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JPMorgan, Deutsche Bank Vie for Rich as Rules Change

Lloyd C. Blankfein
Goldman Sachs Chief Executive Officer Lloyd Blankfein said Nov. 16 that “it’s important to get bigger” in private wealth management. Photographer: Chris Kleponis/Bloomberg

Dec. 3 (Bloomberg) -- JPMorgan Chase & Co., Deutsche Bank AG and Citigroup Inc. are hiring bankers who cater to millionaire clients as more stringent capital rules reduce returns from investment banking.

JPMorgan, the biggest U.S. bank by market value, plans to increase its wealth management staff in Europe, the Middle East and Africa by as much as 20 percent a year until 2013. Frankfurt-based Deutsche Bank is bulking up its Asia business after buying Sal. Oppenheim Group, Germany’s biggest independent private bank, nine months ago, said spokesman Klaus Winker.

Leaders for the Group of 20 nations approved plans last month at a meeting in Seoul to more than double capital requirements for banks after the industry posted losses of more than $1.3 trillion from 2007 through 2009. The change provides renewed impetus for banks to focus on less risky and less capital-intensive units such as overseeing assets for wealthy clients, said Cedric Tille, a professor at the Graduate Institute in Geneva.

“It’s a natural reaction for banks to go more and more toward fee-based advisory activities in response to capital requirements,” said Tille, a former economist at the Federal Reserve Bank of New York. “If they make a mistake, it’s only the clients who get upset.”

Citigroup and Goldman Sachs Group Inc., both based in New York, also are building up their so-called wealth management divisions as Basel III rules are set to curb the risk-taking that led to a seizure of credit markets in 2008.

Wealth Management Uptick

Citigroup, which received a $45 billion taxpayer bailout in 2008 after losses on subprime mortgages and collateralized debt obligations, plans to double wealth management advisers in North America to about 260. Goldman Sachs Chief Executive Officer Lloyd Blankfein said Nov. 16 that “it’s important to get bigger” in private wealth management.

“We’ve seen a massive uptick in the number of banks seeking to participate as global wealth managers,” John Cryan, chief financial officer of UBS AG, Switzerland’s biggest bank, told bankers in London on Sept. 30.

The new Basel proposals will reduce the profitability of operations such as underwriting bond sales, lending to hedge funds and proprietary trading, said Professor Christoph Lechner of the Institute of Management at the University of St. Gallen in Switzerland. The lower-margin wealth management business will help plug part of the gap left by investment banking, he said.

‘Less Risky’

“Private banking offers a more stable cash flow over the economic cycle and requires less capital,” Lechner said. “But it’s tricky because investment banking is incredibly lucrative when the markets are running nicely, in a way that private banking can never be.”

As capital requirements increase, the companies’ return on equity -- a measure of profitability -- will decline. UBS’s investment banking unit reported a return on equity of 10.5 percent in the first nine months of the year, compared with 24 percent for the wealth management division.

Barclays Capital, the securities unit of London-based Barclays Plc, would have lost money over the last decade under Basel III capital rules that force banks to set aside more capital to cover their riskiest units, UBS analysts said in a Nov. 15 note to clients. Barclays plans to reduce the proportion of pretax profit generated by its investment bank to 33 percent, down from two-thirds in the first half of this year.

‘Other Peoples’ Money’

While private banks need capital to cover loans to wealthy customers, client assets are considered low-risk because they are “other peoples’ money,” said Bob Fawl, managing partner at Boston-based Basis Point Group LLC, an industry consulting firm. “The risk is supposedly born by someone else and the bank acts as an agent.”

Wealth management generates stable revenue that complements the less predictable fees earned from investment banking, said Francois Reyl, CEO of Reyl & Cie., a Geneva-based bank with about 4 billion Swiss francs ($4 billion) under management.

“If you’re going to build a one-stop shop with high profits and risky behavior, then you need a private banking engine for the recurring income and its stickiness,” Reyl said.

While wealthy customers withdrew a net 251.6 billion francs from Zurich-based UBS in the 27 months through June, the unit’s only pretax loss was 166 million francs in the fourth quarter of 2008. Most of UBS’s more than $57 billion of writedowns and losses during the credit crisis -- second only to Royal Bank of Scotland Group Plc among European lenders -- came from its investment bank.

‘More Competitive’

The fragmentation of the global wealth market, which according to London-based Scorpio Partnership has about $16.5 trillion under management, means there is room for specialized bankers, said Benoit Dumont, chairman of JPMorgan’s Geneva-based Swiss unit. JPMorgan aims to double client assets in Switzerland over the next five years by focusing on wealthy families.

“The market is becoming more competitive, but no one dominates so there’s something for everyone,” said Dumont, who is targeting customers with at least $25 million to invest. “The good news for this business is there’s a new millionaire created every minute.”

The number of households worldwide with at least $1 million of investable assets, excluding primary residences, rose to 10 million in 2009 from 8.6 million a year earlier, according to a report in June by Merrill Lynch and Capgemini.

DnB NOR ASA, Norway’s largest bank, is seeking to expand its market share of wealthy clients in the world’s second-richest country per capita, said Paal Karstensen, head of private equities at DNB Markets.

Cultural Differences

“We’re increasing our focus on high net worth individuals in Norway, because we see that it’s a client group that’s becoming increasingly important for us,” Karstensen said in a phone interview from Oslo today. “There’s significant potential to grow.”

While private banking is less capital intensive, there are “cultural” differences that make it difficult for larger banks headed by investment bankers to enter the market, said Jacques de Saussure, senior managing partner at Pictet & Cie., Geneva’s biggest wealth manager.

“The key factors are human qualities and the ability to invest for the long term,” said de Saussure. “You can’t buy human relationships.”

Still, clients are more concerned than ever by capital strength ratios when considering who to bank with, said Jean-Pierre Cuoni, chairman of EFG International AG, which managed 87.5 billion francs on behalf of clients at the end of June.

“All of a sudden it has become an issue,” said Cuoni. “It’s a bit of a competitive edge if you can say today, we have 19 percent while the other guy has only 13 percent.”

To contact the reporter on this story: Warren Giles in Geneva at

To contact the editor responsible for this story: Frank Connelly at

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