Lending to the wealthy has become a popular revenue kick-starter for private banks. Some wealth managers are reportedly quietly asking their well-heeled clients to put up more collateral against the loans amid market ructions.

UBS and Credit Suisse are asking their wealthy clientele to stump up additional backing against loans because of the tumble in value in stocks and bonds, the «Financial Times» (behind paywall) reported on Friday, citing sources at wealth managers. The move is an early indicator of what the coronavirus disease, or COVID-19, will mean for banks and wealth managers.

Private banks like the Swiss firms make money on lucrative lending to the wealthy, who don't always have easy access to liquid funds for investing. Wealth managers asking for more collateral is a sign they are ensuring their loans are adequately covered by other assets. Most clients thus far had met the margin calls with ease, one private bank executive quoted by the «FT» said.

Substantial Profit Margin

Lending forms an integral part of UBS' strategy with wealthy clients – a blueprint that co-head Iqbal Khan hopes to replicate from success at his former shop. Credit Suisse doesn't disclose the size of its so-called Lombard (or callable) lending book. According to private bankers, loans to the wealthy can add a substantial profit margin to client dealings.

UBS' lending to wealthy clients rose 3 percent last year to $179.3 billion. It said 96 percent of the Lombard loans rated as investment-grade by its own definition, and typically short-term loans of three to six months. 

Lombard Lending Surged in 2019

The beauty of Lombard loans for wealth managers is the instruments can be canceled with little ado if the quality of collateral deteriorates or margin calls are not met. Julius Baer's goal is to hike lending in line with the growth it expects from its wealth management business.

Last year, Lombard lending surged to 39.4 billion Swiss francs ($42.5 billion), from 35.8 billion francs in 2018, according to the Swiss private bank's annual report. The bank takes debt and equity collateral for Lombard lending – and for mortgages, it asks wealthy clients to put up residential property as security. 

Anything But Property

Julius Baer's board defines lending guardrails for the ratio of lending compared to managed assets. The behavior of wealthy individuals on lending matters is likely to hit securities markets because their scramble to find new liquid assets in order to navigate the crisis.

One private banking executive quoted by the «FT» said the wealthy are adopting an «anything but property» to margin calls: they don't want to risk losing their homes by putting them up in case the loans are called.