Credit Suisse achieved the highest rank in an overall score of wealth managers on a range of metrics such as profits, net new money growth, and subjective values such as branding and geographic diversification, according to a new study of the industry by Mediobanca.

In second place in the overall rankings of the study, Chasing 70 per cent of Global GDP, is UBS, followed by HSBC; JP Morgan; Barclays; Bank of America; Deutsche Bank; Wells Fargo, Morgan Stanley, and BNP Paribas.

But in a word of caution, the Mediobanca study said Credit Suisse may not retain the top slot if gross margins in the wealth management industry remain under pressure, as has been the case.

The 187-page report, which examines trends such as return on equity, profitability, valuations and mergers and acquisitions, as well as more qualitative issues such as branding, comes at a time when the industry will hope that some improvement in global economic conditions will translate into more growth.

“The wealth management industry is the fastest growing segment of the financial services industry. High net worth individuals’ estimated wealth of $43 trillion is 70 per cent of global GDP. It grew by 9.5 per cent in 2010, compared to global GDP growth of 4.2 per cent and looks set to outpace global GDP growth into the foreseeable future,” the report said.

“Having experienced a setback during the crisis as asset values fell and clients became more risk averse, wealth managers have the opportunity to take advantage of this fast-growing segment and increase the penetration of a market which is still under-banked,” it continued.

US cheer

The report had optimistic words about the wealth management industry in the US (the report was written before news reports said that Bank of America Merrill Lynch was looking to shed its non-US businesses).

“On a more positive note, if volumes pick up, while all the industry players could benefit, the large US wealth managers would be the biggest beneficiaries. Morgan Stanley and UBS Wealth Management Americas have been restructuring, re-tooling and in the case of Morgan Stanley, integrating,” the report said.

“While this report confirms the strength of the two large Swiss bank’s [UBS, Credit Suisse] wealth management operations, we prefer the parent banks of the wealth managers covered in this report, with more stable investment banking franchises. This includes JP Morgan Chase, Barclays and HSBC,” the report continued.

“In addition, among the mid-caps, we think all of the Italian asset gatherers offer value, with their strong net new money inflows and low-cost bases now being boosted, in the case of Mediolanum and Banca Generali, by the 'carry trade' they have put on following their participationin the LTRO.”  (This last point refers to the long-term refinancing facility provided to banks by the European Central Bank.)

The report pointed out that as a relatively light user of capital, wealth management businesses give high returns on equity (ROE): “UBS’s core wealth management business and Credit Suisse’s unit earned pre-tax ROEs of 65 per cent and 58 per cent respectively….The top five performers posted a wealth management ROE of between 16 pp and 55 pp above their group ROE. This explains why banks such as Bank of America, Morgan Stanley, Wells Fargo, JP Morgan Chase, Barclays and Deutsche Bank have all been bulking up in wealth management in recent years.”

M&A, offshore

In terms of merger and acquisitions, the report noted that deal volumes fell from a high of 28 transactions in 2008 to only four in 2010; premiums paid for the Swiss-based industry fell as a result of pressure on the Alpine state’s offshore sector. For example, Safra Group paid 2.2 per cent for the controlling stake in Bank Sarasin last year (bought from Rabobank) compared with a multiple of 3.4 per cent paid by Rabobank, for this stake, in 2007.

While offshore banking has been under strong pressure, the report highlighted the still-large amounts of wealth managed this way: almost $8 trillion of such assets are in offshore centres, well over half of assets run by wealth managers in total.

“Offshore wealth management assets are now expected to grow at around 5.8 per cent per annum through to 2015, compared to an increase in total HNWI’s wealth of 8 per cent to 10 per cent, as a result, onshore AUM will grow faster,” the report said.

The report added that wealth managers had been exposed, to a relatively high degree, to exchange rate volatility; the dollar fell 22 per cent against the Swiss franc between the second quarter of 2010 and second quarter of 2011, highlighting the exposure of Swiss managers. “Our estimates suggest Credit Suisse’s wealth management earnings fell almost 11 per cent as a result of the weak currency, a similar decline to that experienced by UBS’s core wealth management business,” it said.