Position private banks to avoid contagion

“What does my investment bank say about me?” is a question private bankers should be asking in the wake of the credit crunch, free-fall in bank stocks and, in the case of Société Générale, catastrophic ‘black swan’ trading losses of $7.2bn (e6.8bn). Many boards of directors now run private and investment banks under unified brands, and recent events show that there is a huge potential for damage from one to contaminate the other. Unsurprisingly, a new kind of risk management—that of wealth management reputation—has hit the agenda. Witness the proposals by UBS to re-capitalise in the wake of its sub-prime write-down, boosting the Tier 1 capital ratio to over 12 per cent from 10.6 per cent in September 2007. This cost of the recapitalisation will be SFr19.4bn (e12bn). Furthermore, the link between private and investment banking is telegraphed not only through structures such as Credit Suisse’s One Bank initiative, but it has also become established practice for many private bankers to promote access to their investment bank’s deal flow as part of their pitch process. In the case of SG Private Banking, the bank has long paraded its access to SocGen’s expertise in derivatives and structured products. Ironically, it has also gone on the record recently as saying that French banks would be the beneficiaries of an imminent flight to quality risk management. Many of the world’s largest private banking operations lie within universal or investment banking groups that have made significant sub-prime write-downs, as the table below shows. So, are the private banking arms of these banks going to suffer long-term damage? Already, players like Pictet, Julius Baer and Lombard Odier Darier Hentsch are touting their immunity to sub-prime because they have no investment banking divisions. Pure-play private banking is quickly becoming a marketing differentiator. However, in Scorpio Partnership’s view the winning organisations will be those that can stand on their own records and not those that engage in marketing by fear. Banking crises come and go. In the long-term, private banking reputations depend on how clients are actually treated. The principal contagion of sub-prime to private banking will depend not on an association with investment banking, but rather on how well they have insulated client portfolios from products that are adversely affected by the crisis.

Equally important will be groups’ ability to keep their nerve and maintain the momentum of wealth management activities as the ride gets rockier. Scorpio Partnership believes that is essential that these banks stay the course and demonstrate their commitment to wealth management, rather than circle their wagons around highly cyclical investment banking businesses. This is precisely what happened at the beginning of the Millennium and many groups then had to play a game of catch-up, rather than reaping the benefits from wealth management operations that had been tempered by fire in the downturn. To that end, the recent commitment by Merrill Lynch CEO John Thain to increase wealth management as a core activity is music to the ears. Ted Wilson is managing partner at wealth management strategy think-tank, Scorpio Partnership