Crisis tests private banks as wealth shrinks

ZURICH (Reuters) - Private banks are having to work harder to justify their fees to rich clients at a time when plummeting asset prices are hitting global wealth for the first time since the bursting of the Internet bubble in early 2000.

Wealth management had been one of the most profitable bank segments prior to the crisis, prompting non-traditional players to expand into this sector over the past few years.

The segment, which has UBS AG (UBSN.VX), Citigroup (C.N) and Merrill Lynch & Co Inc MER.N among its key players, has only been partially affected by the crisis and its inflows have shored up some banks from the trouble caused by risky investments.

But the market turmoil is turning into a serious stress test for all private banks as global clients demand higher returns for the fees they pay for having their wealth looked after.

"The main challenge for private banks is by far to demonstrate they create added value for clients," said Victor Aerni, global leader for wealth management at the Boston Consulting Group.

"Clients pay on average a 1 percent fee but performance has been as good as if you had invested in your average T-Bill."

Top private bankers will discuss the challenges facing the industry, which manages about $40 trillion in assets for the very wealthy, at the Reuters Wealth Management Summit in Boston, Geneva and Singapore on October 13 to 15.

Total wealth of global households is predicted to fall by about 10 percent to around $110 trillion this year, the first drop since 2001, and after a 4.9 percent rise in 2007, preliminary estimates from the Boston Consulting Group show.

Some analysts predict assets managed by the wealth industry will also decline after years of buoyancy.

The global credit crisis that started in 2007 has severely affected both North America and Europe, which together account for two thirds of global wealth, pushing players to focus even more on new growth areas such as the Middle East and Brazil.

Financial turmoil has hit nearly all asset classes, prompting investors to retreat to safer investment categories such as cash or fixed-income securities, and away from the sort of structured products that traditionally offer better returns for the banks.

CONSOLIDATION ON THE WAY

"Revenues will drop," said Bertrand Lavayssiere, managing director for global financial services at Capgemini. "It is going to be difficult to increase profitability."

The crisis is reshaping the private banking landscape as some players on both sides of the Atlantic are forced into consolidation.

The merger of Merrill Lynch into Bank of America (BAC.N) and other shakeups in the industry will create larger franchises that can challenge once dominant player UBS. Other banks have openly said they see opportunities despite the crisis.

Swiss bank Credit Suisse Group AG (CSGN.VX), which has strengthened its franchise during the credit storm at the expense of market leader UBS, pledged on Wednesday to seize opportunities in private banking when they arise.

"We remain alert for targeted acquisitions that could accelerate our growth," said Credit Suisse CEO Brady Dougan.

Europe's largest bank HSBC Holdings Plc (HSBA.L)(0005.HK), whose strong retail franchise shielded it from the crisis, also said this week it was in a position to look at acquisitions in private banking.

"There will definitely be consolidation, among the big players, but also among the boutique banks and trust operations," said Stephanie Jarret, a partner at law firm Baker & McKenzie.

"Some of it is already happening and we will see further consolidation into 2009. The crisis is just accelerating the process."

Yet, other challenges remain. Hiring can be tough as private bankers' salaries, especially in fast-growing markets, do not seem to be abating despite the tens of thousands of job cuts already announced in the banking industry in recent months.

And new, tighter regulation against money-laundering and tax evasion is posing new threats for those banks managing an estimated $7.3 billion of offshore wealth.

"The traditional advantage of pure-play bank secrecy will vanish," said Aerni. "To be a successful player you have to continue to focus on talent and innovation."

(Editing by David Holmes)