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How wealth managers navigate the current chaotic market environment

posted onMarch 23, 2020

Wealth managers are cutting some credit they extend to wealthy clients as worldwide financial markets chaos triggers a significant increase in margin calls according to Reuters. Wealth managers like Credit Suisse, Julius Baer and UBS profit from the interest they charge on their Lombard lending portfolio. 

Less known to the wider public, a lombard loan or “lombard lending facility” is a type of secured loan, in which the entire loan amount is secured by a deposit. Swiss lombard loans can be secured by money held in bank accounts, life insurance policies, securities (like stocks or bonds) or other assets. The name “lombard” has the same origin as  the northern region of Lombardy in Italy, whose people, the Lombards, were known as skilled bankers and lenders throughout the Medieval Europe. 

Lombardy has been under a lockdown since 8 March  and is the worst-affected region in the country with 3,095 deaths due to the outbreak of coronavirus. Across Italy there have been 53,578 total cases to date, with about 6,000 people having recovered. 

Meanwhile, bankers from three Swiss wealth managers in Asia, which has the highest numbers of billionaires globally (754), said they asked some clients in the last couple of weeks to raise collateral against their loans amid a panic selling in securities. 

Income generated from lending accounted for a third of the total operating revenues of global wealth managers in 2019, and was the second biggest sales contributor after investment management fees, according to consultant Tricumen. 

UBS, the largest bank in Switzerland and the world’s largest wealth manager, has seen relatively low losses in its lending portfolio and feels comfortable with its liquidity despite the coronavirus’s economic impact, Chief Financial Officer Kirt Gardner said Wednesday at the virtually held Morgan Stanley European Financials Conference. 

"We have a conservative risk profile, a high-quality credit portfolio and relatively limited exposure to highly impacted industries, like oil and gas, or air transportation," Gardner said on the conference telecast. "While we have seen a significant increase in margin calls, we’ve experienced very few losses to date across our Lombard portfolio." Gardner's remarks were reported by Reuters. 

UBS loans to customers in the wealth management business at the end of December rose to $175 billion from $170 billion at end-2018. Lombard loans at Julius Baer also rose 10% last year to $41 billion. 

Leaders of Europe’s biggest banks have cautioned that the coronavirus will hit "already under-pressure earnings as a lockdown across many parts of continental Europe slows economic activity, eats into fee income and puts corporate borrowers at risk."

Meanwhile, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said on Monday that investors have already removed $83 billion from emerging markets. She warned of pandemic's economic hit on "low-income countries." The Washington-based organisation expects a recession in 2020 to be "at least as bad as during the global financial crisis or worse."