Wealth managers’ lending appetite should survive the pandemic. Collapsing markets triggered a raft of margin calls on loans to rich clients in the first quarter. Yet Credit Suisse’s relatively modest first-quarter bad debt provisions suggest the pain for big wealth managers will be manageable. And the promise of quick credit should ensure the wealthy keep borrowing.
Private banks have long extended credit to clients, secured against the value of their portfolios of securities. When markets fall, banks may demand extra collateral. That’s what happened in February and March. One billionaire who appears to have been caught out was Masayoshi Son. The SoftBank Group boss pledged as much as 60% of his stake in the tech-to-telecoms conglomerate as security for loans from banks including Credit Suisse and Nomura, the Financial Times reported on April 9.
Despite tough conversations with clients, large private banks seem to have navigated the turmoil. Credit Suisse earmarked 39 million Swiss francs for loan losses in its International Wealth Management unit in the first quarter and 97 million francs for its losses in Asia-Pacific, a relatively small portion of a quarterly 568 million francs the bank set aside. UBS said in mid-March it had suffered limited losses on loans to the wealthy. Relatively conservative credit standards helped. Large Swiss banks let customers borrow about 50% of the value of the invested assets. That’s enough to absorb the 35% fall in the STOXX Europe 600 index from its peak on Feb. 19.
The turmoil does not appear to have dimmed private bankers’ lending appetite. Average loans at JPMorgan’s Asset and Wealth Management division rose to $162 billion in the three months to March, from $156 billion in the last quarter of 2019. UBS said in March it still aims to expand lending in its wealth management unit by $20 billion a year from $179 billion in 2019.
Private bankers say rich clients also remain eager to borrow. The stock market bounce has eased the threat of further margin calls. And Lombard loans offer a quick and cheap way to raise cash to support a business through the lockdown, or snap up cheap assets.
Just as the impending economic slump means banks will face bigger bad debts, wealth managers will not be immune to defaults. But with interest rates even lower than before, their quest for wealthy borrowers will endure.