December 30, 2019 / 9:13 AM / in 7 months

Breakingviews - Wealth managers will inflate superprime bubble

CEO Sergio Ermotti of Swiss bank UBS gestures as he attends the company's annual shareholder meeting in Basel, Switzerland May 2, 2019.

MILAN (Reuters Breakingviews) - The world’s biggest banks are stirring up a new lending frenzy. More than a decade has passed since loans to subprime home buyers went bad. Now UBS and other private banks are cranking up credit to uber-rich clients. This superprime bubble will bring higher returns, but hopefully with fewer risks.

A global transparency push forced the wealth management industry to kick the lucrative habit of hiding clients’ assets from tax authorities. Now rock-bottom interest rates are making it harder to deliver positive returns. That’s putting pressure on fees and squeezing profit margins.

In an attempt to boost revenue, wealth managers are extending more loans to successful entrepreneurs and their offspring. Total lending revenue at top private banks grew 8% annually in the two years to mid-2019, according to Tricumen, a consultancy.

UBS’s private bank had extended $176 billion to wealthy clients at the end of September. That’s equal to 7% of the $2.5 trillion in assets it looks after. New global wealth management co-head Iqbal Khan, who previously cranked up lending at rival Credit Suisse, looks set to go further. Some executives reckon private banks could comfortably extend credit worth up to 15% of the assets they manage.

Lending to people who are already rich appears relatively low-risk. So-called Lombard loans, which are secured against a portfolio of securities lodged with the private bank, are typically the safest. Gross margins on such loans tend to be less than 100 basis points, says consultancy Capco. Banks can charge twice as much for fancier collateral such as real estate or shares in unlisted companies, and even more for credit backed by art, yachts or wine. However, private bankers will sometimes reduce rates to win a bigger mandate – or lock in an investment-banking client.

Even though wealthy borrowers can generally repay the loan, accidents do happen. When Steinhoff International revealed a massive accounting fraud in 2017, the likes of Bank of America and Citigroup suffered losses on 1.6 billion euros of loans secured against shares owned by Christo Wiese, the South African retailer’s former chairman.

Yet such lending is still safer than risking big fines by helping money launderers or tax dodgers. And unlike the subprime crisis, it probably won’t blow up the entire financial system. This bubble has further to inflate.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/2tigSKw

Breakingviews

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