management after the tremors of the subprime mortgage
crisis and a resulting flight to quality banks that have escaped a
brutal balance-sheet mauling. And everyone could get hurt in a
nastily-developing bear market.

Private banks, large and small, have a golden opportunity to pick
up share from their rivals tainted by the subprime debacle. Players
like Julius Baer have a “once in a lifetime opportunity” to gain
share from the large integrated banking groups that have suffered
from the credit turmoil, according to new Morgan Stanley
analysis.

UBS, one of the banks most hurt by subprime write-offs, is heading
for two years in the doldrums as it tries to recover from its US
mortgage exposures, a research note by analysts Huw van Steenis and
Bruce Hamilton forecast.

A separate investor note by JPMorgan Chase suggested that UBS
clients may have withdrawn as much as a net CHF41 billion ($40.2
billion) in the second quarter of this year following record losses
from subprime contagion.

UBS, giving an update on its second-quarter earnings, has just
reported that in the period net new money was negative. This was
most pronounced in April but improved in May and June, especially
at its global wealth management and business banking division, it
said.

Most worrying of all, UBS’ wealth management could come under
“significant pressure” if current US tax evasion investigations
broaden into a case directly impacting the bank, analysts at Credit
Suisse warned. They contend, “In a worst case scenario, UBS could
lose its banking license which could have adverse effects on the
global private banking franchise.”

The US inquiry could cause large amounts of US client money quickly
to return onshore, as no taxpayer can risk looking like they are
hiding funds if UBS has to face a summons forcing it to turn over
information about American taxpayers with undeclared accounts
abroad, bankers say.

The two Morgan Stanley analysts, after meeting with the chief
executives of listed Swiss banks, conclude that Baer and other
medium to small Swiss private banks will be a “key beneficiary” of
dislocation among their large rivals.

“Some banks look on track to hire twice as many bankers as they
planned, with increased likelihood of higher client asset transfers
with new hires, notwithstanding obvious market headwinds,” they
wrote.

Baer, which bills itself as Switzerland’s biggest pure-play private
bank, will add 10 percent net new money this year and Credit Suisse
4.5 percent while UBS will see a 1 percent decline, they forecast.
For Credit Suisse, the two see “strong” asset and wealth management
cash and capital generation providing support. At the UBS asset and
wealth management operations, the analysts think the group will
probably see two years of “anaemic flows and downward pressure on
profitability from defending market share.”

In another bleak assessment, JPMorgan analysts led by Kian
Abouhossein say in a note to investors that “UBS remains a building
site.’’ Their forecast of CHF41 billion of client outflow compares
with a net CHF12.8 billion outflow from the asset and wealth
management units in the first quarter, the first negative
performance in eight years. Overall, clients of UBS’ wealth
management international and Switzerland unit will probably
withdraw a net CHF13.5 billion this year, after adding CHF125.1
billion in 2007, the analysts forecast.

“Post second quarter, we expect outflows to slow, as in our view
UBS is aggressively acting to prevent outflows, in particular in
wealth management,’’ said the analysts. They did stress that the
underlying UBS franchise is “intact,” saying the deterioration is
short-term and not structural. The Morgan analysts predict that
Credit Suisse’s clients will add CHF13.5 billion in net new money
this year.

This positive picture for Swiss private banking other than UBS is
not shared universally, with warnings that the credit turmoil will
impact on banks in Geneva and Zurich as they see significantly
lower commission and fee income as wealthy clients attempt to
weather the current storm.

While private banks may be picking up market share from “a wounded
UBS, we believe the earnings risks are to the downside from weaker
gross margins, market impacts on assets under management and less
flexible cost bases,” Lehman Brothers analyst Jon Peace says.

The current international pressure on offshore banking from tax
authorities in several countries is a major worry for smaller Swiss
private banks, which are not as diversified as large integrated
players according to analysts at Citigroup. But the Citi analysts,
like others, do agree that the mid-tier Swiss banks and Credit
Suisse will benefit from “specific franchise issues that are
currently affecting UBS.”

At the same time, both Credit Suisse and Deutsche Bank have
suggested that they should be the beneficiaries of a “flight to
quality” among private clients at banks hit by the subprime crisis.
Deutsche wealth chief Pierre de Weck, in a recently published
interview, remarked, “Clearly we’re benefiting from a flight to
quality and from the fact that Deutsche Bank as an institution has
weathered the storm with its strategy and management intact.”

Christopher Meares, the head of HSBC Private Banking says his group
“is in a strong position” compared to some of its rivals in Europe
and the US hit severely by the sub-prime debacle.

That’s echoed by another big wealth player in the US. Northern
Trust has had an inflow of assets from bigger competitors,
according to Sherry Barrat, the Chicago-based company’s president
of personal financial services.

Robert Balentine, the head of Wilmington Trust Corp’s investment
management group says that, for the first time in his career, he
has seen client concern about the location of their assets.
Wilmington has detected “tangible evidence of very wealthy clients
shifting assets out of brokerage firms in great numbers.’’

US Trust, now part of Bank of America, has gained clients in the
subprime-mortgage crisis and subsequent credit crunch according to
Tim Maloney, a senior executive.

Whatever the private banking model, 2008 with its credit crisis,
bear market and attacks on offshore banking is shaping up as the
toughest year for wealth advisors since the dotcom bubble burst in
2000/2001.

Christian de Juniac, senior partner and managing director at Boston
Consulting Group declares, “I would be surprised if there is a
private bank that is currently hitting its revenue
targets.”