An abundant flow of rich people's money into private banks is rapidly evaporating and dashing hopes it can balance out sub-prime damage in other parts of their businesses.
Stock markets have dropped some 10 per cent so far this year, hurting assets of millionaire clients and reducing the fees they pay their banks – and income at wealth managers could slip by a similar amount or even more.
"The growth story is over," said Christopher Wheeler, equity analyst at Bear Stearns. "What we're talking about are 5 to 15 per cent declines in pre-tax profit."
“It isn't disastrous, but it is ... a small downturn, having had a very strong period of above-average growth," Wheeler said.
That would be bad news for UBS – reeling from $37 billion (Dh135.79 billion) in credit writedowns, the world's heaviest – and for Credit Suisse, as private banking makes up roughly a third of income at the two Swiss banks.
Wealth managemers – who invest rich people's money – have witnessed soaring growth rates in recent years, benefiting from stable fee income regardless of performance, balancing wild swings in investment banking income.
But the MSCI global index has dropped 7 per cent so far this year and the FTSEurofirst 300 index 13 per cent, and large banks will feel the impact not just in their private banking units but also on a group level.
"Our 2008-2010 EPS estimates decline by 4 to 6 per cent, while our price targets fall 4 to 5 per cent for the Swiss private banks," Goldman Sachs said in a recent note, referring to declining client assets.
"For Credit Suisse and UBS this could undermine a key remaining pillar of support for the share price."
IN THE RED
This time round, all the pointers are in the red.
Millionaires are parking cash in low-margin money market funds and have reduced leverage as plummeting stock markets eat into their assets, meaning banks may see fee income drop at an even faster pace than the market.
Turnover of structured products in Switzerland is down 14 per cent so far this year, March data from the country's SWX stock exchange showed, in a sign clients are pulling out of a range of banks' most lucrative and complex products.
Clients are also reducing their trading activities, banks say, depressing another source of income. And for Swiss banks there is an adverse currency effect, as the Swiss franc has strengthened thanks to its safe haven status.
UBS, the world's largest wealth manager, this month admitted subprime problems in its investment bank were spreading to its private banking operations, saying clients in Switzerland had withdrawn money in the first quarter of the year.
The bank still expects "positive" inflows in its private client business, but sounded a lot less confident than last year, when it collected a whopping 156.3 billion Swiss francs ($154.6 billion; Dh567.38 billion) in net new private client money.
"The question is not so much what this year will look like, but what is next year going to be?" an equity analyst at a large bank said, asking not to be named.
"In the last down-cycle (in 2001 and 2002) profits were down for two years on a row," the analyst said.
Substantial private banking units at Citigroup, Merrill Lynch and Deutsche Bank might also be hit, though their results lean much less heavily on private banking than at the Swiss banks.
But despite the gloom, some wealth managers may still gain. Eyes are on Julius Baer, which has invested heavily in Asia and other emerging markets, where it is benefiting from the emergence of new, prosperous middle classes.
Baer, like other small wealth managers in Switzerland, has said it is taking in clients from large rivals such as UBS, benefiting from the fact it has no exposure to investment banking and has escaped subprime damage.
Baer stock is trading at 16.2 times expected 2008 earnings, almost double the 8.8 times sector average multiple for the Dow Jones Stoxx banking index, although part of the premium may be due to takeover speculation.
Small banks are facing the same market pressure as their larger peers, but may benefit from the fact that rich clients are easily irked by negative headlines.
"We're having a Neutral rating (on Baer), but the market seems to reflect the thesis that they will see inflows from the larger banks," the analyst at a large bank said. (Reuters)
Private banks feel sting as crisis hurts the rich