Private Banking: A Crisis Foretold

How private banking endured the last global crisis shows how it might come through this one.

Despite private bankers’ cherished self-image of timeless solidity, the last crisis—the great financial crisis of 2008—re-taught them their business is cyclical. In flush markets, the rich not only get richer, they multiply. The number of high net worth individuals (HNWIs) surged at nearly twice the rate of global GDP during the boom years 2002-2007, research by Booz & Co. found.

The cycle reverses when markets crash. Not only does clients’ net worth contract, but the clients turn more cautious. Booz found that cash and fixed-income allocations jumped from 49% to 69% of private-banking portfolios during 2008, at the expense of equities and particularly alternatives: “Clients shifted toward simple, transparent, liquidity-oriented products with lower margins, largely retreat[ing] from risky and complex asset classes.”

Structured products were in vogue pre-2008; private equity and other illiquid investments pre-2020. But the downdraft is likely to be similar. Net-net, global private-banking revenue fell by a quarter or more after the last crisis; and it took more than five years to regain 2007 levels in North America and Western Europe, according to McKinsey data.

The regional outcomes point to a lifeline for post-2008 private bankers that may not be available this time: a wealth explosion in China and elsewhere across East Asia. The Asia-Pacific region added some one million HNWIs from 2008-2011, according to Booz. Their assets in China alone swelled to more than $1 trillion. The catalyst was a Chinese state stimulus program that drove annual GDP growth into double digits. But Beijing is unlikely to repeat this rescue effort, while Covid-19 may set back wealth accumulation in other Asian growth markets like Indonesia and India.

On the other hand, today’s wealth managers don’t need to worry about a regulatory onslaught like the one that came after 2008. The G20 struck a series of blows against global tax evasion and money laundering starting in 2009. The US chipped in unilaterally with its Foreign Account Tax Compliance Act. The joint campaign curtailed high-margin offshore accounts, striking particularly hard at the premier offshore center, Switzerland. Swiss banks paid upward of $5 billion in fines, and a nonquantifiable cost in reputation, to settle actions brought by the US, France and other countries. The Swiss roster of private banks fell from 179 to 112 from 2005-2017, according to KPMG. This cleanup campaign seems largely to have run its course now.

Crises yield winners as well as losers, and the jockeying for position accelerates once the initial shock wears off, if wealth management after 2008 is any guide. 2010 was a peak year for M&A in the industry, as more than $500 billion in assets under management changed owners, according to Berkshire Capital. Writ large, the business shifted toward universal institutions that can nurture relationships with rising entrepreneurs through their commercial or investment banks, and can add leverage once they achieve HNWI status. “Banking is now a major profitability driver and strategic source of client acquisition for wealth managers,” McKinsey writes.

But some “pure-play” private banks have thrived on moxie, like Switzerland’s Julius Baer, which jumped from the industry’s 16th-largest in 2007 to No. 9 in 2018. Others found the right niche, like US-based Northern Trust, which has ridden its expertise in family-office management to the No. 12 spot globally, according to ADV Ratings. A number of universal banks have meanwhile lost ground, notably HSBC, Deutsche Bank and Barclays.

The great consolation for private bankers is that their industry remained profitable even at the depths of the last cataclysm. In the decade following 2008, top wealth managers like UBS and Credit Suisse renewed focus on their money-spinning knitting, radically paring back investment banking and trading. High on a list of points that are the same now as they were then, McKinsey puts this: “The industry is among the most profitable and competitive in the financial services ecosystem.”

The very top of the private-banking chartsalso remained stable, dominated by the same Big Four as 12 years ago: UBS, Bank of America, Morgan Stanley and Credit Suisse. Maybe there is some timeless solidity after all.