Int’l private banks: How they loan money to the world’s wealthy

When most people think about the raison d’être of private banks, preserving the wealth of HNWIs is typically the first thing that springs to mind. But as Paul Golden reveals, lending money to their highest-net-worth clients is an established lever for private banks to encourage these clients to trust them with more of their wealth. This, in turn, is seen to reduce the banks’ dependence on investment banking activities, while increasing customer loyalty…

Looking after the wealth of wealthy people is, of course, a profitable business – a fact that scores of plushly-furnished institutions, located in some of the most expensive streets and districts around the world, are physical testimony to. And for good reason: the finances of wealthy individuals and their families and personal business interests can be enormously complicated and if not properly managed, serious problems can arise.

But wealthy people, like everyone else, sometimes need to borrow money, too. There are house purchases to finance, for one thing – not to mention yacht and private jet purchases. And in real life, unlike the movies, cash isn’t always the payment method of choice, even among HNWIs.

For the private banks these wealthy clients tend to use, meanwhile, there are solid financial reasons why lending is appealing.

For one thing, as private banking becomes more competitive in certain parts of the world, the extra income from such operations can be useful to such institutions’ bottom lines – which is why, some say, private bank lending appears to be on the increase.

Data to support this claim isn’t easy to find, however, in part because many private banks are generally coy about disclosing the value of their loan books.

Still, figures provided by Credit Suisse and Société Générale indicate that they have increased the volumes of the client lending being done through their private banking channels in recent years.

In October 2015, Credit Suisse stated that it hoped to increase the loan volume within its international wealth management division by 43% by 2018 – or from SFr39bn (US$39.8bn, £29.9bn) at the end of 2014 to SFr56bn. (At the end of second quarter of this year the loan balance was SFr43bn).

At the end of last year, the total amount of credit outstanding among Société Générale Private Banking’s clients was €18.3bn, or 16% of assets under management. This figure has risen over the last two years, following the creation of a new private bank operation in France at the beginning of 2014, and growth at SGPB Hambros in the UK, Luxembourg and Belgium.

Yachts, ships and planes

According to Martin Hofacker, head of real assets lending at Credit Suisse, the types of lending private banking clients typically require, not surprisingly, includes real estate lending, ship and yacht financing, aviation financing (for private individuals only), and, for those who might be looking to smooth out their cross-border cash flows, export financing.

Jean-Francois Mazaud, head of Société Générale Private Banking, says lending is in fact “an important factor in collecting assets under management” in the private banking world, as it can go hand-in-hand with the clients’ wealth preservation strategies when these involve, for example, investing in property as an asset class.

“Changes in the financial markets and in government measures can push our clients towards property investment, and we can accompany them in the direct acquisition of property, and also suggest financing through club deals,” Mazaud explains.

More innovative loan types

Meanwhile, private banks appear to be increasingly willing to consider a wide range of loan types, private banking industry sources say.

For example, says Kleinwort Benson head of entrepreneur clients Paul Bentley, Kleinwort Benson will lend into a trust structure, or arrange lending for clients based overseas; while Claude Casavant, EMEA head of loan & deposit products at Deutsche Bank Wealth Management, says his bank’s lending covers floating, fixed, term and revolving facilities in a wide range of currencies.

Roopalee Dave, a London-based senior manager in EY’s wealth and asset management practice, refers to an increasingly innovative approach from banks offering lending to clients through ‘white labelling’.

“These facilities can resemble small bridging loans, and are offered to clients as products which are typically secured against their portfolios.”

RBC Wealth Management’s strategic focus is to grow the portion of its credit portfolio secured by liquid collateral, such as marketable securities or investment portfolios, says managing director head of credit, Ojan Jamkhou.

“This type of lending allows clients to make the most of their investable assets by maintaining exposure to the market, while releasing equity that can be used for further investment or liquidity needs,” he continues.

“We also offer loans secured by intellectual property rights and offshore life insurance bond wrappers.”

At BNP Paribas Wealth Management, meanwhile, most of the bank’s ultra-high net worth clients request credit drawn against the collateral of their financial market investment portfolio, and the bank does this type of credit on major investment markets, listed asset classes and currencies, explains Remi Frank, head of the key client group, who adds that his bank is one of very few that offer business jet and yacht financing.

‘Lack of liquidity’

At Northern Trust, the Chicago-based financial services giant, the lending growth seen over the last few years is seen as having been tied to prolonged low interest rates, and families funding less liquid investment strategies, according to Lesley Hodgson, head of the bank’s global family and private investment office EMEA.

“We have also seen a greater demand for credit facilities and other financing solutions that are linked to sophisticated tax and estate planning structures,” Hodgson says.

Loan values, she says, range from US$50,000 to US$300m.

“We have found credit being used to implement diversification plans, by funding a new asset allocation until cash is raised in a tax efficient manner, which has the benefit of maintaining correct asset allocation and not selling off other assets in a bear market,” adds Hodgson.

“Some of our families have longer term credit facilities, which remain unused, and are only drawn down upon a specific event, for example to cover death and estate taxes upon the death of a family member.”

Growth potential seen

Among the private banks which see opportunities to significantly grow their private client lending is JP Morgan private bank, where Ryan McGlynn, head of capital advisory services EMEA, says private client lending could grow by high single to low double digits.

“We provide an array of lending solutions, from facilities against marketable securities to unsecured loans for our largest clients,” he says.

“Additionally, we provide mortgages in the UK, loans against personal aircrafts and yachts for long-standing clients, [and] letters of credit and loans against single stock positions.

“Clients can elect to have their interest rates on a floating basis in an on-demand or committed facility, or a fixed rate for a committed period of time.”

Another major banking group that evidently sees potential in the private banking business model is Société Générale, to judge by its announcement earlier this year of plans to buy the Kleinwort Benson wealth management group, to merge it with its London-based private banking arm, SG Hambros.

The merger, it said, would immediately make SG Hambros – which is already a part of SG Private Banking, its private banking arm – “one of the leading private banks in the UK market”.

SocGen is buying Kleinwort from Oddo, another French bank, which acquired it in January as part of its €760m purchase of BHF Kleinwort Benson.

The Kleinwort Benson purchase is seen as reflecting Société Générale’s growth ambitions in private banking in its core markets of Europe, the Middle East and Africa.

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